On November 17th, CrowdX will host its inaugural webinar, introducing the company and discussing with a panel of experts how market evolution can help address the funding gap faced by many privately owned growth businesses today.
To provide some context here, we asked Niall Pearson, Director, Head of Corporate Broking & Sales team at Hybridan for his views on how the current ecosystem could be improved. Not only can this ensure a more prosperous future for a greater number of privately held companies, but it also has the potential to see more progress to an IPO and offer wider public ownership, too.
Register for 17 November 2021 online event, 12-1pm, here.
What do you see as being the biggest challenges facing growth companies today?
“The clue is in the question – the main reasons why investors in small caps take higher risk, is that growth companies can deliver superior returns in the long run. It requires a different operational mindset of a CEO to deliver strong operational growth that delivers a rising share price. Achieving sustainable scale is a difficult balance act. “Growth at any cost” is not as popular here in the UK as it is in Silicon valley, where profit is a not always the focus but rather growth or in some cases “user growth”.
“At the other end of the scale, investors don’t want to see a war chest cash rich balance sheet in growth companies – but deploying that cash conservatively into driving R&D and driving sales. Getting that balance right has always been a key challenge for small caps. Also owners need to let go and bring in the right talent, and be prepared to accept reasonable levels of dilution so that the Company gets sufficient capital to commercialise good concepts/disruptive business models.
- Being first in new markets can be an expensive mistake
“London has always been a firm favourite for attracting opportunism where new companies are created in an instant to take advantage of the latest sector craze – most recently it has been in areas of esports, quantum computing, cannabis and blockchain. Across the past 10 years this has been shown in other sectors such as cybersecurity, cloud computing, mobile payments…the list goes on. The company that is first out of the gates in these sectors tend to raise vast amounts of money as investors all want exposure to this “new” sector, but unfortunately they tend to deliver poor share price performance as they are going through unchartered waters and encountering the pitfalls that require vast amounts of money that a market struggles to support against the backdrop of a cratering share price. Investors tend to do better out of the third or fourth entrant into the market as they themselves have learnt the pitfalls.
- Access to capital
“In fast moving sectors, companies who don’t have readily available access to capital will struggle to compete with rivals who have backers with deep pockets. This is less of an issue in the public markets, but there are many private companies we come across who have been walked down many roads to dead ends with private equity and venture capital. Not only does this derail business plans but getting into a lengthy DD process with private equity can cause the company to take their eye off the ball on the day to day operations of the business.
Why has the market struggled to address this?
“Despite investment sectors dramatically changing over the centuries – the way the market has deployed capital has not really evolved which is strange. The Dutch East India back in 1600 is widely thought to be the first company to IPO and that process of exchanging paper/cash (apart from the introduction of CREST) has not changed at all. There is also a power shift going on in the equity markets – especially at the height of the Woodford era, institutions deployed the “take it or leave it” approach when bidding companies for stock, deciding which other institutions were on the book and at what price. Thankfully due to a few high profile cases, compliance now precludes this practice. Institutional investors are starting to be more accepting to the retail investor as a fundamental driver to liquidity and provide the aftermarket support where larger institutions have been lacking.
“There is also an element of truth to the criticism we get here in the UK that we are a hotbed for innovation for growth companies, but the City struggles to “get” these growth stories and applying their 100 year old valuation rule book to a high growth tech business precludes you from doing a lot of deals. This can be mitigated. A forward looking valuation is not impossible but investors need to join the dots. If you are projecting strong growth then you need to have full disclosure on contract wins, pipeline and prospecting activity.
Does technology or changing market demand hold the key here?
“Technology definitely has to be a driver here to bring share issuance into the 21st Century and further democratising the equity markets. There is no reason why fair valuations, pricing & access fundraises can’t be open to the masses – both in public and private markets. In the private sphere especially, having a liquid platform to trade shares will provide a very real “sense check” on valuations rather than hyped up valuations produced by “independent experts”.
How do you think this landscape will look in 5 years’ time?
“Competition between private equity and public markets will intensify. Private equity might be forced to pay up to keep deals privately for longer as the equity markets have been welcoming to large IPOs on lofty valuations which is attractive to founders looking for an exit.
“Shareholder activism is on the rise and it is being acted on – whether that’s on nil cost options, golden share issuance or other corporate governance concerns. Boards are starting to sit up and listen to market sentiment and take appropriate action.
“There is still a high degree of short-termism in the thinking around democratising equity markets. PrimaryBid’s research shows that of the 15 biggest stock market listings this year – where retail investors were excluded – 11 had share prices opening ahead of their listing price. In the near term, happy bankers and happy management team but in the long run – this initial IPO rush of aftermarket support will decline and where is the motivation for retail support if they were cut out from the IPO price? We would hope the mindset starts to change here when companies are seeking a listing.