Nasdaq Going For Growth


It is no surprise that NASDAQ executive Adam Kostyal will be prospecting for business at Slush, an annual tech conference in Finland that this year is expected to attract some 10,000 participants. The Nordic region has given birth to some of Europe’s biggest tech stars and some, like Spotify, are candidates for initial public offerings.

While recent volatility has led some growth companies to question whether they should delay going public, NASDAQ has had the strongest year for IPOs since 2000, says Kostyal, NASDAQ’s Sweden-based Senior Vice President and Head of European Listings.

Markit raised $1.28 billion the largest European tech IPO in the U.S. in 2014.

Some 33 of the international IPOs in the U.S. this year took place on NASDAQ. There were eight listings from China, eight from Israel and four from the UK, including Markit, a company specializing in collecting and disseminating financial data, which raised $1.28 billion, making it the largest European tech IPO in the U.S. in 2014.

There are strong arguments why foreign technology companies should go public in the U.S., says Kostyal. “European companies get bigger valuations when they list in the U.S., better analyst coverage, and it is easier to attract talent and grow their businesses,” he says.

But NASDAQ is not just courting the big growth companies that are ready to IPO. “We want to get closer to start-ups at a far earlier stage,” he says.

To that end, NASDAQ has launched an offering, called NASDAQ Private Market (NPM), that allows unlisted companies to trade private shares. Secondary, or private, markets are marketplaces that allow angels, venture capital firms, founders or employees to trade shares in a private company.

Today, on average, companies are waiting until they have much higher market caps to go public, meaning that stakes are locked in for a longer period.

First-generation secondary markets in the U.S. that were used to trade shares of private companies did not allow companies to control who was trading their shares.

Indeed, as the value of high-growth U.S. Internet companies such as Facebook soared, early investors and employees turned to free-for-all private markets to cash out.

Online marketplaces for trading shares in unlisted companies, such as New York-based Second Market, were akin to a Wild West in which private companies had no say in the price of their shares or who their shareholders were.

Things got so bad that U.S. companies started drafting constitutional documents (the equivalent of British Articles of Association) to block the activities of secondary markets.

NASDAQ Private Market is evaluating a European presence

In contrast, companies using NPM can organize liquidity programs that will allow them to retain their employees without going public, but at the same time maintain control, Kostyal says.

The first company that signed up to use NPM when it launched in March was Mobli, an Israeli social mobile photo and video-sharing site that competes with Instagram.

The company raised $60 million last November from América Móvil, the telco giant led by Carlos Slim.

The listing on NPM gives Mobli and other companies the option of conducting primary capital raises or controlled secondary transactions.

To trade on NPM in the U.S. companies have to meet at least one of a number of qualifications: they must have raised $30 million in funding within the last two years; total assets and annual revenue must each be $50 million or more; they must show an annual net income of $750,000; shareholder equity must be at least $5 million; and they have been operating for at least two years.

NPM is evaluating a European presence but would first need to secure regulatory approvals.

As more European companies go for growth rather than selling early, unlocking some liquidity is likely to have some appeal.

“The ability to take a little bit of liquidity out is a good thing because it encourages the entrepreneur to go for a bigger exit,” says Nenad Marovac, a managing partner at London-based venture capital firm DN Capital.

Stock Plan Administration Is Not Rocket Science

NPM also recently acquired a software platform which offers an integrated stock plan administration and capitalization table tracking service for private companies, both big and small. The service allows investors and founders at start-ups to understand who owns what as well as to run planning scenarios.

Stock plan administration “is not rocket science, but it is complicated,” says Eran Palmon, the Silicon Valley-based Israeli entrepreneur behind software platform TruEquity, which NPM has renamed ExactEquity.

“There are so many mistakes and misunderstandings. We wanted to make this data accessible so that everyone can understand what is going on.”

Roger Rappoport, an entrepreneur- turned-lawyer at Silicon Valley’s Procopio, Cory, Hargreaves & Savitch law firm, an active user of ExactEquity, says he recommends founders start their cap table/stock plan administration tracking from day one to ensure they understand how investment terms can impact their holdings and future exits.

European firms have been slower to develop equity plans than their U.S. counterparts. “We found that as we talk to founders in Europe and definitely in the UK that although the giving equity to employees philosophy sounds right — they get the Silicon Valley story — the tax and legal and currency issues here make it very difficult to use it the same way as the Americans do,” says Janet Cooper, a managing partner at Tapestry, a UK law firm focused on compliance. “But it is not as difficult as you might think.”

NASDAQ’s Strategy To Cozy Up To Start-Ups

Taking the time to develop an equity plan for employees is worth it, she says. “Why do it? Companies tend to grow much quicker because it incentivizes the staff to work that much harder.”

What is important, says Cooper, is to not just give employees shares but grant them the opportunity to sell the shares. “Then people will see the value.”

If you look at it from that perspective, “the ability to trade on private markets in a controlled environment helps companies retain employees,” says Carine Schneider, co-head of NPM. It should also help to attract top talent.

Helping start-ups sell shares and manage stock plans is part of NASDAQ’s strategy to cozy up to start-ups long before they are ready to IPO, in the hope that more will choose its exchange. The move comes as NASDAQ faces increasing competition at home and abroad.

Indeed, the London Stock Exchange is courting late-stage European and Israeli tech companies. Over half a dozen foreign companies have been accepted on to the Future Fifty UK government program because the government wants to attract more companies to base operations in the UK and/or go public there.

And, EnterNext plans to announce initiatives at its first-ever pan-European tech conference on November 17th.

A Lot Of Companies Are A Bit Fed Up With AIM

One of NASDAQ’s edges, says Kostyal, is that it is the only transatlantic exchange. The NASDAQ OMX group runs exchanges in Helsinki, Copenhagen, Stockholm, Reykjavík, Riga, Tallinn and Vilnius.

European companies that are not big enough to go public in the U.S. should consider listing on one of NASDAQ’s Nordic exchanges and use that as a bridge to go public on the New York exchange in the future, says Kostyal.

He is optimistic that NASDAQ’s Nordic exchanges will see more tech listings.

“A lot of companies are a bit fed up with AIM [a UK market for smaller, growing companies ] and with our own growth market, NASDAQ First North, we offer a much more liquid alternative for these companies,” he says.

“First North has already had 40 listings this year and growth companies are attracted by the possibility of being part of the NASDAQ ecosystem.”



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