Why the UK Tech Sector needs IPOs

The article below first appeared in CityAm on 11th June, 2018.

Two recent IPOs by British tech startups demonstrate what an important solution a stock market listing is for many companies, writes entrepreneur and investor Robin Klein.

Launch of ZPG plc on the London Stock Exchange — 18th June, 2014

The decision for a startup to move to an initial public offering (IPO) is not an easy or quick one to make, but one that requires careful planning and execution. However, launching on the stock market should not be over-estimated either. Anyone who has built a business capable of listing should not find the process any more onerous than hundreds of other tasks that they have already successfully completed.

At LocalGlobe we have now backed two companies at seed stage that have gone on to float, only to be sold thereafter. This month, Zoopla (ZPG) was bought by Silver Lake for £2.2b, while last month FreeAgent was bought by RBS for £53m.

Zoopla and FreeAgent are two very different businesses in scale but are similar in that they are both fast-growing technology businesses, built in the UK and focused on the UK market.

I was a strong advocate of Zoopla listing. It was clear to me that Alex Chesterman, who had already successfully launched LoveFilm and sold it to Amazon, would be a natural public company chief executive. Confident and ambitious, Alex has a great record of smart deal-making and for brilliantly integrating the companies that ZPG had acquired.

Like many other founders, he was unsure that operating in the glare of the public markets and more formalised governance was really for him. Of course, he adapted brilliantly.

Tech companies that grow to the scale of ZPG have generally gathered a number of shareholders along the way, whether from venture capital, angels or corporate backers. These are layers of different share classes and the shareholders will each have different long term objectives. An IPO is a really good solution, affording the flexibility of exit for all, albeit with some restrictions.

FreeAgent listed on the Alternative Investment Market (AIM) of the London Stock Exchange (LSE) — a decision that flew in the face of conventional wisdom and beliefs held in the tech community, such as concerns about the lack of liquidity and knowledgeable investors. However, AIM may present an opportunity for many other mid-sized, angel-backed companies.

FreeAgent was, at the time, a relatively small company with annualised recurring monthly subscription revenue of just £7.6m, approaching profitability and growing at around 35 per cent each year. It was trading at a modest market cap of around £30m.

These numbers are important since there are many such technology companies that will not appeal to the traditional venture capital firms but are superbly run businesses, with predictable revenues, great products and outstanding customer service.

Back in 2012, when I was a venture partner at Index Ventures, we led a campaign attempting to bring the attention of the capital markets to the big opportunity presented by European tech companies. That required convincing investors, some of whom had felt that tech IPOs had been overpriced or had underperformed in the past, and often convincing founders themselves, who did not always consider an IPO to be a route to continued expansion.

Part of the 2012 campaign was a mini conference held in September of that year where 13 companies presented to a group of capital markets investors.

8 of those companies went on to become Unicorns (valued at over $1bn) and 4 went on list on major stock exchanges.

We’ve come a long way since then. Today, it seems pretty clear that there are significant pools of capital seeking to participate in the digital economy and the LSE and AIM are two of the platforms that can accommodate this demand. Now that there is substantial angel, seed and venture capital to back the formation and growth of our technology companies, a liquidity mechanism which enables the founders to continue to build their companies is badly needed.

In the three years since the ZPG IPO there have been 47 tech IPOs on the LSE that have raised £21.47b — £8.66b in IPO and £12.73b in follow-on. The largest, WorldPay, raised £2.86b and was later acquired and delisted. The smallest, ATTRAQT Group, raised £1.51m. Recent UK tech firms to IPO include fintech company IntegraFin, worth £980m, and Blue Prism, a robotic process automation business with a valuation of £1.05b.

The UK also leads Europe in its production of tech ‘unicorns’ — perhaps the most IPO-ready group of companies. Of Europe’s 34 unicorns, 14 (41%) are based in the UK.

A viable, active IPO market for technology companies is an important element in building and sustaining a strong ecosystem. Without NASDAQ, for example, it is doubtful that Silicon Valley could be the powerhouse that it is today.

The biggest advantage for the company itself is the instant credibility that a listing on a major stock exchange confers. This translates into better governance, easier recruiting, easier and cheaper ongoing access to capital — equity and debt, greater access to corporate partners and a ready currency to be used in acquisitions.

IPOs help build layers and cohorts of experienced company builders, investors, mentors, non-executive directors and advisors, which is what an ecosystem needs to continue flourishing and growing.

For the tech ecosystem to continue to thrive, we need to see more exits, more IPOs, more Zooplas and FreeAgents.

The performance of tech sector against FTSE 100 speaks for itself:

For the tech ecosystem to continue to thrive, we need to see more exits, more IPOs, more Zooplas and FreeAgents.



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Robin Klein

Entrepreneur, now active early stage tech investor. Portfolio includes/d: LoveFilm, Moo, Graze, Zoopla,CityMapper,Fizzback,Improbable,Transferwise+ others