Public market investors...
... have an uncanny way of spotting the money-making potential of the latest tech platform – and they do it every quarter!
Both Uber and Lyft’s flotations got stuck in the traffic as investors slapped a one-star rating. Uber tapped the public market for over US$8 billion at a US$82 billion IPO valuation. Uber loses over US$1 billion a quarter but still suggests that it will be back for more capital soon depending on the performance of new areas of growth such as food and freight. Unfortunately, the public spotlight is impatient.
Not all stock exchanges can provide more than US$10 billion of cash (Uber+Lyft) to a loss-making start-up with big dreams . Yet NASDAQ and NYSE have demonstrated repeatedly that they have the investor appetite and depth to raise such staggering sums. In Europe, the London Stock Exchange AiM and French Euronext present themselves as the partners for European start-ups, while the other exchanges tend to be focussed on more established business – such as those making money!
In this battle to attract technology companies, Europe is succeeding on one measure: European markets attract more tech IPOs, some 172 tech IPOs, compared to 96 for the US since 2015. But size matters.
The recent tech IPOs of Lyft, Pinterest and soon-to-arrive Slack, WeWork, and Palantir are raising more than 100x the amounts raised in a typical IPO during the internet bubble of the late 90s: billions today vs millions then.
Today’s tech IPOs are from companies that are more mature, more refined yet still loss making because they are being kept private for longer, funded by patient private capital and only seeking an IPO once they dominate their market. Growth and market dominance are key for VCs in the valley. Furthermore, recent analysis shows the number of private companies in the US rising significantly against a sharp fall in the number of public listings.
Stock exchanges are national icons. But in realty are they are private businesses seeking to match companies that wish to raise capital with investors who wish to invest. They apply their template of regulations that seek to standardise the timing and format of information that is available on each company to drive a level playing field for all investors. Liquidity is the core objective.
One significant challenge in Europe is market fragmentation. London’s stock exchanges have an approximate market cap of €4.44 trillion; Euronext, the pan European exchange has over €4.78 trillion: even combining these two come in at only 73% of the market cap of NASDAQ. European consolidation may be an attractive in-organic way of scaling up but competition authorities are unlikely to acquiesce even before you get into the nationalist interests. Brexit further complicates this discussion.
The greater the number of active investors on the exchange, the greater the chance for the company to achieve a fair valuation over time. Liquidity drives a more efficient valuation capability.
For tech companies, US investors in both public and private are attracting tech stars with their capital investment capability and record.
This capital comes from returns generated by the FAANGs (Facebook, Amazon, Apple, Netflix, Google: aka Alphabet), dating from the first internet infrastructure and internet boom of the late 90s. US investors are flush with cash and are keen to spin the wheels again. The extraordinary amount of wealth created has gone onto fuel the next wave of tech innovators in the private and then public markets at valuations unrecognisable in other geographies.
My recent visit to TiECon 2019 in the heart of Silicon Valley reminded me of the glass box that surrounds the Bay area. Innovators like Jack Hidary, Alphabet X and the Hidary Foundation look out into the world to address problems which are seemingly unsolvable with an ease akin to troubleshooting your laptop with a call centre. The rest of us then consider a solution that seemed so obvious. Such conferences are magnets for VCs to provide the capital to these ideas.
The magnet for innovation is talent and money. So what is Europe’s magnet?
Being heard in the US is challenging. Start-ups have to run quite far before they can attract investor interest as competition for airtime is huge. In Europe, the stage may be less congested. Exciting tech companies can attract disproportionate attention, potentially benefitting from being a big fish in a small pond. This appeals to entrepreneurs who efforts need to be focussed on their business rather than their profile.
The US is a significantly more regulated and protected marketplace. Expensive lawyers are ready to file a class action lawsuit on companies and individuals on any whiff of inaccuracy. Business forecasting is an art, rarely a science over the long term and managing investor communication while ensuring legal compliance is a challenge not to mention prohibitively expensive.
The European approach is much less litigious even when considering its leadership in regulation such as GDPR. Interestingly, when Adyen – a Dutch fintech titan valued at over €21 billion - listed on the Euronext Amsterdam it still managed to attract significant US investor interest without the additional protections afforded by US stock exchanges.
Recommending the hooks for UK/Europe stock exchanges was the question debated by a High Level Advisory Group (full disclosure, I am a member) in Paris last week which seeks to present its findings to the European Commission at the start of 2020.
Europe needs to play to its strengths and not be afraid to see migration as large fast growing global tech champions find themselves unable to trade efficiently without a US base. In fact, Europe with its significant market size (330 million population), leading research universities and supportive governments and a simpler, easy to navigate regulatory environment could be the world’s leading tech incubator. While this may be sailing against the geopolitical current of nationalism, successful entrepreneurs think globally and not nationally. The current trade wars instigated by the US against China and elsewhere may also give Europe a fillip.
Assuming we are all focussed on supporting our most exciting tech entrepreneurs and companies to grow, create jobs, intellectual property and value for all stakeholders wherever their origins; the drive for local ownership should be replaced with global partnership where all countries share in the global success. If Europe can help incubate the entrepreneur and company while it refines it business model, then this could well be the natural first step towards global dominance.
Introduction: Nish Kotecha is a tech (serial) entrepreneur, investor, advisor and board member based in London. His is the co-founder of Finboot, a Blockchain for enterprise group.