ASEAN Venture Capital & IPOs: Future Growth?

SentinelOne's IPO and the European Tech Listing Landscape

Trading of shares in American cybersecurity firm SentinelOne commenced yesterday on the New York Stock Exchange. Prior to its initial public offering (IPO), the company had secured approximately $700 million in funding.

The company’s debut price exceeded expectations, yet shares still concluded the day with a substantial increase of around 20%.

A Trend of Strong Valuations

SentinelOne’s IPO represents a noteworthy instance within a continuing trend of rapidly expanding technology companies achieving robust valuations on American stock exchanges. The appeal of the U.S. market for public listings remains strong, even attracting tech firms from China despite potential valuation discrepancies.

However, not all technology startups prioritize or even consider an American IPO. A significant number of European companies ultimately choose to list on their local exchanges.

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Exploring European IPO Choices

Following the active IPO period of 2021, The Exchange investigated the reasons behind some tech companies’ preference for European listings over those in the United States.

This inquiry is particularly relevant given the increasing venture capital investment within Europe. The first quarter of 2021 witnessed record-breaking investment in the region, totaling $21.4 billion, as reported by Crunchbase News.

Initial data for the first half of 2021 indicates continued positive momentum in European venture capital activity. Increased VC funding typically translates to more successful startups and, consequently, a greater number of exit opportunities, including initial public offerings.

European IPO Activity is Increasing

IPOs within Europe are gaining traction. Considering the U.K. as part of the broader European market, London-based listings have demonstrated a strong start to the year, both in terms of capital raised and the number of listings.

It’s important to note that not all IPOs have been successful; Deliveroo experienced difficulties following its initial listing in the United Kingdom earlier this year. Conversely, the listing of cybersecurity firm Darktrace proceeded more favorably.

This leads us back to the central question: why do some tech companies opt to list in Europe rather than the United States? What does the future hold for IPOs within the EU, and will we observe more companies, like Wise, choosing to list in their home regions?

Expert Perspectives

To gain a deeper understanding of the current IPO market and its implications for European public offerings, The Exchange consulted with Franck Sebag of EY, David Miranda, a partner at Osborne Clarke Spain, and Yoram Wijngaarde from Dealroom.

The ultimate location for a substantial number of potential listings remains uncertain. The question is whether Europe can retain its emerging corporate leaders.

Europe's Competitive Advantage in Stock Listings

European stock exchanges possess a distinct advantage when it comes to listing companies with relatively modest market capitalizations. A European Union-based startup seeking a U.S. listing generally needs to demonstrate a valuation of at least $1 billion to attract sufficient investor interest. However, for companies valued below this threshold, a European market often presents a more suitable option, as indicated by Miranda in a TechCrunch interview.

The UK's Inclusive Approach

The United Kingdom mirrors this trend, as highlighted in Tech Nation’s 2021 report. The London Stock Exchange accommodates a wide spectrum of companies, varying in size and scope. While the UK holds the third position globally in the number of unicorn companies, achieving a billion-dollar valuation hasn't historically been a prerequisite for a successful Initial Public Offering (IPO) in London.

London maintains an open stance towards tech firms of all sizes, sectors, and nationalities, a fact substantiated by the diverse range of IPOs observed in 2020, according to the public-private organization.

Investor Familiarity and Regional Preference

Despite this broad inclusivity, Sebag points out that it’s uncommon to see a European startup, not headquartered in the UK, choose to list on the UK exchange. A crucial element for IPO success is investor familiarity with the company. “Businesses that primarily operate within Europe are more inclined to select a European stock exchange, as investors there will possess a greater understanding of the specific product or service offered,” Miranda explained.

Considering this, Believe’s recent decision to list on Euronext Paris appears logical, despite its initial market performance. Even within its home country, the digital music company isn’t widely recognized, despite its aspirations to become the “Publicis of music” and its 2020 revenue of 441 million euros (roughly $523 million). Therefore, it remains uncertain whether a U.S. stock exchange would have yielded better results.

