Europe Shouldn’t Be Content With Boring IPOs

European Straits #142

Hi, it’s Nicolas from The Family. Today, I’m following up on the importance of exits in a startup ecosystem and the reasons why boring European IPOs are not a reason to celebrate.

Two weeks ago, I wrote a column in Sifted to discuss the issue of exits in Europe. To make a long story short, we don’t have enough of them (either IPOs or acquisitions), and that creates problems for everyone: entrepreneurs who have to scale back their ambitions; venture capitalists who can’t generate returns for their limited partners; employees who never cash in on their equity; and Europe as a whole, as it lags further behind the US and China in today’s Entrepreneurial Age.

Then there was some pushback, with insiders such as James Clark from the London Stock Exchange pointing out that, despite the lack of liquidity, there are indeed tech companies that go public in Europe—actually even more than in the US 😮! And so I realized it was worth digging a bit deeper and exploring the conflicting perspectives. Here’s a new iteration on the specific topic of European tech companies going public. Please read along and let me know what you think 👇

Why isn’t everyone impressed with European IPOs?

1/ My first hypothesis was that most of those IPOs are in fact ‘fake’ IPOs. You can compare the huge celebrations that come with ringing the bell on the New York Stock Exchange and those matter-of-fact IPOs for which everyone involved is kind of ashamed: the entrepreneurs that don’t make much money and feel that the company is doomed over the longer term; the stock exchange that hosts the paltry ceremony but knows there won’t be much trading; the investment bankers that cash in their fees and are anxious to move on to the next deal; and the venture capitalists, above all, because they’re the ones who had to force the lousy IPO forward so as to give some small amount of money back to their limited partners. I won’t name names, but we in Europe know many instances of such embarrassing situations.

2/ Another hypothesis is that the category of “tech companies” is in fact too large and too heterogeneous. The US tech ecosystem has become successful not because there were many tech IPOs in the past, but because those IPOs happened across several generations, each reflecting the expansion of the ecosystem and the willingness of entrepreneurs to tackle ever more difficult challenges. Here’s another way of putting it: there are occasional tech companies with a transformative impact, and then there are the others. Public markets used to play a key role in facilitating the emergence of the former. Maybe now they’re more focused on the latter—and that’s OK, but we shouldn’t overlook the difference. It takes transformative tech companies to build an ecosystem, and those still aren’t going public in Europe.

3/ A third hypothesis: some European tech companies have indeed gone public, but in the US. This bears important consequences. We may have IPOs of companies with a European footprint such as Spotify and Farfetch—and the resulting liquidity. But when a European company goes public in the US we miss out on the positive feedback loop that nurtures an ecosystem of investment bankers, analysts, and institutional investors, which in turn will help more European companies go public. What’s more, those IPOs in the US are dependent on the ups and downs of the (partially uncorrelated) US IPO market—and that’s a problem. Nothing like the WeWork debacle has happened here in Europe, but now our tech companies should shelve their IPOs because Adam Neumann was a fraud and SoftBank was negligent in its due diligence? What does it even have to do with us?

4/ Then there’s the fourth hypothesis, which says a lot about Europe: maybe we don’t even realize that these IPOs have happened, seeing as we all live in the bubble of our local ecosystem. Last week, my colleague Hugo Amsellem made the case that entrepreneurs and investors in various European capitals were merely ignoring each other. Then just two days later, venture capitalist Yaron Valler echoed Hugo by explaining that Europe should stop apologizing and start connecting startup cities. It’s not only that information about IPOs doesn’t circulate from one city to another. It’s that many local players don’t have a vested interest in an IPO happening in another city—and some, including policymakers, even have an interest in downplaying them. (Case in point: You won’t find French officials celebrating a tech IPO in London or Amsterdam because they’re actually mad that it didn’t happen in Paris.) 

5/ Now, what never really happened in Europe is the deepening of private capital markets. For the US, quantitative easing and the subsequent low interest rates have created private markets awash with capital. In such conditions, there was no reason for those building large companies to be in any hurry for an IPO. And when the pressure to generate liquidity (and sheep-like behavior) finally kicked in, it had to happen via very large and highly successful IPOs—a tour de force which, obviously, is difficult to manage for companies that are still struggling with unit economics (see: Uber) or are up against formidable competitors (see: Snap, Slack). The reason why there are no such IPOs in Europe is because European founders haven’t had the luxury of raising billions on private capital markets. It means that eventual IPOs have to happen at a much earlier stage—and those logically don’t seem nearly as impressive.

