Preparing To Exit

No one is saying that it feels like 1999 again. The average time for a company to go public then was four years; now it is more like 13, says Nelson Griggs, NASDAQ’s Senior Vice-President, Global Corporate Client Group.But European and Israeli tech companies are once again making headlines by opting for IPOs. Russia’s Qiwi, a digital payments company, listed successfully earlier this year on NASDAQ and completed a subsequent follow-on transaction. France’s Criteo, a data-driven advertising technology company focused on e-commerce listed on NASDAQ in late October, raising $251 million in an upsized IPO that further increased excitement around the sector. And Israel’s Wix, which hosts build-you-own web sites, went public on NASDAQ on November 6th.

These IPOs were closely watched as there is a swelling group of European and Israeli companies in the pipeline that are rumored to be preparing to go public (see the chart).Regardless of the broader foundations of a firm’s business activity and development, a disappointing IPO — or initially impressive flotation followed by a soufflé-like price deflation — can haunt even celebrated companies for months (just ask Facebook). Given the high stakes involved, start-ups need to insure their financial opportunity of a lifetime doesn’t wind up being the worst move they ever made.

There’s arguably no more critical chapter in a tech company’s history than figuring out the right exit strategy. The good news for European companies is there are more options than ever. There are now multiple ways for European Internet companies to raise growth equity and going public is only one of them.

“An exit is like a love story,” says Marco Rodzynek (pictured on Informilo’s home page), a partner at Noah Advisors, the corporate finance firm behind the NOAH Conference, an annual event that focuses on late-stage Internet companies; this year the organizers expect to attract around 2,000 people. “You should admit only at the very end what you are really up to and should at all times keep the involved parties entirely focused on you.”

You don’t get to do an IPO over again if it doesn’t turn out as you’d hoped, “so you want to make sure you’re ready for it, have chosen the right market, and have the best legal and banking partners to help you make it a success,” says Christopher Grew, a partner with global law firm Orrick, Herrington & Sutcliffe in London. “The key is identifying what different options and partners correspond to the specifics of your company and objectives, and will contribute most to your IPO being successful.”

That’s even harder than it sounds — and often depends first and foremost on where a start-up decides to list. Indeed, after the decision has been made to go public, most other considerations flow from the choice of market the company lists in. For a majority of European tech companies, the clear preference has been America’s New York Stock Exchange (which handled 16 of the 20 largest tech IPOs in 2012) or NASDAQ, rather than the more local London Stock Exchange. For most people who’ve taken part in the internal deliberations of going public, the advantages and allure of a U.S. flotation have been evident.

 

“The chances of achieving a superior valuation are almost always better with a U.S.-listed IPO versus a European or London listing. This is driven by greater capital availability and the greater degree of analyst and investor specialization in the U.S.,” argues Raphael Grunschlag, managing director and head of European technology banking at the global investment banking boutique William Blair & Company in London. William Blair recently handled the IPOs of Criteo and Qiwi. It underwrites approximately 20% of all U.S. IPOs.

 

“UK institutional investors have historically preferred essentially defensive positions and secure returns, which in part explains the low rate of tech IPOs in London,” says Grunschlag. Another factor to consider is that despite the perceived volatility in the U.S., the window for IPOs actually stays open longer there relative to London. “The U.S. market can absorb several poor-performing transactions before activity decreases, while in London, a single disappointing IPO can shut everything down,” he says.

 

That not need be the case — and influential actors in the UK are moving to make London a more attractive IPO market. Last March, LSE officials joined the UK government to ease rules governing public introductions in what’s now called the High Growth Segment. Among those measure was a reduction of the minimum level of IPO stock from the previous 25% to the current 10%. That’s still twice NASDAQ’s 5% requirement for initial offerings, and doesn’t address issues raised by critics like Grunschlag and Grew.

 

“When you’ll raise $400 in a London IPO compared to $600 in New York, you’ll list in the U.S. almost every time — as nine out of 10 European tech firms going public do,” says Grew. “The only reason for a European company to stay local is if it’s considered a national champion, or is otherwise so deeply rooted in national or regional markets or activities that listing in New York would pose a problem.”

 

Other experts beg to differ.

 

“Yes, overvalued IPOs in the States are great, especially for VCs and founders, as Facebook, Zynga, Groupon and others have demonstrated,” says NOAH Advisors’ Rodzynek. “However, execution risks are high and once failed, direct and indirect costs could be a big, big burden on a young company. Don’t feel like an Englishman in New York. Sometimes it is good to stick to your roots and not chase the highest IPO valuation around the planet.”

 

Robin Klein, a partner with Index Ventures in London and a founding partner in The Accelerator Group, argues that the new LSE measures will make listing in London both more logical and profitable for European tech companies. He predicts the cost and hassle to Europe-based firms of having to face demanding U.S. investors (think trans-Atlantic commutes and culture clashes) is something that British and continental tech execs will gladly avoid. Klein also forecasts the debunking of what he calls the “mythology of higher valuation in the U.S.” as a number of tech introductions in London prove it to be a “real and viable alternative to the NASDAQ.”

