Fund managers will miss out on the UK’s next Google or Facebook if they continue to disregard the coming wave of matured startups going public in London, say top tech investors.
London venture capital firm LocalGlobe, which has backed the likes of Robinhood, Wise (formerly TransferWise) and Zoopla, warned that almost all of the capital being invested in so-called scaleups comes from international private equity sources, such as the Ontario Teachers’ Pension Plan and Temasek.
Saul Klein, a partner at LocalGlobe and early Skype executive, said the lack of participation by domestic funds in the scaleup ecosystem represented “a pretty catastrophic miss in the last 20 years”.
“We now have 20 or 30 companies wanting to go public every year rather than two or three,” he added. “The last 20 years should give us enough evidence that this is not like a flash in the pan, there are some fundamental, massive secular trends underpinning this shift from public to private [capital].”
Data collated by LocalGlobe showed that nine of the world’s top 10 companies by market value are founder-led, and seven of those were backed until IPO by venture capital funding.
“It’s all very well saying that the great returns are going to be in alternative asset classes and investing in private markets, but those asset classes are entirely inaccessible to retail investors unless they’re being accessed through pension funds and insurance companies,” Klein said, speaking at a 27 April media briefing.
Robin Klein, who co-founded LocalGlobe with his son, said the reason the UK and FTSE have lagged behind New York indices in terms of performance is that fund managers in the UK “have really not got to grips with the opportunity” at hand.
The comments come in the wake of a listing for food delivery app Deliveroo, which failed to meet expectations as shares fell as much as 30% on its first day of trading. Other UK tech stars, such as Darktrace, Wise and Oxford Nanopore, are next up to test London’s investor appetite.
Robin Klein added that changes to London’s listing rules, which would allow for dual-class share structures and a greater free float percentage, “are really just moving the deck chairs around”.
“It’s not attacking the root cause of this disparity, which we believe is due to a lack of understanding, a lack of commitment to the sector, and a lack of education as to how to value these companies and the time horizon that one needs in order for these companies to mature,” Robin Klein said.
A survey of LocalGlobe’s portfolio companies showed accessing dual-class share structures were “bottom of the list” of the primary reasons why UK tech firms want to go public. Additionally, 60% of respondents would favour an IPO route, compared with 13.3% considering a direct listing and just 6.7% viewing a Spac as most attractive.
Julian Rowe, general partner of LocalGlobe’s sister fund Latitude and former head of digital media for JPMorgan in Europe, said the next cohort of tech companies is “just about to be under our noses here, and there’s a tremendous opportunity — and a tremendous risk of missing that opportunity — unless something changes”.
The survey showed that good analyst coverage of the sector by banks was the top reason for companies in deciding where to list their business, at 66.7%.
Rowe said that analysts act as “the conduits between your company and everything you’ve built, and the outside world”, making them an important factor for startups in determining share price success.
“You really want people with the expertise to do that. And if you can’t find them in a certain geography you will look elsewhere. It’s a tremendously important magnifying effect, particularly when it means with that, you have a share price that updates every millisecond.”
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