Investors’ renewed confidence in technology companies is sparking a host of flotations
Last year was a quiet one for technology fundraisings, with only two IPOs on the London Stock Exchange’s main market and AIM. The global recession, together with burnt fingers during the last dotcom bubble and disappointing performances by some high-profile technology IPOs, conspired to drive investors away from technology investments and towards perceived safer investments such as oil, gas and mining.
However, 2012 has kicked off on a more positive note. The Techmark index was up by 5.3 per cent in January and the recently announced Facebook IPO could be the success story that jumpstarts a new era for the technology markets.
As confidence in technology starts to recover, there seems to be no reason why successful technology companies should not look to the London markets. In particular, AIM, with its flexible system of regulation and access to a deep pool of institutional capital, provides an ideal fundraising environment for cutting-edge technology enterprises that do not yet have the infrastructure to cope with the demands of a full listing in London or abroad, but still offer high growth potential for investors.
Another factor that could help inspire positive sentiment in the marketplace is the UK Government’s explicit support and encouragement of technology companies.
Late last year the Government focused on the growth of ’Silicon Roundabout’ - an area in Central London that includes Shoreditch, Hoxton and Old Street - as a hub where entrepreneurs and businesses can develop and grow.
While some of these early-stage technology companies have been sold to big players for a handsome profit others have held out, growing organically and by acquisition, perhaps waiting for the ideal time for a public offering.
No one would dispute that economic conditions have taken a toll on higher risk investments, steering investors towards the main market and its counterparts abroad. Scepticism about ’flash-in-the-pan’ business models and the fickle nature of internet consumers can scare investors away from investments that have made handsome returns. Indeed, there were many doubters at the time of the Google IPO in 2004.
From a legal and regulatory perspective, early-stage tech companies with innovative business models may be less likely to have the record, capital and infrastructure required for a main market flotation.
In addition, compliance requirements can prove a drain on cash and management resources for smaller companies.
Nonetheless, as risk appetite recovers, these companies are likely to find a better fit on London’s junior market, where fundraising is cheaper and compliance less burdensome.
Lessons will, however, have to be learned from the past. To attract investors, companies will need to emulate Facebook by showing real revenue and growth potential backed up with credible planning and management capabilities.
Reciprocally, the markets will need to offer competitive multiples to keep attracting technology companies to London.