Taking a company public is many entrepreneurs’ ultimate dream. The idea of achieving “unicorn” status (AKA a billion-dollar valuation), embarking on a roadshow, and ringing the iconic bell in New York City is enough to make any go-getting founder drool.
But for many, the prospect of reaching this milestone remains just that: a dream. Going public in the US is expensive, difficult and stressful, even after the initial public offering has passed.
According to Chris Mayo, Head of Primary Markets for the Americas at the London Stock Exchange Group, there’s a better way – and it’s just across the pond.
Going public in London is a more accessible goal for many, with its lower barrier to entry and long-term cost-effectiveness. Additionally, London’s growth market AIM tends to focus on smaller companies averaging between $50-$200 million in market capitalization (versus the United States’ typical starting level of $1 billion).
“We get companies from the US as small as $50 million of market cap and they have been successful,” Mayo said. “A Maryland-based company from a few years ago actually listed a $45 million market cap. It’s now above a billion-dollar cap and is planning a Nasdaq listing.”
In looking at the typical list size on the AIM, Mayo noted that revenue is another consideration that is especially relevant for technology businesses, in addition to the market cap.
“I think the rule of thumb in the US has been, we want to have at least $100 million of annual recurring revenue before you go public,” he said. But to list on the AIM, ARR is significantly lower, with $10 million as the usual entry point.
AIM and London’s Main Market serve different niches, especially from a company size perspective, somewhat similar to NASDAQ and NYSE, but unlike NYSE and NASDAQ, they both sit under one roof at London Stock Exchange. AIM’s size focus and corresponding regulatory framework make it a good match for SaaS businesses.
Moreover, a company doesn’t have to have a presence in the UK in order to list on the AIM, and listing in London has immediate financial benefits. The IPO process is more flexible than the US, as the US requires a costly draft registration statement prior to seeing investors in “testing the waters” meetings. On the other hand, companies that go public in London can feel out their options without the need to have costly draft documentation in place.
According to Mayo, not only is the cost of going public and being public significantly lower in the UK than in the US, litigation risk is also much less severe. This is why a smaller company can handle the burden of being a public company more easily in the UK.
The icing on the cake? Going public in London comes with a sweet bonus: a liquidity option. Compared to the US (where it’s incredibly difficult to sell secondary stock at IPO for growth companies), founders and venture capitalists (VCs) at companies who list in London often have the option to sell into the IPO, which generates a cash return for part of their shareholding on day one.
Mayo says going public in London is a stepping stone to an American IPO for some US companies. The business gets access to high-quality institutional capital at an earlier stage and without the hefty long-term expenses, which keeps the business lean and fuels growth. Later down the line and with higher market capital, the US company can consider listing with an American stock exchange as a number have already done.
According to Mayo, London has most recently attracted technology companies and businesses in life sciences. He pointed to Boku as an example: the fintech company, which was backed by Andreessen Horowitz, Benchmark Capital, Khosla Ventures, NEA and Index Ventures, wanted to go public but only had about $25 million in revenue. Instead of aiming for an American IPO, they listed in London with a large secondary sell-down by VCs as part of the deal. The VCs have since been able to perform further accelerated sell-downs of their stake in the company. Since then, Boku has raised capital twice for two acquisitions.
“In general, I’ve noticed an uptick in cloud computing businesses, companies focused on digital and handheld technology, and SaaS businesses focused on specific industries. More and more of these companies are looking to list in the U.K.,” Mayo said. “It makes sense. It’s a much less expensive way to access high-quality institutional capital, at a much smaller size range than you can in the US. It really is a very interesting angle for both founders and VCs to grow their businesses.”
How can a US-based SaaS business prepare for a London listing? As a former investor in SaaS businesses, Mayo has specific insight.
“From a financial perspective, predictability over financial performance is key. The one thing the public market hates is volatility in revenue performance,” he said. “Governance is another area founders need to focus on. There’s a level of formalization required. You need to put a board in place that has the right level of expertise and diversity. Quite frankly, most businesses do not have that, and it takes a lot longer to put in place than many realize.”
Additionally, Mayo said founders looking to go public at any point in the future should evaluate their accounting systems to make sure they are robust enough to handle the requirements for a public company.
“Public companies are held to a higher standard than private companies, so you likely will need to make some adjustments to your systems,” he said.
Of course, these financial and governance requirements will be present regardless of whether a business decides to list in the US or UK.
“Once you’ve got these in place, you can more seriously consider your options,” Mayo said, “and for a US-based SaaS business looking to go public, London’s AIM is a great option.”
Chris Mayo helps companies and investment managers from the Americas access capital through corporate equity, debt, and fund listings on London’s public markets. He has more than 20 years of corporate finance experience in New York and London for Barclays, Salomon Smith Barney, Citi and Schroders. He has executed IPOs, financings and M&A transactions in the US and Europe worth tens of billions of dollars.