Hacking Wall Street: Are tech unicorns about to disrupt stock market flotations?

 
Michael O'Dwyer
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Tech companies already flush with cash are looking to the "direct listing" as a way of saving on adviser fees (Source: Getty)

Tech companies have changed the way we chat, bank, travel and date. Are they about to disrupt capital markets too?


“In [Silicon] Valley there’s always been that mentality: how do we hack Wall Street?” says Rob Kniaz, a founder of tech-focused venture capital firm Hoxton Ventures.

Two weeks ago reports broke that Slack, the workplace messaging app, was planning to go public, potentially firing the starting gun on a slew of major tech company flotations in 2019.

Ride-hailing apps Uber and Lyft, home-sharing giant Airbnb and office space provider WeWork are among those pondering an initial public offering (IPO) in 2019. Uber’s IPO, if it happens, could see it valued in the region of $100bn (£77.6bn).

But if the tech giants are to expose themselves to the scrutiny and regulation that comes with a public listing they will want to do so on their own terms.


Early indications are that Slack may follow the lead of Swedish music streaming service Spotify, which floated in New York last year using a “direct listing”, a novel form of IPO whereby it did not raise any new capital and saved a packet on adviser fees as a result.

Despite lower fees, a direct listing retains a key benefit of the traditional IPO process by allowing existing investors to sell their shares on the public market. This is especially important for tech companies.

“Often with tech start-ups a lot of the employees’ remuneration tends to come through shares and so an IPO is a good liquidity event for them,” says Mark Austin, a partner at law firm Freshfields Bruckhaus Deringer.

More sophisticated investors who backed successful startups early in their development also want to cash in. Investors who have had their money locked up in a private company for between seven and ten years want to get these investments “out the door”, says Kniaz, a backer of Deliveroo and cybersecurity startup Darktrace.

The direct listing route is not for everyone. Some companies need the new funding that comes with a traditional flotation. Others lack the brand recognition or underlying financial strength to pull off this novel approach. But after Spotify’s flotation – broadly deemed a success despite a current valuation that is about 10 per cent lower than at the close of its first day of trading – direct listing is a viable option.

No company has yet attempted a direct listing in London. Metro Bank listed in 2016 without taking on new investors but raised new funds from its existing shareholders as part of the process. But there are other ways in which tech firms could challenge the status quo of corporate finance.

“It is, undoubtedly, the case that the more disruptive companies, who are innovators within their own industry, want a much more thoughtful, creative approach to their capital markets transactions,” says Alex Ham, Co-CEO of Numis Securities, a broker. “What they don’t want to hear is how every other company has gone public.”

One example is the emphasis many tech companies place on attracting retail investors – regular consumers with cash to invest – in addition to more traditional institutional investors.

“The consumer-facing, high-growth companies that might consider going public, ask us ‘how do we engage with retail?’” says Ham.

Many startups have developed stellar brands with a loyal, even cult-like, following, opening up an opportunity to broaden their investor base by selling shares to their own customers. Despite the additional regulatory requirements that apply when offering shares to retail investors, tech companies remain keen to have their consumers invest in the company. As well as raising funds, selling shares to consumers encourages them to feel invested in the success of the business.

For banks and advisers who can come up with the innovative solutions tech executives crave, the rewards are rich.

Bankers are “paying attention to tech like never before” and tech companies “know the cards are in their favour”, says Kniaz.

Austin sees plenty of prospective mandates in the sector: “There’s a good potential pipeline of tech IPOs and exits at the moment, subject to the usual caveats around macro-economic and political issues. There’s been a good amount of pitching.”

Of course, there are some aspects of going public that the tech companies cannot change, at least not immediately. Floating means subjecting themselves to new levels of regulatory scrutiny, which can be challenging for companies for whom disruption is in their DNA. That can cause a “culture shock” for some tech companies, says Austin.

“It’s the Elon Musk problem,” chuckles Kniaz, referring to the founder of electric carmaker Tesla, whose tweets landed him in hot water with the US Securities Exchange Commission last year.

But regulatory requirements are unlikely to stop tech companies swiping right on a public listing in 2019. Barring a macroeconomic meltdown, Kniaz is expecting a “deluge” of flotations. If he’s right, the template for how the world’s biggest companies go public may look quite different this time next year.