Our IPO journey

A version of the following post was given as speech last week to Euronext Dublin’s IPOready participants, who have just completed module 1 of the programme.

As a startup founder, I have lived through 10 venture capital funding rounds — as well as one aborted IPO. On the other side, as a venture capital investor, I’ve been through more than a hundred funding rounds with portfolio companies. In 2016 I finally experienced the IPO journey, when we IPO’d our venture capital business — so founders everywhere will be delighted to know that every now and again, even venture capital investors are forced to taste their own medicine!

Private vs public

Raising capital is one of the biggest challenges that any entrepreneur will face, especially in Europe, where private capital markets are not as deep as they are in the US. Despite being more than 50% larger than the US in population terms (513m vs 329m), the EU’s private growth capital market is less than a quarter the size of the US market ($23B vs $107B in 2018 according to Pitchbook).

In this context, it seems increasingly incongruous that more growth companies are not pursuing public listings. In part, this discrepancy is due to the fact that there are many advantages relative to private fundraising.

• Founders and management team can retain control of the business while still achieving some liquidity.
• “Tired” investors can exit partially or completely, allowing for a “refresh” of the investor base and eliminating the pressure to exit.
• The company potentially has a currency for acquisitions.
• While governance requirements are set at a high level, individual investor controls largely fall away.
• Liquid share options represent a much more attractive incentive for talent than illiquid private company options.

Our IPO Journey

Our own IPO journey in Draper Esprit was, in many respects, prompted by the collapse of a €200m private fundraising, which we had been working on for many months. One investor withdrew and that brought the whole edifice crashing down. We began to realise that many investors simply weren’t prepared to be locked up in a completely illiquid investment for 10 or more years, yet there was huge hunger in the public markets for exposure to growth technology investments in particular.

The IPO itself was extremely hard work and it wasn’t necessarily a smooth passage. A publicly-quoted venture capital business was a novel concept and we had a lot of explaining to do. How would the model work? How would we value our investments? What information on the underlying (private) portfolio companies would we be able to provide to the market? Yet it became clear very quickly that we were talking to an entirely new universe of potential investors that wouldn’t even have considered a conventional, illiquid venture capital fund.

Many of those investors had very large amounts of capital to deploy, and had decision making cycles that were remarkably short when compared with LP investors in venture capital funds. After a significant delay, we finally went public on the Dublin and London markets on the 16th of June 2016 — just a week before the Brexit vote in the UK. (You need a little luck in business sometimes!) Our initial market cap was just £120m.

Lessons learned

The real revelation, however, came afterward. We were lucky enough to have a great start our out of the gates (exiting Movidius at a significant premium just months after the IPO and demonstrating to investors that the model worked) and we were able to go back to the market three times in less than two years, raising an additional £315m for further investment in the portfolio.

Each of those three fundraisings took just 6 to 8 weeks to plan and execute, and our share price more than doubled. And all of the senior management team have been able to achieve some liquidity.

Of course, there are also some downsides. The level of public disclosure required is, obviously (and necessarily) higher than that required of a privately held company. Board independence becomes essential and there is a significant, though frequently overestimated, compliance burden. It’s also true that public markets are not a fit for every business; if your market cap is too small, it can be difficult to attract the attention of major institutional investors. If your business is volatile or unpredictable, the public markets can be unforgiving.

But in saying all that, I can confidently say it’s something I’m sorry we didn’t do sooner…