In September the coalition government joined forces with the London Stock Exchange and entrepreneurs and investors to kick-start on effort to make the on-ramp to a capital market listing easier for fast growing technology business.
As one of the figureheads behind the drive, Index Ventures’ Robin Klein tells us why he feels so strongly about the issue and what he hopes it will achieve in the future.
What were your initial frustrations which led to you getting involved?
We have been very involved in helping to build an early-stage ecosystem and community, promoting London as a centre for tech innovation and entrepreneurship.
That process has been taking place over quite a long time and when I count back and think about what it was like when we first started there was very little enthusiasm and capital.
We are great believers that if opportunities exist, and there is the will, then a static situation should be made more dynamic.
I suppose the issue has risen because a number of companies are growing up and becoming of the size where they need to decide on their next step. The London Stock Exchange is not providing a potential outlet for them.
What is happening is that they are either considering or completing a listing in New York or on NASDAQ, or they have just sold out.
We have had a situation with a number of companies where we have felt that perhaps they had sold themselves too early, not simply because the founder was tempted by a good price.
I think what we are hoping is that if the London Stock Exchange could open up a bit more we could see a number of them choosing to stay at home and list on stock exchanges to continue to grow their businesses.
Who are the main parties involved in this drive?
We see the three stakeholders in this, maybe four. One is the companies themselves – we need to make them aware that one potential route to continued expansion is to list.
The other is regulation, which frankly on its own regulation isn’t going to solve anything but it will smooth the way. What the government involvement has done is really opened the issue up and put it on the front page. I think that in itself is a big step forward as people are now talking about it. And there is a debate to be had, as there is no one solution to this.
The third stakeholder, and the toughest one that will take longest, are the investors -people who are going to buy the shares in these companies. You can understand why they might be reluctant and there are a number of reasons why. One, because previous tech flotations have not performed well enough. Also, recently the likes of Facebook and Zynga have clearly been priced too high. Finally, those with longer memories will also think back to the burst dot com bubble.
Investors who are not close to the tech phenomenon that has taken place over the last ten years could be negative.
From inside, we know that the current tech expansion and growth is nothing like the dot com boom and bust, these are real companies and with solid cash flow.
They are tech-enabled businesses, which are growing at the expense of the old economy. Examples are Rightmove and Zoopla which have taken away massive amounts of print and classified advertising and directed in their direction.
There are lot of very smart investors who need exposure to these companies and part of what we want to do is help expose these companies not to say buy these shares as they might not be ready for flotation but just to get to know them and figure out how they are growing so fast.
Are the government and capital markets accepting that more needs to be done?
Yes I think that is absolutely the case. The government has seen that very quickly and I suppose one of the reasons is the Jobs Act in the US, which was designed to do exactly that.
You might say they didn’t have a problem so why would they introduce the act. They wanted to stimulate what was already happening to bring these fast growth companies to market.
I look at some of the comments in the FT, which has run articles on both sides of the argument, and some against the push imply that either venture capitalists or companies themselves are trying to rush to the market when they are pre-formed and that we want the listing rules to be reduced to make half-baked companies come to the market.
That is not the intention at all and we would be making a massive mistake if we bought any company to market which was not profitable, cash generative, well governed and with predictable earnings, so the changes we are seeking have nothing to do with loosening the governance.
Venture capital-backed companies are very well governed and from Series A these companies have all the necessary framework in place including renumeration and audit committees.
What will be the measure of success for this development?
I think it is going to take time but what we want to see is one or two companies coming onto the market and be well received by a category of investors and larger institutions. Furthermore, we’d like to see some specialist analyst positions being created in certain institutions who will focus on sector. Those would be specific goals that we would like to see achieved.