When is the right time to undertake an initial public offering (IPO)? What are the main differences between the US and the UK market? And should you even IPO at all?
There are so many questions, common misunderstandings and myths surrounding the issue of taking a company public, and it can have such a massive impact on your business if approached in the wrong way.
As part of our Future Fifty programme for the UK’s very best late-stage tech companies, Tech Nation in partnership with Barclays and Macfarlanes recently held a roundtable on IPOs, discussing the biggest issues and questions that our attendees had surrounding the subject.
After the discussion, we spoke to James Clark, Head of Tech and Life Sciences at London Stock Exchange, and Andrew Learoyd, Chairman of the Board at Funding Circle, who recently floated on the London Stock Exchange, to get their insights.
When is the right time to IPO?
Andrew Learoyd: When the reason(s) for going public are pressing – raising capital or sorting the capital structure, providing liquidity for shareholders, obtaining an acquisition currency, raising the public profile for example – when the markets are receptive and the company is ready in terms of its resources and its business momentum.
James Clark: The biggest misconception is that IPO is something to worry about in the future, or something to put off until some future date. If you start thinking about IPO from the earliest possible opportunity, you give yourself that chance to be ready if and when the time comes.
Get to know public markets before you start to engage with them. Your decision could have an impact on where you decide to take your business.
The more knowledge you have at the scaleup stage, the more choices you have, meaning you can make a more informed decision about what is right for your business. If you are unsure, then come and speak to LSE for advice. We have a wealth of knowledge, are completely confidential and it is in our interest for companies to understand public markets as much as possible, whether or not a listing is the eventual outcome.
When should companies begin to think about preparing for IPO?
JC: I meet companies from Seed stage onwards, but any time is a good time to think about it. The most important thing is to inform yourself of how IPO works – understanding an IPO as one of many options just makes good business sense.
AL: Companies should really be thinking about it as early as possible. You can’t predict when conditions and preparedness coincide. Some aspects of the process can be run on a predictable 3-4 month timetable, others such as hiring the right team or Board can take much longer.
There is nothing wrong with starting to get ready a year in advance of your expected IPO date. Losing momentum is not a big issue since much of the preparatory work is not wasted.
What is the best way to get the process started?
AL: It helps if you have people in the management team or Board members who have been through it before. We chose to appoint lawyers at an early stage and we hired an IPO project manager to help us to prepare ahead of engaging bankers.
Try to organise yourself so the heavy lifting is done outside the core management team – if they take their eyes off running the business it is not just the IPO that will suffer.
How should you go about selecting/approaching institutional investors?
AL: Investment bank advisors will do investor targeting and profiling, together with organising “early-look” meetings from early in the process. In fact, increasingly, institutional investors want to see or even invest in companies well ahead of IPO. Banks will make introductions to these investors and, in this way, management teams and institutional investors will get to know each other during the development as a private company.
What is the best advice for UK tech companies considering IPO?
JC: Do as much homework as possible. Fundraising of any kind can have an impact on how your business grows. As a business, there are plenty of different fundraising options open to you – VC, public markets, banks – different funds serve different sorts of purposes.
In London we of course have our Main Market, but we also have AIM – our growth market – it basically puts high-quality investors in front of startups and other similar companies. If you are scaling up and achieving a certain amount of annual revenue – you have a choice to make. Do you want to raise another round of venture capital? Or do you want to go public? It’s a daunting decision and the more you know about IPO, the more you know what it might mean for your company. A solid understanding allows you to make the best choice for your business.
What is your best advice for speaking to investors?
AL: Honesty and openness – be yourselves. Yes, it is important to create the right “equity story” around the pitch and to present a good deck, but investors want to understand and test the management, not their advisors.
What are the main issues surrounding corporate governance?
AL: It is hard to say that any corporate governance issue is more important than another because it doesn’t matter which it is, if you get it wrong the penalties are between high and terminal.
