Posted by James Worrall, Partner
Funding tech: an IPO is not the only way
Modern tech businesses are often mature, profitable companies by the time they come to list on the market. Is there merit in getting onto their growth curve earlier?
Too late to invest?
Last week’s Sunday Times interview with James Anderson, manager of the Scottish Mortgage Investment Trust, makes a point that by the time tech stars come to list on the market, many are ten years old and much of the gain in their value has been made.
Why is that? Instead of floating within the first five years like they would have done a decade ago, future tech stars, while they are still small, more and more frequently opt for raising funds privately instead of via flotations. It is often the smart play for tech companies whose costs are relatively low and can be covered by investors rather than via an IPO.
Why stay private?
While not every tech start-up aspires to be the next unicorn in the market (‘unicorn’ being the label for privately held start-up companies valued at over $1 billion – think Airbnb, SpaceX and Ola Cabs), decisions as to sources of funding for growth are equally relevant. With the increase in funding streams, tech businesses that do aspire to list on the stock exchange are frequently able to do so later.
Conversely, maintaining private company status for as long as possible can facilitate businesses’ longer-term decision making, as they are not obliged to report every 13 weeks to the stock market and so are less concerned by short-term impacts of decision making and share price volatility. Anderson references Spotify, the streaming giant into which his fund invested back in 2015: “The owner said to us, ‘How could I build this business if it were a public company? We are taking on piracy, competing with giants such as Amazon and Google and taking on the entire music industry. You can’t do that if you’re worrying about profits and reporting on your progress every 13 weeks.’ ”
In the hunt for better returns for investors, Anderson explained that he sought the board’s permission to invest a material proportion of the Trust’s £7.8bn of assets into unlisted companies. Decisions such as this one have supported the development of funding options for private companies without the need to float.
With smart investors such as Anderson backing unlisted companies, the future looks bright for tech start-ups. The only trick is to come up with the next Airbnb, Deliveroo or Uber (this one private for only another week – link to Uber article). Easy?
For more information regarding funding options for growth contact James Worrall or another member of our Corporate team:
01225 730 170 Email us
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