FreeAgent IPO— a sign of things to come?

Update as at 23rd January 2017: FreeAgent is now trading at around £48m market cap compared to the £32m on listing.

Last Week, FreeAgent was listed on the Alternative Investment Market (AIM) of the London Stock Exchange (LSE) raising £8m of primary capital.

FreeAgent, based in Edinburgh, is a provider of cloud-based SaaS accounting solutions designed specifically for UK micro-businesses (defined as sole traders and companies with fewer than 10 employees) and their accountants.

LocalGlobe first invested in FreeAgent in 2009 at a post-money valuation of £1.225m and has invested at every round since then, in addition to buying some secondary shares.

FreeAgent remains a relatively small company with Annualised Recurring Monthly Subscription revenue of just £7.6m, approaching profitability and growing at around 35% per annum. It is trading at a modest market cap of around £30m.

These numbers are important since there are many such technology companies who will not appeal to the traditional venture capital firms but are superbly run businesses with predictable revenues, great products and outstanding customer service. Ed Molyneux, Roan Lavery and Olli Headey have built a company focused on their core customer capable of significant further growth and done so with relatively small amounts of capital.

The decision to list on AIM flies in the face of conventional wisdom and beliefs held in the tech community but may indicate an opportunity for many other mid-sized, angel-backed companies. There have been exceptions of course — ASOS springs to mind — but AIM has largely been ignored or avoided by tech companies seeking capital, profile, liquidity for early investors and employees.

The lack of liquidity and knowledgeable investors is often cited as why one would avoid an AIM listing. Liquidity is bound to be an issue for FreeAgent but certainly not to the extent that remaining private would have been. As to the lack of informed investors is concerned, I’ve been surprised and delighted by the level of interest and the depth of understanding of SaaS business models displayed by some of the investors.

A viable, active IPO market for technology companies is an important element in building and sustaining a strong eco-system. Without NASDAQ, it is doubtful that Silicon Valley could be the powerhouse that it is today.

It seems pretty clear that there are significant pools of capital seeking to participate in the digital economy and the LSE’s AIM is certainly one of the platforms which can accommodate this demand. The growth of the crowd-funding platforms, despite the inherent and obvious risks attest to this.

Now that there is substantial angel, seed and venture capital to back the formation and growth of our technology companies, a liquidity mechanism which enables founders to continue to build their companies is badly needed. Lets hope that FreeAgent and others like it can show the way to a strong, healthy AIM market for quality small and mid sized businesses.

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