Is the IPO boom a good thing for British startups?

Should UK startups be encouraged by the recent surge in IPO activity or is there legitimate cause for concern?

Is the IPO boom a good thing for British startups?

The recent flurry of IPO activity in London has been dominating the business pages. With retailers and tech firms floating on the London Stock Exchange left, right and centre, it seems that companies are shaking off the shackles of recession and going all out for growth. It is certainly difficult to dispute that the market is looking rather buoyant and with investor confidence sky high, a wave of excitement is flowing through the City.

Nevertheless, Fat Face’s withdrawal from an IPO – along with the difficulties that have plagued the likes of Saga and Royal Mail since their flotation – have created some cause for alarm. Especially where our cherished start-ups are concerned, what is to be made of the IPO boom? Could our most promising young firms be unwittingly encouraged to jump on the bandwagon too early? Or is it exactly the catalyst they need to go full steam ahead and raise the cash needed to fuel growth?

As one would expect, people on the front line have opposing views on whether the rush of IPOs is a healthy thing for the UK’s start-up community. Here’s what a couple of them had to say.

“An exciting prospect for entrepreneurs”Theo Osborne, managing partner, Force Over Mass Capital

The surge in IPO activity is undoubtedly healthy for the UK’s start-up community and for the UK technology scene in particular. IPOs raise awareness of the UK as a highly attractive technology hub, incentivise the creation of profitable exchanges beyond NASDAQ and give hope to UK entrepreneurs whose goal remains to achieve a higher valuation on domestic public markets. From a technology perspective, going public enables companies to raise the capital necessary for extensive R&D phases, which are crucial to bolster further innovation.

Moreover, whether it’s on the AIM or the main market, listing in the UK draws competition out of NASDAQ and creates a more level global playing field. Fat Face’s decision to abandon its IPO in retail should be taken in context as one company in the high-street retail sector and not generalised to represent market conditions everywhere. In reality, there were 62 successful listings and £1.1bn of capital raised through IPOs in 2013 according to the head of AIM, Marcus Stuttard. Given that the UK’s deal volume has reached a three-year high of over £7bn, it’s unwise to let a few anomalies colour a highly lucrative, promising and exciting prospect for entrepreneurs.  

In short, British entrepreneurs who are focused on high-growth businesses should feel confident about listing on our public exchanges.

We need to get valuations under control”Professor Vikas Shah, founder, Thought Strategy

The recent IPO boom has certainly proved one major fact: investor appetite for high-growth young businesses has (to some extent) returned. For those who are ready to go to market, this can undoubtedly provide an excellent exit for early investors, partial exits for founders and inspiration for the rest of the market that may want to follow in their footsteps. A buoyant IPO market is also a great signal to the rest of the world that we’re open for business.

My concern however stems from the valuations and multiples that many of these IPOs place on businesses that follow the route. While I would not go all-out and say we have a bubble, I think there is definitely some irrational exuberance in the valuations of new IPOs in the high-growth start-up space which invariably will rarely be met by performance figures moving forward. When that happens, people will start pulling money out and that’s dangerous. I really hope that we manage to get the valuations under control to allow these publicly quoted young businesses to become sustainable market participants.

The start-up scene globally is really hot at the moment and it’s important for the UK to retain a competitive edge in terms of funding. This means angel/seed funding, venture capitalists, private equity and the public market will need to work to build sustainable conditions for their investees. 


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