Here at Index, our conference rooms often play host to ardent debates. Robust discourse over where we should invest is an ingrained part of our culture. But when it comes to the fundamental issues that allow us to act on our mission of promoting the entrepreneurial ecosystem, we are generally in violent agreement. Over the last few months, we have mobilised around one major issue: to open the London IPO market and allow homegrown companies to realize their full potential. Indeed, we are on the record on this point. We first wrote in May about why the lack of London tech IPOs stunts the European ecosystem and followed up in July with specific recommendations on how to kick-start the London IPO market.
Today we are thrilled to report that the UK government, in the conjunction with the London Stock Exchange, announced its own JOBS Act, an initiative that helps European and Israeli tech companies better access capital and launches London down the road of being a global tech IPO hub of the future.
The primary aim of the policy is to make the London Stock Exchange a more attractive place for tech companies to go public. It achieves this by creating provisions for high-growth companies on the LSE, reducing minimum float requirements and enabling venture-backed businesses to adopt appropriate corporate governance procedures.
We hope that these changes will begin to remedy a chicken-egg problem we have seen over the past two decades that has caused institutional investors and would-be issuers to accuse each other of being the reason for a subcritical IPO market, as companies increasingly chose to list in New York over London. A lower minimum float requirement will encourage issuers to price their IPOs at levels that make them irresistible to growth-deprived investors.
Just as impressive as the content of the proposals is the alacrity with which the government supported this cause— a fact that underlines how seriously the UK takes growth and the role that technology, startups and entrepreneurs can play in further establishing London as a global hub for tech startups. Indeed, one could even interpret the government’s speed and agility in crafting this legislation as a sign that the budding entrepreneurialism of Silicon Roundabout has rubbed off on 10 Downing Street. It should come as no surprise. The U.K. has a strong, 20-year tradition of supporting technology companies and the results are already being felt: the U.K. internet economy’s contribution to GDP stands at 8%, which is the highest in the world, ahead of the U.S., Japan and South Korea. (1)
Though today’s news is certainly a cause for celebration, a long journey remains ahead of us. Many parts of Europe’s start-up culture still require a paradigm shift. A robust IPO market depends on many players— not just early-stage investors, stock exchanges and tech-savvy governments-- but also institutional investors, bankers and, most importantly, entrepreneurs. While making it easier to access the capital markets is a critical step in actualizing the vision of an entrepreneurial ecosystem from start-up to giant, everyone still must play their part.
Investors, for starters, need to make sure that their best companies come to market. These companies should fall into the category of “high-growth,” presumably with annual revenues upwards of 20 - 30 million pounds, year-on-year growth of at least 20%, a proven track record of hitting their numbers and a strong executive team with sterling corporate governance to support them.
European bankers need to study up on how to properly value internet companies, better understand their business models and assess the competitive advantages of their strategies. Though the hype machine around Facebook and Zynga has put somewhat of a damper on broad enthusiasm for the U.S. IPO market, let’s not forget the formidable value to founders, employees, investors, customers and society created by venture-backed companies like Amazon, Genentech and Apple that went public and continued to deliver outsized returns for years and even decades. Let’s also recognize that these companies would not have become what they are today without having been able to go public. Since 2009, while the FTSE 100 Index has increased by 39% in value, new high-growth companies like ASOS have increased by 695%, while RightMove has increased by 841% in value.
Though the argument persists that Europe is incapable of producing this type of company, we fundamentally disagree. We know of at least 20-30 IPO-ready European tech companies today, like Criteo, Wonga and Moshi Monsters, that are poised to capitalize on the global internet economy and perhaps enter the pantheon of great public companies. The U.K. is home to at least 10 of these high-growth companies, while 6 are in Germany, 5 are in France and the rest are distributed across Israel, Russia, Spain, Italy, the Nordics and Eastern Europe. We also know of dozens of companies that might have chosen to go public and double down on their growth, but instead chose to sell themselves to the likes of eBay (Skype: born 2003, sold 2005), Electronic Arts (Playfish: b. 2007, s. 2009), CBS (Last.fm: b. 2005, s. 2007) and Amazon (Lovefilm: b. 2003, s. 2011), because an
IPO was not considered a realistic option. We hope this sentiment will begin to shift, starting today.
Of course, entrepreneurs need to believe in the strength of London’s public market in the first place. They must trust that its participants will enable their companies’ shares to trade effectively, reflecting their appropriate value and provide them with continued access to capital. An IPO is by no means an exit, but it is a crucial step in building a great company. Under the right circumstances, an IPO is the launch-pad for a true long-term partnership between entrepreneurs and the institutional public-market investors who will accompany and support them on the next leg of their path to greatness.
Our hope is that today’s good news from Downing Street will serve as a further catalyst for these changes and that, in the future, as more high-growth companies are created in Europe, many of these companies will choose to go big and stay home.
- Neil Rimer and Robin Klein