Billionaire Masayoshi Son, Chairman and CEO of SoftBank Group Corp., speaks in front of a screen displaying the ARM Holdings logo during a news conference in Tokyo on July 28, 2016.
Tomohiro Ohsumi | Bloomberg | Getty Images
The UK may be a great place to start a tech business, but when it comes to taking the crucial step of building your business, the picture is not so rosy.
This is the lesson several high-growth tech companies have come to London to learn.
When Deliveroo went public in 2021, at the height of a pandemic-driven food delivery boom, the company’s shares quickly fell 30%.
Investors have largely blamed the legally uncertain nature of Deliveroo’s business – the company relies on couriers on gig contracts to deliver meals and groceries to customers. This has been the subject of concern as these workers seek recognition as staff members with minimum wages and other benefits.
But for many tech investors there was another, much more systemic reason at play – and it was cited as a factor behind chip design giant Arm’s decision to avoid a UK listing in favor of a market debut in the United States.
Institutional investors who dominate the London market lack a good understanding of technology, according to several venture capitalists.
“It’s not the stock market, it’s the people who trade on the stock market,” Hussein Kanji, founding partner of London-based venture capital firm Hoxton Ventures, told CNBC. “I think they’re looking for dividend stocks, not high growth stocks.”
“Two years ago you could have said, you know what, this might be different, or just take a chance. Now a group of people have taken a chance and the answers have come back. This is not the right one. decision.”
Many tech companies listed on the London Stock Exchange in 2021, in moves that have boosted investor hopes that more big tech names will start to appear in the blue-chip FTSE100 reference.
However, companies that have taken this route have seen their actions penalized accordingly. Since Deliveroo’s IPO in March 2021, the company’s stock has fallen dramatically, falling more than 70% from the £3.90 price at which it valued its shares.
Wisethe UK money transfer business, has fallen more than 40% since its direct listing in 2021.
There have been outliers, like a cybersecurity firm Dark Tracewhose stock is up nearly 16% from its listing price.
However, the broad consensus is that London is failing to attract some of the big tech companies that have become household names on major US stock indices like the Nasdaq – and with Arm choosing to debut in the US rather than the UK, some fear that trend will continue.
“It’s a known fact that London is a very problematic market,” Harry Nelis, general partner at venture capital firm Accel, told CNBC.
“London is creating, and the UK is creating, globally relevant companies – Arm is a globally relevant company. The problem is that the London capital market is basically not efficient.”
The London Stock Exchange was not immediately available for comment when contacted by CNBC.
The “B” word
Brexit has also clouded the outlook for tech listings.
Funds raised by London listed companies plunged more than 90% in 2022, according to KPMG research, as the market cools due to slowing economic growth, rising interest rates and distrust of UK business performance .
Hermann Hauser, who was instrumental in developing the first Arm processor, blamed the company’s decision to list in the US rather than the UK on the “idiocy” of Brexit.
“The fact is that New York is of course a much deeper market than London, partly because of the idiocy of Brexit, London’s image has suffered a lot in the international community,” he told the BBC.
Arm, headquartered in Cambridge, is often referred to as the “jewel in the crown” of British technology. Its chip architectures are used in 95% of the world’s smartphones.
Soft Bankwhich acquired Arm for $32 billion in 2016, is now looking to launch the company in New York after failing to sell it to US chipmaker giant Nvidia for $40 billion.
Although three British prime ministers lobbied for it to be listed in London, Arm chose to pursue a stock exchange listing in the United States. Last week, it confidentially registered for a listing on the US stock market.
Developing advanced chip research and development is an expensive business, and Japan’s SoftBank hopes to recoup its seismic investment in Arm through the listing.
Arm expects to bring in around $8 billion in revenue and a valuation of between $30 billion and $70 billion, Reuters reported, citing people familiar with the matter.
Arm said he would eventually like to pursue a secondary listing, where he lists his UK shares after a US listing.
Is an IPO everything?
Still, regulators have sought to lure tech companies into the UK market.
In December, the government launched a series of reforms aimed at attracting high-growth tech companies. The measures included the ability for companies to issue dual-class shares – which are attractive to founders because they give them more control over their business – in the main market.
Last week, the Financial Conduct Authority also proposed to simplify the listing segments of standard and premium shares into a single category for shares of trading companies.
It would remove eligibility requirements that can deter start-ups, allow more dual-class share structures and remove mandatory shareholder votes on acquisitions, the regulator said.
Despite the negative implications of Arm’s decision, investors remain largely optimistic about London’s prospects as a global tech hub.
“Fortunately for us, that doesn’t mean the UK isn’t attractive to investors,” Nelis told CNBC. “It just means your IPO is just a fundraising event. It’s just a place, a place where you get more money to grow.”