With a mix of experience around the table, from CFOs with £billion floatation experience through to running very early stage, founder led businesses, there were plenty of opinions shared between the pros and cons of IPO versus trade sale.
Twenty-five companies have successfully achieved an IPO across London Stock Exchange’s markets so far in 2012, with software firm WANdisco plc recently joining AIM with a market capitalisation of £37m, raising £15m in gross proceeds.
An IPO is certainly seen as a good way to raise funds, although rarely do the founders fare particularly well financially. Though it can provide favourable returns for seed and ‘A round’ investors, Founders with an executive role within the business are often unable to capitalise on share options without unsettling investors and the wider markets. Floatation can see a major change in the dynamics of a management team. The demands of being a public company put immediate pressure on the CFO in terms of the regularity and compliance of financial reporting, and the CEO immediately becomes the public figurehead of the business. Neither of these changes sits comfortably with every management team, and the shift from being an entrepreneurial, agile business to one constrained by public reporting can often lead to a change in leadership.
Some thought that an IPO is however, an easier way to raise funds than approaching institutional investors. The due diligence can be less onerous, though the downside is that investors are much more likely to liquidate their investment in a shorter timeframe than if the management team were working with the backing of Venture Capital.
Investors in new listings are unquestionably attracted by the quality of the management team, along with how compelling the story for growth and further investment is, and with a strong Chairman on board, the attraction is even greater. For technology deals, patents are essential, and though it is unlikely that you will see any gain in valuation, without patents it will be very difficult to attract any significant investment.
Interestingly, most agreed that an IPO, rather than being seen as an exit, should be the catalyst for growth. It can provide both the credibility and transparency to underpin further equity capital raising rounds. With AIM companies raising a collective £3.7b in further issues last year, listing can be a great way to leverage the company’s value to make future acquisitions without needing to use cash.
However, with the majority of the room having worked mainly in early stage, technology driven businesses, where the founders are still key components of the management team, a trade sale is still seen as a more lucrative exit option. It was commented that though this seems to be a preferred route, the culture divide between the UK and US still seems to prevent the billion dollar start up from becoming reality, with most founders content to sell out rather than follow in the steps of Facebook, Google et al.
Thanks must go to Ken Ford for Chairing the discussion, as well as to Mark Russon, Arild Eide, Julian Rae and Quentin Golder for their advisor contributions and of course to all those who participated in a fascinating discussion. Bailey Fisher looks forward to seeing you at its next CFO dinner in the autumn.
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Bailey Fisher's regular series of CFO dinners are run on an invitation only basis. If you would like to know more about them, and its other networking events, please contact Andrew Moore on 01223 422438 or email; Andrew@baileyfisher.com
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