6/ In the absence of deep private markets, an IPO is just business as usual. We have this idea that going public is the culmination of a wild ride of fundraising, necessarily arriving with a bang. But more often than not, it’s simply the only option for raising money in an environment where capital is scarce. You may remember Ben Horowitz’s story of bringing Loudcloud public back in 2001 after the dotcom bubble had popped. He didn’t do it to celebrate smashing success; rather, he did it because it was the only way to keep the company afloat. Similarly, many European IPOs happen for lack of better funding options: mainstream growth investors aren’t interested because they’re intimidated by the tech dimension; venture capitalists aren’t interested because the growth rate is not exponential enough. And so these boring European IPOs might be to the late stage what is to the early stage: all about building a (boring) steady, sustainable, and profitable business rather than the next flashy tech giant.

7/ Now here’s the real question: Is Europe handicapped by the lack of ambition? In the aftermath of the WeWork debacle, we might be reassured with our ecosystem’s being content with bland founders, cash efficiency, and slightly-above-average growth rates. But we’d better not forget what the Entrepreneurial Age is all about: increasing returns to scale. There’s a reason why tech entrepreneurs advertise their funding rounds so noisily: the exposure gives them a chance to race ahead of their competition by attracting more customers and better talent. On the other hand, who cares about that company that went public on a European stock exchange and is barely known beyond a small circle? Why would the best engineers want to join it? And isn’t that company in danger of being bested (or swallowed) at some point by a privately-funded competitor that has been able to favor growth over profitability for a longer time?

8/ Europe needs to do better than that. The global economy is splitting into large, autonomous regions, with Asia now being self-reliant (they have their own investment banks and quite a lot of liquidity) and the US being sequestered by Donald Trump. But Europe needs to open its own path. A paper published by Bruegel in 2016, titled The United States dominates global investment banking: does it matter for Europe?, was eye-opening in that regard. Basically, the financial crisis and its aftermath raised the bar for investment banks operating at a global scale, which contributed to weakening European banks and, by contrast, strengthening American ones. The problem here for European tech companies is that they’re losing a lot in terms of information advantage and soft relationships. Either they deal with US players with a global footprint but without much skin in the European game (a phenomenon known as “home country bias”, discussed here and here), or they deal with local players that risk taking an overly parochial approach. Now we Europeans need to step up our game without relying too much on the US—and that includes IPOs, too.

9/ Meanwhile in the US, there’s a backlash against IPOs anyway. Direct listing is all the rage now. And then there’s Eric Ries’s project of building a Long-Term Stock Exchange, about which I wrote a while ago. While the US ecosystem is looking for answers, maybe that’s the opportunity for Europe to regain the initiative? After all, IPOs are virtuous in many respects: they provide access to more capital; they turn the company’s shares into a more liquid asset; they force an overhauling of operations and strengthen the company as it grows; and if things are done right, they contribute to nurturing that ecosystem of bankers, analysts, and investors that then contributes to lifting everyone else up—including by generating much-needed returns for private investors up the stream.

10/ And that is why nobody should think we’re there yet. Sure there are IPOs in Europe. But what we don’t see is a well-oiled investing ecosystem that generates high returns all along the stream. To prosper, venture capital needs three things: basic research up the stream (funded by either the state or large corporations); liquidity down the stream (through well-priced acquisitions and IPOs); and limited partners attracted by the resulting returns and willing to allocate more and more capital to that fringe asset class that is tech companies. We might rejoice in the fact that our IPOs are boring and that it denotes a lesser role for those evil VC firms in search of exponential returns. What we’re missing though is the ability to fund the occasional outlier that has a shot at becoming a global tech giant. We at The Family still don’t see a reason why we Europeans should leave all those to the US and China, and we’ll keep pushing for more exits in general and less boring IPOs in particular.

Please scroll down for a list of articles to dig deeper into IPOs in Europe.

🤑 We’re making progress on the employee equity front. For more than one year, The Family has been partnering with our friend Florent Artaud to launch Ekwity, a business specialized in assisting startups that want to allocate more equity to their employees. Ekwity just released a detailed handbook for founders and employees that will be accessible in a few days. In the meantime, you can read Florent’s articles on Medium and check out this article in yesterday’s Les Echos (in 🇫🇷).

⚗️ My colleague Sandrine Lacout continues her stellar series of HR and hiring articles with concrete tips on how to conduct interviews (In French 🇫🇷, with the English translation coming in the next few days): Comment réussir à mener un entretien | le savoir-être 2/2

👌 A few months ago I met Stripe’s Brianna Wolfson in San Francisco. A published writer herself (check out her novel Rosie Colored Glass), Brianna has been instrumental in launching Stripe Press, the company’s publishing arm (and publisher of landmark books such as Elad Gil’s High Growth Handbook and Martin Gurri’s The Revolt of the Public). Brianna just left Stripe and published a very interesting thread that lets you learn more about this fascinating company and their unique approach to doing business. Read it here: I recently left Stripe after 4.5 formative and magical years.

Here are more readings about IPOs in general and those in Europe in particular:

From London, UK,