It’s a fascinating time to be considering the subject of how to make the UK’s technology businesses a more attractive investment proposition. Hot off the press is news that the London Stock Exchange (LSE) has published its draft rulebook for the High Growth Segment, a new Main Market segment for high growth companies.
I believe that this is a positive step by the LSE. As tech businesses are strongly represented among the UK’s high growth businesses, a greater number of tech companies seeking investment via this route is anticipated. This development should also provide investors with easier access to the UK’s future tech success stories.
The reduction in the free float requirement (the amount of shares which have to be made available to investors) from 25 percent to 10 percent is the big change which has been made, and if it takes off, the High Growth Segment should act as an important stepping stone for companies ultimately seeking a full listing.
The LSE is clearly doing what is within its power to help tech companies to engage with investors. However, it can’t influence the relative enthusiasm of investors in the UK compared to New York or Silicon Valley, for example.
It’s therefore important that UK tech businesses properly understand the needs of investors. I believe that investors need more time than they are typically given to consider these companies in order to fully understand and evaluate them as an investment opportunity.
Many UK tech companies are often attempting to prepare for their IPO too quickly. I see the process being managed better in the US, where, in simplistic terms, companies typically announce to investors that, “In two years we plan to become a public company and these are our plans ahead of doing so.” This gives potential investors time to understand the nature and value of the business.
In contrast, in the UK, preparations are made more privately and intentions announced much later once plans are more fully formed – giving less time for investors to consider the opportunity. There is definitely a different mindset and I’m an advocate of the US approach.
Another concern is that too many tech companies focus on recent sales and not on understanding where future growth will come from as a measure of their value. Too often this leads to disappointing financial results after external investors have been brought in. I believe that today’s tech businesses should focus more on demonstrating a commitment to long term, sustainable growth.
For example, investors are likely to consider an opportunity as being less risky if a business has a portfolio of revenue generating products or has acquired complementary businesses – rather than having a single product or piece of technology.
Rightly or wrongly, there is also a feeling in the UK tech sector investor community that there are fewer and less well-informed tech analysts here than in other countries. This needs to be addressed to ensure that we can articulate the opportunities offered by individual tech companies - and investors have the information and confidence needed to invest.
Given the strong performance of the UK tech sector, it’s of critical importance that a coordinated approach is adopted in order to make our technology businesses a more attractive investment proposition – and to make the UK a more appealing long term home for them. The LSE can help, the tech analysts can help, but most importantly, the rising stars of the tech sector can help themselves by having a considered approach to how they engage with investors to help fund their ambitions.
Linda Main is a Transaction Services Partner at KPMG in the UK