When a stock listing makes sense
Why should a tech business aim for a stock market listing over other forms of fundraising? And, with market uncertainty, what kinds of success are London-listed businesses experiencing? James Clark, a familiar face on the UK tech scene and now business development manager at the London Stock Exchange, answers our questions.
An initial public offering (IPO) is seen by many in the tech world as a kind of holy grail for business. Is listing of itself a guarantee of success?
"Unfortunately, much as in life there are no guarantees in business. It’s interesting that you put an IPO in those terms. I think for many management teams, an IPO can seem a long way off and so a bit of a holy grail. However, as companies shift through the gears and grow, an IPO becomes for them an important milestone along a path of continuous development. For management teams, the feeling at IPO is that there’s a definite sense that the company has arrived.
"From a practical point of view, an IPO enables a business to tap the public equity markets for investment, and of course investment (in its many forms) is the lifeblood of a growing company. An IPO is different from other forms of investment because it requires a greater degree of transparency from the company. That transparency enables public market investors to trade with confidence, but the process of building transparency is what also helps transform companies as they go public. Increased transparency ultimately leads to increased profile, not just with investors but also with the wider business community, and this ultimately contributes to long-term success."
Why should companies consider a listing on AIM compared to taking VC investment?
"Investors in AIM and VCs are growth investors, so companies considering either should be focused on their growth. The key facet to consider here is the rate of growth required. Of all the forms of investment, the VC requires most rapid growth over the shortest period to justify their investment model. The demands they place on portfolio companies reflect this, and for some companies that growth expectation is necessary, even vital to succeed in their market. But, for the vast majority of companies, this short-term focus on growth is unnecessary and possibly harmful. AIM investors expect to see sustainable growth, but not at the rate required of a VC. Companies that list on AIM are naturally looking to grow, but not at the rate required of a VC-backed company."
Which UK tech businesses have IPOd to date?
"2016 has been an interesting year for tech on the public markets. NASDAQ has been incredibly quiet – just two IPOs to date – because any company large enough to make an impact and attract top-tier investors probably require a valuation that would be a challenge against the current market backdrop. This is something that people like Bill Gurley have discussed at length. Here in the UK, we’re at a different point in the cycle, so rather than being unable, many of the big UK tech companies aren’t quite ready to go public. However this doesn’t mean things have been quiet.
"Our junior market, AIM, allows smaller companies – say $40m to $500m – to go public relatively easily and it has welcomed a number of tech firms in the last few months. Among those companies to list in 2016 are Osirium Techologies, Blue Prism and Cerillion, hailing from Reading, Merseyside and London respectively."
What is stopping more from AIM listing?
"It’s worth bearing in mind that an IPO is just one of many outcomes for a business. Many businesses still fail, others will stay private by choice, and some will be acquired in a trade sale. This is the natural order of things. Recent research by Nabarro shows that 24% of tech companies are interested in an AIM IPO – this is good news when you consider the range of options a company has for growth at any given point. The same research showed that 49% are interested in listing on another UK market.
"This is interesting for two reasons – firstly it shows an admirable level of ambition and that entrepreneurs are swinging for the fences, secondly it also perhaps reflects that London Stock Exchange, unlike any international exchange groups, operates a range of markets for companies at various stages of their growth cycle."
What stage does a company need to be at to be accepted for AIM listing?
"If you were transposing AIM onto the tech sector, the natural point of crossover is around Series B investment and beyond. AIM would suit a company with a valuation of anywhere from $30m all the way up to $1bn, though the sweet spot is between around $50m to $500m. From a practical standpoint, investors will expect businesses to be able to show revenue growth. Profitability is less important, so long as a clear path to profitability can be shown.
"There are a number of conditions a ‘nominated adviser’ will take into account when assessing the suitability of a company for AIM, such as board composition, free float size and growth prospects. The key point, though, is that AIM listing has been specifically designed to provide access to markets for companies that are keen to take public investment, but who do not yet meet the requirements that come with a Main Market listing. That is the real benefit – AIM is the right-sized market, with the right level of oversight to allow growth companies to raise public funds."
Tell us about the ELITE programme and how it benefits businesses.
"ELITE is London Stock Exchange Group’s initiative to help growth companies better prepare and structure for their next stage of development and further external investment. Working with Imperial College Business School, ELITE facilitates long-term structured engagement between these ambitious businesses, business leaders, entrepreneurs and the corporate and investor communities.
"The ELITE community now includes over 380 companies, more than 150 partners and 100 long-term investors across Europe, Israel, Russia and Turkey. We recently opened our 5th UK cohort, adding 16 new companies to take the total to over 70 companies from across the UK.
"Being a CEO of a growth business is tough, with many challenges. ELITE offers the opportunity for companies and their leaders to be prepared and to thrive in this environment through a support programme designed to tackle the challenges of scaling. Furthermore, ELITE companies become part of a vibrant community of international entrepreneurs – growing their opportunities to trade and partner. Finally, through access to ELITE’s vast collection of partners and investors, companies can access the diverse range of experienced advisors needed to help them grow."
How else do you help small businesses?
"Through our 1000 Companies to Inspire Britain report, now in its third year, we showcase some of the UK’s most exciting and fast growing businesses. We know these firms need access to tools to grow but they also need to be celebrated. The publication highlights that the UK is home to hundreds of diverse successful businesses from across numerous sectors, all with a unique capacity to innovate and create new jobs."
For more information contact:
Business Development Manager