Online used car seller Cazoo opted for a New York listing over London
Nadine Dorries was in an ebullient mood. Six weeks after a Cabinet reshuffle made her Culture Secretary, a post that includes responsibility for the UK’s digital sector, she laid out her priorities in a speech to the annual dinner of lobby group techUK.
Playing to the audience, Dorries promised to tackle the “stuffy culture” of the City, which she said made investors reluctant to back tech start-ups.
She also promised to make London “the best place in the world” for entrepreneurs to float their companies, saying: “we don’t want to see British companies have to go do that in New York”.
The timing was unfortunate. Later that week, Matt Moulding, the embattled boss of ecommerce company THG, said listing in London had been a disastrous choice that had “sucked from start to finish”.
“The obvious lesson is: don’t IPO in the UK,” a despondent Moulding told GQ. “I should have IPO’d in America. That’s obvious.”
London’s sinking floats
Moulding was a special case. His business was in the middle of a downward spiral – desperate attempts to win over shareholders were backfiring and its shares were in freefall.
But he is far from the only executive running a UK-listed tech company that has looked to greener pastures on Wall Street. The likes of cloud computing company WANdisco, music service Napster and – before it was put up for sale – software company Blue Prism have this year considered or confirmed plans to move their listings to New York.
Billion-dollar startups like online car seller Cazoo, digital health app Babylon and electric van maker Arrival have also chosen to list in the US instead of the UK.
London has had its own successes, attracting the likes of Wise, Oxford Nanopore and Darktrace, pushing the number of tech companies in the FTSE 350 to a post-dotcom crash high this year. But still, the number of companies looking stateside suggest the Government has work to do.
“The UK has difficulty in valuing companies that are building tremendous value,” says David Richards, the founder of Sheffield-based WANdisco, which this year said it is considering a New York listing.
“The US uses a completely different set of metrics to value companies. And until that changes, it is going to be very hard for UK companies to reliably list in London; until the investment community understands how to invest in tech. UK investors on the whole, are very focused on short termism,” says Richards.
“Would Amazon have been able to survive in London? Would Salesforce? I doubt it.”
Richards repeats a common concern among tech founders: that the London Stock Exchange is dominated by investors seeking profits and reliable dividends, rather than growth and investment. This phenomenon recently led Paul Marshall of investment manager Marshall Wace to call the City of London a “Jurassic Park” where investors “dedicate themselves to clipping coupons rather than encouraging growth and innovation”.
US tech valuations far outshine UK rivals
This year Napster, the music streaming company formerly known as MelodyVR, announced plans to delist from Aim, London’s junior market, ahead of a Nasdaq flotation in 2023.
The company argues this would give it a valuation close to its competitors with chief executive Anthony Matchett saying this could be anywhere between seven and 15 times the £35m valuation it had in the UK before announcing plans to switch.
“Nasdaq is a much more appropriate market, because of the investor sentiment because of it being more sophisticated,” Matchett says.
“I don’t think that’s anything against the UK, but it’s just that Silicon Valley culture has bred a lot of amazing high growth tech companies, and people are used to seeing those list in the US. It’s tried and tested.”
Lewis Liu, an American who founded his software company Eigen in the UK, recently announced plans to move its headquarters to New York. While a flotation is at least two years away, the company’s move Stateside was partly inspired by a desire to list in the US – and he predicts more will follow.
“There is no trillion dollar company outside of America. We have an opportunity to be a massive company, and the US capital markets can support that.”
Meanwhile, the rise of blank cheque companies known as “Spacs” in the US have also made Wall Street more attractive to British startups, particularly those without the reliable income treasured by City investors. Spacs typically target early-stage firms that have little in the way of revenues, let alone profits.
Cazoo founder Alex Chesterman, who floated his previous company Zoopla in Britain, says New York was a much better destination this time, because Cazoo was lossmaking and planned to invest its money back into the business.
“Some people [in the UK] struggle to get their head around the idea that your plan is to lose money. That’s a plan that US investors understand more readily and are more comfortable with.”
Number of tech firms listed on FTSE 350
This year, ministers and the Financial Conduct Authority have made highly-publicised efforts to make London more appealing to technology companies, with reforms that make Spacs easier and allow for features popular in the US, such as dual-class share structures. But changing the rules can only do so much: one investor says that the City simply suffers from a lack of growth funds and analysts who understand tech.
“When people say the London Stock Exchange doesn’t support tech companies, they don’t mean London Stock Exchange the capital market, or the company. What they mean is the entire financial ecosystem of the city.”
The UK has not been devoid of successful tech floats in the last year. Many of those considering crossing the Atlantic had previously been feted by investors, only experiencing a change of heart when things started to go south. Their problems could be their own, rather than London’s.
But even those who are staying put often grumble about short-termism in private. Many would say that Dorries’ diagnosis of a stuffy culture is correct. Identifying the problem is one thing, but fixing it is another matter entirely.