Alternative European Markets

Beyond the London Stock Exchange and the pan-European Euronext, European tech startups can also explore listings on junior stock exchanges. Miranda identified three primary alternative markets: AIM, Euronext Growth, and BME Growth (Spain). While AIM has been the most successful since its inception in 1995, Euronext Growth, established in 2005, is gaining momentum and is expected to attract more attention following Brexit.

Testing Investor Appetite

“For small and mid-sized companies – a common profile in Europe – these alternative European markets offer a valuable opportunity to gauge investor interest and prepare the company for increased public scrutiny before transitioning to a main market listing,” Miranda stated. The size of a company is a significant deterrent for European startups considering a U.S. public offering, as compliance costs can be disproportionately high.

Governance and Long-Term Investment

While compliance requirements are generally lower in Europe, the market still prioritizes strong governance signals, as demonstrated by the Deliveroo IPO. Concerns surrounding dual-class shares and worker treatment impacted the offering, as previously noted by The Exchange. This suggests a heightened focus on corporate ethics within European and British markets.

This stems from a mindset that can ultimately benefit companies, according to Miranda. “European investors generally adopt a longer-term investment horizon, which contributes to greater price stability.”

The U.S. Market as an Alternative

While European listings offer certain benefits, Miranda doesn't anticipate a strong surge in companies choosing to go public within the EU. This isn't due to any inherent drawbacks of European markets themselves, but rather the potential appeal of alternative opportunities elsewhere.

The public markets in the United States represent a highly attractive venue for initial public offerings (IPOs). Miranda explicitly stated the rationale: “Companies prioritizing capital generally gravitate towards U.S. markets, which typically offer greater valuations, reduced capital costs, enhanced liquidity, and access to investors with substantial financial resources.”

Sebag echoed this sentiment, noting that the “average capital raised in European IPOs is approximately half that of U.S. IPOs,” even when considering comparable levels of dilution. Consequently, “the disparity in valuation between the two regions is considerable.”

Wijngaarde further elaborated on the factors that might favor a U.S. IPO. He explained that “the composition of a company’s board and shareholder base can play a crucial role; if a significant portion of a startup’s investors are based in the U.S., a listing in New York may be more strongly preferred.”

American markets present the possibility of securing greater funding with similar dilution, alongside a more vibrant trading atmosphere. This combination makes a compelling case for U.S. listings.

Unless current market conditions shift, the United States is likely to maintain its attractiveness for European startups aiming for a public debut. Consider SentinelOne, for example, which recently achieved a valuation exceeding $10 billion despite reporting only $37.4 million in revenue for the first quarter.

However, this doesn't entirely preclude the possibility of increased tech IPO activity within the EU.

The Timing of Exits May Shape the Future

Questions are arising regarding the inclination of European startups to pursue initial public offerings (IPOs), particularly in comparison to the speed at which their U.S. based counterparts do so. With abundant availability of private equity and growth equity funding, the impetus for early public listings is diminished.

Sebag points out that the substantial private funding landscape reduces the reliance on alternative IPO venues for rapidly expanding startups, citing examples like Contentsquare, Revolut, and N26, which secured significant capital outside of traditional stock exchanges.

Despite this, the increasing number of venture capital-backed European unicorns suggests a future influx of IPOs. The location where these companies ultimately list will be significantly impacted by their chosen timing, a factor heavily influenced by the volume of available private capital.

Companies approaching the billion-dollar valuation mark and considering a U.S. IPO may be inclined to delay going public to maximize their valuation. Conversely, those favoring an earlier IPO may find the stock markets within the EU and the U.K. to be more suitable initial listing locations.

This dynamic introduces a compelling question: will a distinct and thriving exit market emerge within Europe? Wise’s choice of a direct listing on the London Stock Exchange (LSE) signals the potential for unexpected developments.

The role of the Alternative Investment Market (AIM) and similar platforms remains to be seen, but will be closely monitored. Further analysis will focus on a trend observed on both sides of the Atlantic: SPACs – more information will be provided shortly.