This is taken from a piece I wrote for the Financial Times.
As a venture capitalist, I invest in technology companies that I believe have tremendous potential. I hope that a number of these will go on to realise this potential through an acquisition or an initial public offering (IPO) – which is how my firm makes its money.
However, there is one small problem. My firm focuses on the European market – and therefore the IPO route is all but closed.
Technology IPOs in Europe are few and far between and, even when they do happen, the valuations and liquidity can’t compare to the US.
Lately, the US IPO market has been in full swing. There have been big IPOs from the likes of LinkedIn,Groupon and Zynga. But, perhaps more importantly, there have also been a number of IPOs from smaller businesses, such as Bazaar Voice, Guidewire, Demandware, Brightcove and Exact Target – all with revenues of less than $100m, and a better price performance than many well-known names.
In Europe, the last big internet IPO was Mail.Ru Group in 2010 – and much of that success was down to its shareholding in Facebook. According to Bloomberg, the value of technology IPOs in the US was $4.5bn in 2011, compared with just $389m in Europe.
Essentially, this means that one exit strategy for start-up investors is off the table. If European companies decide to hold an IPO, they will probably do it in the US – as Qlik Technologies and Xyratex have done. This weakens Europe’s technology industry and means more money and jobs move to the US.
So what can be done? In the UK, the government has introduced some good initiatives, such as R&D tax credits and extensions to the enterprise management incentive(EMI) scheme. But they could still do more.
There is an opportunity to streamline the regulatory and listing process – especially for smaller businesses. Subsidies would also help. And the UK could take the lead on improving the patent process to make it easier for companies to protect IP and prevent the destructive practices of patent “trolls” – companies that buy up patents and then negotiate or sue to be paid for them.
In Europe, leaders need to tone down the rhetoric against bankers and make sure the tax system does not penalise them further. Investment banks, with their all-important analysts, are essential if an IPO market is to flourish.
However, most importantly, the European technology ecosystem needs to mature and produce more world-beating companies.
If some of these go on to list in London, they will inspire other companies to do the same. Success follows success and, over time, this would create greater liquidity, analyst coverage and confidence. It could establish the kind of self-fulfilling system that the US has created.
Thankfully, the merger and acquisition (M&A) market still looks healthy, as large tech companies have unprecedented levels of cash (at least $500bn) on their balance sheets – much of which is in pounds or euros and cannot be repatriated tax-efficiently. A good proportion of it will therefore be spent buying European companies – something that was certainly a factor in Microsoft’s acquisition of Skype.
But, as an investor, I want to see the IPO market opening up. There is still a part of me that regrets that MessageLabs didn’t get the chance to play a part in this when our IPO was derailed by the financial meltdown in 2008. Even so, I still feel the European market offers great opportunities for investors.