Take them all seriously, have the right people and processes in place and when things go wrong, know how to respond quickly and properly.
Any advice on the book building process?
AL: Price limits in the book building process are not especially relevant – if a shareholder is committed to the story, you want them in the book.
Finding out who are genuinely going to be your long term holders and buy more shares after listing is the hardest part. Concentrate on who has really done the work and who asks the right questions.
What are some of the biggest myths surrounding IPO?
JC: A big myth within IPO is that once you’ve raised capital at IPO, that’s it. But the public market is a great place to come back to raise more money; 2/3rd of all the funds raised in London in any given year will be what we call “follow ons”. And while the IPO process is rigorous and time consuming, once you have IPOed, public markets are an incredibly quick and cheap way to raise further capital.
Just Eat is a good example – they IPOed in 2014/15 and raised $600 million. The company has subsequently come back 8 times and has now raised over $2 billion. You can come back to the market when you want to achieve more things with your business. Going Public is just the next phase of a business’ life – it’s not the end. A company joining the public market is certainly not being “put out to pasture”!
Another myth is that you need to be a billion dollar company to IPO – you can do it with 10s of millions in value. A good example of this would be Future Fifty alumni LoopUp, who IPOed at about a $50 million valuation and their revenues have been about $10-20 million. They IPOed and used the public market quite successfully to continue their long term growth.
Another classic is that you need to IPO in the US to access US investors. You can access institutional investors from the US on the London market – in fact, 30% of the money invested into London comes from North America.
What are the main differences between listing on the UK and the US market?
JC: We get this question a lot, and understanding the difference is fundamental to understanding markets. There are two overall areas of difference between the US and the UK markets: Market structure and market culture.
Structure is the rules and regulations surrounding how the markets works, while culture is the behaviour and unwritten rules surrounding how investors expect things to happen.
The structure in London is made up of AIM and the Main Market. Each market has different rules and are regulated differently, but in general for tech businesses, AIM is for smaller high growth companies, while the Main Market is for larger growth companies. A very crude rule of thumb is that companies valued at less than half a billion dollars are likely to go to AIM, and those valued more than that are likely to go on the Main Market because each market attracts different types of institutional investor.
If you compare that to the US, whether it be Nasdaq or New York Stock Exchange (NYSE) – each are just one market containing everything from the very smallest to the very largest. While the rules are more or less the same as the Main Market in London, there is no equivalent of AIM and generally, smaller companies can find the US a tough environment to IPO because the high quality institutional investors focus on the largest companies.
There are also a number of really big differences between UK and US markets are around regulations, free float requirements, reporting and disclosure rules, rules around shareholder lawsuits and any number of smaller areas. When you combined these differences in regulation with market culture you appreciate just how different the markets really are.
A classic example of how all these things can play out is the much anticipated “pop” when a company IPOs. This is a blog post all its own, but briefly, in the US companies generally want a big pop (>50%) to demonstrate excitement in the market. There’s a lively debate in the US within the tech industry about whether this is really such a good thing for tech companies – it’s certainly a mixed blessing at the very least! In London, companies prefer a more subdued increase, say 10-20%, as this indicates the pricing of the deal has been more accurate, the company has maximised its fundraising, investors have seen a bit of a return and not too much money has been “left on the table”.
Because of these differences, observers can misunderstand how public markets work and get the wrong end of the stick when assessing the success of an IPO. Sometimes people judge what happens on one market, by what they would expect to happen on the other market. It’s important to look at both markets and understand their nuances to see if an IPO has really gone well or not. Ultimately the long term performance of the company should be the measurement of success.
It’s really important to understand the differences between these two markets, and as you may have guessed so far, London Stock Exchange is a great place to ask to find out more.
Any tips for after IPO?
AL: As hard as it is, try not to allow the share price to reflect on team morale – markets can be fickle and share prices go up and down with far more volatility than the underlying long term value that you are creating. A high price does not make you masters of the universe, a low price does not make you losers!