There comes a time in the life-span of any large successful company when they consider an IPO. In fact, almost all of the technology companies, which we now consider to be great, such as ASOS, Google and Priceline, have 'gone public' en route to achieving that status.
Now, thanks to a combination of favourable market conditions and the underlying strength of the fundamentals in the technology sector, this is precisely the right moment for the next wave of potentially global businesses to be mulling over and preparing for the possibility of an IPO.
You wouldn’t know it from the media or by talking to institutional investors, but over the past decade Europe and Israel have quietly been building the next generation of tech giants - significant businesses, from Dublin to Tel Aviv, with millions of customers, hundreds of millions in revenue and creating tens of thousands of new jobs. Some like ASOS, Moleskine, MoneySupermarket, Ocado, Rightmove and Yoox have already gone public - generating many billions of dollars of market value - but most are still private and waiting in the wings.
Last Wednesday, for the second year running, a small gathering was held in London, at which a selection of these growth stars made short presentations to a hand-picked audience of about 80 world-class institutional investors and fund managers. The event was initiated last year by Index Ventures, along with JP Morgan and Code Advisers, with the simple idea of introducing the two sides of the marketplace - companies and investors - to one another.
The 13 companies presenting that day hailed from across European time zones - the UK, the Netherlands, Spain, Scandinavia and Russia - and delivered a refreshingly diverse mix of products and services, from games, e-commerce, payments solutions and enterprise software to financial services, entertainment and travel. Common to most was the global nature of their reach, as well as their focus on offering services via mobile devices and tablets, as well as the desktop web.
The reaction from investors was, in many cases, one of surprise at the scale and rate of growth these businesses were able to show - and at the sophistication of the management teams’ presentations. There was palpable electricity in the room and most left the conference with the impression that European Technology - so long depicted as the bridesmaid to Silicon Valley’s starrier bride - is experiencing game-changing velocity. (Index is planning further investor conferences and would welcome applications to attend.)
The businesses we saw at the event were a very good representative sample of European-born high growth companies. But a sample, they were. Indeed, we estimate that there are over 50 companies in the 'zone', comprising of businesses which are growing fast and have substantial revenues (at least five of the thirteen have sales exceeding $0.5bn) [Disclosure: fewer than half are Index-backed companies].
But although there’s much to celebrate, we need a reality check too. Events such as these are all too rare in Europe. By contrast, they are commonplace in the US. There they are viewed as part of the basic education of both companies and investors in the run-up to a potential IPO, which is why the only option European and Israeli stars have had - if they wanted an in-depth and insightful conversation about capital markets over the last 10-15 years - has been to fly across the Atlantic.
While it’s no exaggeration to say that these conversations are an essential part of the process of building great companies, it’s also true that, in itself, the conference was not the silver bullet to tackle that much-hyped question: ‘Where are the European $bn companies?’. Nevertheless it was a significant part of a wider campaign - kicked off by Neil Rimer in May last year, and followed up with a number posts and press articles which addressed the issues around providing genuine choice to those entrepreneurs who want to continue to build their companies independently, without resorting to a sale to a large U.S. corporation.
We postulated that the LSE - as one of the world's great stock exchanges - needed to open up to high growth tech companies and that investors should take a closer look at the great businesses being built on their doorstep. The LSE and the UK Government responded magnificently, by creating the 'High Growth Sector' on the main market and abolishing stamp duty on AIM within ISAs to improve retail investor participation and increase liquidity.
And yet an attitude of ‘Why bother with pushing the LSE and exposing these companies to UK and European fund managers, when there are perfectly good markets in New York?’ persists in many quarters - which is why the case for our best crop of companies going public in London still needs to be made. And made vociferously. To that end, these are the factors which I believe tilt the balance in London's favour (over New York), if the business is headquartered in Europe and, potentially, Israel:
1. Operational Challenges: You cannot run any company without talking to your shareholders regularly. In the case of a publicly listed one, every quarter - without fail. For a European headquartered company with a predominantly US shareholder base, this means regular coast to coast trips for the CEOand CFO. There are also the analyst and press briefings to be done. Sure, an IR (investor relations) team can take some of the intensity, but make no mistake, the cost and distraction are significant and real - and exacerbated by the distance and the energy-sapping jet lag. Creating a US HQ is an option, but there are also significant associated costs from both an economic and business perspective.
2. The mythology of the higher valuation obtained in the US: It’s generally assumed that US investors value growth companies more highly than their more conservative counterparts in the UK. This may well apply to pre-profit companies, but examining some of the investment banks stats we see that after 2 years the P/E (earnings) ratios tend to even out. We would argue in any case that the listing price is of relatively small consequence - especially if current shareholders are not ‘bailing out’. Markets value growth, of course, but they also value predictability and strong earnings.
3. US (and other) investors do invest in European companies listed on the LSE: Increasingly the top tech investors are global and invest in the best companies worldwide. Look at the major shareholders of Rightmove, ASOS, Moneysupermarket - they comprise global investment houses from the US, UK and elsewhere.
4. Unequalled support from the very top: If you plan a listing in the US, you are unlikely to get an invitation to the White House. Here in London, we are regularly able to get government and the LSE into the same room thanks to the support of No. 10 and the Chancellor, who have shown a propensity to listen and respond to the needs of the sector - knowing what a growth engine it is.
It’s becoming increasingly clear that we cannot continue to have a thriving startup scene (which we now undoubtedly have) without the later, higher rungs in the ladder being in place too - as well as there being viable, compelling options for companies who wish to remain independent and join the ranks of the global giants.
* Robin Klein is a Venture Partner at Index Ventures and Founding Partner of The Accelerator Group.
This piece originally ran in The Telegraph, on 21 September 2013.