 

That said, pundits agree that London needs at least one successful exit by a big Internet company on its local exchange. A number of London-based companies are expected to IPO, including King.com, Shazam, Badoo, Mind Candy and Wonga. It is not clear which will go first or whether any will choose to do a local listing.

 

“I wouldn’t be surprised if there’s some floats taking place in the next year or so,” Klein told London’s City A.M in September. “London is a sophisticated market and we certainly don’t want [it] losing out in the most attractive sector for growth.”

 

Of course Index is an investor in Criteo, which chose NASDAQ for its listing.

 

Nicolas Brusson, CEO of BlaBlaCar.com, a fast-growing pan-European car-sharing service and a scheduled speaker at NOAH 2013, wishes the LSE success in luring European IPO activity from New York, but thinks it’s a lost cause among big companies — and a wasted battle for smaller ones. “Nobody under $100 million in revenues is doing IPOs anymore, and the rare smaller company that does will wind up on secondary markets like AIM that everyone would rather avoid,” Brusson says. “Why go public with all the accountability and regulatory constraints that involves if you’re going to be invisible on a secondary market, or largely overlooked as a tech novelty in London?”

 

That’s an important question, since Brusson calls the IPO process “so incredibly complex, long, and filled with complications and delays” that companies need to be doubly certain they’re ready to take the step before wading in at all. Once they’re sure the time has come, though, the question then becomes which banking and legal partners to select to prepare for the flotation. Both Grew and Grunschlag say that though most leading firms have offices in both the U.S. and UK, tech companies would do well to opt for banking advisors and legal offices whose main activity is weighted in the same country as the IPO itself. And while most top-level firms boast activity in a variety of sector and company flotations, it’s far wiser to find partners with experience — or even specialization — in the precise technology and niche an exiting start-up is involved with.

 

“In the end, you’re looking for partners who understand you and your business, and can carry out their work on your behalf as though they’re almost part of the (issuing) company itself,” says Grew. “It’s really vital everyone is rowing in the same direction, and feeling like they’re part of the same tight-knit team.”

 

 

Other Options

 

Of course not every company needs or wants to go public. More growth equity — from a variety of sources — is pouring into European Internet companies, helping companies get much bigger while remaining private.

 

When Swedish payments company Klarna raised a $153 million round in 2011, Sequoia Capital’s Michael Moritz, who sits on the company’s board, told TechCrunch that the round “is the public financing of 12 years ago. It is just done privately.” The buyers in these “pre-public investment rounds” are the same investors that would have previously bought IPOs, funds like General Atlantic, DST, T. Rowe Price, Fidelity and Tiger.

 

For example, last year General Atlantic, a global growth equity firm, invested $44 million in Turkish online food ordering service Yemeksepeti.com. There was no need to do a road show to raise the round. Some 20 U.S. and European VC and PC firms trekked to Istanbul to see the company.

 

Venture capital firms are clearly also participating in large “shovel in” rounds. Before going public Paris-based Criteo raised $63 million from venture capital firms Index Ventures, Bessemer Venture Partners, Elaia Partners and Idinvest Partners, as well as from SoftBank Corporation, Adams Street Partners, SAP Ventures and Yahoo Japan. And Tel Aviv-based Wix , which serves customers in 190 countries and says it is growing at a rate of 34,000 new registered users per day, raised $61 million in venture capital from backers that include Insight Venture Partners, DAG Ventures, Benchmark Capital, Bessemer Venture Partners and Mangrove Capital Partners. Both companies were able to raise huge rounds even though they are based outside of Silicon Valley.

 

Expect more Asian companies, which are flush with cash, to invest in Europe’s Internet companies, says Mattias Ljungman, a partner at Atomico Ventures. Eight of the 10 biggest merger-and-acquisition transactions involving game companies this year have been initiated by buyers based in Asia, according to Digi-Capital, an investment bank that specializes in mobile and games. These include the Supercell deal, in which SoftBank was joined by a subsidiary, the Japanese game company GungHo, in investing $1.5 billion in exchange for 51% of the shares in the Finnish gaming company. (Atomico is an investor in Supercell, as is Accel Partners).

 

Along with buyout funds and VCs, institutional investors clearly have more of an appetite for investing in European tech companies.

 

For tech industry executives who need smaller amounts of liquidity but aren’t ready for an exit, NASDAQ is about to launch NASDAQ Private Market and is actively courting European customers. NASDAQ Private Market (NPM) is a joint venture combining NASDAQ OMX’s resources and operational expertise with SharesPost’s private company transaction platform. Though the firms remain private, they have shares, and some employees or investors who have received such stock want to cash out. Others want in. The sellers and buyers can be matched through NPM’s electronic network of broker-dealers.

 

NPM lets NASDAQ tap into a new line of business. Tech companies are clearly waiting longer before going public and private company transaction platforms like SharesPost have benefited from this new way of trading shares privately.

 

The interest in buying shares in tech companies via private markets in the U.S. suggests bullish investor interest in companies that may come to market over the next couple years. NPM will give investors a way to get to know European tech companies before they go on an IPO road show, yet another potential way to stimulate appetite for more and bigger exits going forward.

 

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