Europe has a shortage of risk capital for small, early-stage and growing businesses. This is an impediment to developing high-growth, technology sectors. While sources of capital from alternative financing sources such as, venture capital and business angels are becoming more accessible, the EU is still at a significant disadvantage to the United States, and risks falling behind to other markets such as China.
Public markets are a well-recognised component of the “next push” stage of the “funding escalator” and:
- Provide an exit strategy for investors who invested in earlier stages of the company’s life cycle
- Enable innovative SMEs to maintain independence
- Provide both institutional and retail investors with transparent access to innovative SMEs and growth-tech companies
- Diversify the investor, or shareholder base, in tech SMEs
- Give companies a higher public profile and brand recognition
From a broader economic perspective IPOs are also important given 92% of job growth in companies occurs post IPO and that countries where capital markets, and especially stock markets, are underdeveloped suffer in terms of below average growth.
However, the majority of European tech companies, backed by alternative finance, exit via corporate acquisitions. In 2016 76% of all European tech exits by value in 2016 were made to non-European buyers. The lack of IPO exits for tech companies is not a new phenomena: on average, from 2007 to 2016, 10.7% of European VC exits at cost were by IPO. This relatively small amount of IPOs is not just limited to venture capital backed companies: for the same time period only 13.7% of all Private Equity exits were by IPO.
This does not create the environment necessary in Europe for the next “SAP” to emerge.
In the course of the project nine, potential and interrelated challenges have been identified. One key part of the project will be to test the relevance of each challenge and identify solutions to these challenges.
- There are too many stock exchanges in Europe (the market is fragmented)
- European public market investors lack the knowledge and appetite to invest in listed tech SMEs and mid-caps
- SME Growth Markets, and other Junior Markets, are not tailored to the specifications of innovative SMEs
- Many European tech companies have not achieved sufficient size or scale, at IPO, to be successful as a public company
- Lack of liquidity for listed tech SMEs
- There is a Lack of secondary trading opportunities for privately held shares in Innovative SMEs
- European Retail investors typically do not invest via the capital markets
- There is a lack of research coverage (equity analyses) for listed tech SMEs
- The costs of listing outweigh the benefits