You don’t have to be a unicorn to IPO

01 August 2019

You don’t have to be a unicorn to IPO

Virgin Galactic’s SpaceShip Two craft reached the edge of space for the first time last December, and a test flight in February 2019 carried its first passenger aboard. It heralded many thousands of column inches and culminated with the recent news that Virgin Galactica would soon be listed on the New York Stock Exchange (NYSE), arguably the most liquid of all markets. 

Chamath Palihapitiya, a billionaire tech investor and former Facebook executive who will chair the new listed company, said: “The risk-reward is really compelling, comparable to software companies right at the start of their growth.”

For some of the tech unicorns here in the UK (and those aspiring to be one) the galactic heights of a ‘big board’ listing probably seem light years way. It is true that floating your company needs fortuitous timing and meticulous planning, but with an abundance of each anything is possible. 

Photo by NASA on Unsplash

What to consider when preparing to IPO

There are various factors that contribute to a successful IPO, including a solid management team, good advisers, strong corporate governance, a robust business model (or at least a vision of one) and plenty of cash. The last ingredient is essential as the process is costly: one-off costs in the US are estimated to be between US$1-2m and in the UK it can cost up to £1m for a similar listing on the world’s oldest exchange, the London Stock Exchange (LSE). 

Where to list is also an important aspect to consider. So-called unicorns, or private technology companies that are worth more than $1bn, will by definition only be interested in the well established exchanges whose liquidity can satisfy the enormous financial appetites for their traded stock. Although for smaller companies other exchanges are worth exploring. 

UK a strong market for tech unicorns

The term ‘unicorn’ was first coined in America by seed-funder and venture capitalist Aileen Lee in 2013 (source: Welcome to the Unicorn Club, Techcrunch), but the UK has been highly successful in engendering such legendary animals despite the tricky economic climate. Indeed, some 13 new unicorns have been created over the last 12 months. In the last year, the UK has been ranked third behind the US and China for creating fast-growing global tech companies, whilst London ranks second to the US Bay Area for the number of ‘fintech’ unicorns (source: Tech Nation, June 10th 2019). 

The reasons why the UK provides such a good culture for entrepreneurialism are varied. UK Government tax relief schemes such as The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) certainly help. This is in addition to the myriad mentorship, incubation and support programmes available to business owners, which have helped create a healthy start-up mentality across the board. Lastly, the London stock markets have a market for everyone no matter how big or small they are.

The recent float on the LSE of Trainline, the transport-booking app owned by US private equity group KKR, is a great example of a hugely successful tech IPO. The firm was valued at nearly £2 billion after the first days’ trading and it remains on track after strong results were posted for the first quarter. Interestingly, the number of companies listing on the LSE bounced back in the second quarter after the extension of the Brexit deadline and reached a total of 15 – triple the number in the first quarter (source: EY IPO Tracker). 

Junior markets

For the British unicorn the current climate is certainly bullish, although popular wisdom suggests that while London is home to the largest number of billion-dollar tech companies in Europe, getting an IPO off the ground post-Brexit will be tougher. 

It seems unlikely that any of them will debut on the senior market before the Brexit deadline but there has been plenty of activity on London’s junior markets – AIM, NEX and even the Standard Listing, the secondary listing on the main London Market favoured by companies not wishing to go onto any of the junior markets. The Brexit extension has actually accelerated placings on these small cap markets as companies have increased the pace to go public before the deadline. For many of Evolution Capital’s targeted clients, or mid-market TMT companies, an IPO or introduction onto one of the smaller London exchanges could be a viable float alternative.

Nick Nelson, CEO of aspiring NEX debutante SulNOx Group explains: “Essentially there are three reasons why a company goes public: to raise money, to give shareholders an exit or to gain credibility with potential suppliers. The main reason for SulNOx to go public is for us to gain credibility with potential customers for our products. It is much easier for multinational companies to do business with publicly listed organisations. We concluded all our fundraising pre-listing which simplified the listing process. Additionally market regulations mandate a working capital requirement of 18 months and once this was raised and banked the rest was straight forward.”

Preparation still a must 

There is still a good deal of preparatory, regulatory and administrative overheads to be met as part of the process, even on these junior markets.The regulatory requirements in the UK are certainly less onerous on AIM than the main market but there are still numerous requirements to be fulfilled. A nominated advisor (NOMAD) needs to be recruited, to guide the company through the listing process, effectively acting as a regulator and ensuring rules are adhered to. One-off costs also need to include audit, accountancy and legal requirements and monthly recurring fees will include NOMAD and exchange fees. 

NEX also necessitates an independent advisor to be appointed by the company whilst the Standard Listings are self-policing. There will be plenty of additional work and administration from prospectus writing to feasibility studies but once everything is in place the company can start trading.

Entrants to AIM should not expect much change from £500k, although a listing on NEX will come in at around half that amount. There will still be plenty of market regulations to comply with on both exchanges, but if forecasts are met, good news is forthcoming and fundamentals kept solid there is no reason why the company’s stock will not trade freely with an upward tick. One should never underestimate the amount of time needed in preparation for either an AIM or NEX listing. 

Nigel Cook, MD of Evolution Capital, said: “Whether a company’s board decides on flotation or disposal as part of their growth and exit strategy there is no escaping the sheer amount of effort in the preparation of either. Whatever the route chosen, getting an adviser who knows the ropes is an essential part of the road to success.”

Benefits of an IPO 

Listing on a stock exchange can be a central spoke for a business owner’s growth strategy, but there are a number of other benefits to be gained. Being able to access new capital, becoming more credible to larger customers or just attracting and retaining better people is a definite benefit of being a listed company.

Blue Prism, Warrington-based RPA (Robotic Process Automation) pioneers, floated on AIM in 2016 and entered the market at 78p a share, a price that rose dramatically and within three years exceeded £25.

Chief executive Alastair Bathgate said: “Strategically, we wanted to stake our claim on this new RPA market as a leader in that space. We wanted to make ourselves more credible dealing with some of the large partners and customers. They prefer doing business with a public company.”

After an almost 10 fold increase in revenues in four years and an ascending share price the company was able to access £100m at the beginning of 2019, which paved the way to the purchase of two major complementary RPA vendors earlier this year.

For any company, great or small, going public is not for the faint-hearted. The process requires passion, commitment and great attention to detail. But for those owners and boards who decide on this route it can be very rewarding. Businesses all around the UK are contemplating how they can expand: with the right plan, a correctly executed public flotation could be the answer.

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