AFTER YEARS lamenting the local technology scene, Europe’s start-ups and their venture capital backers are finally bullish about building businesses on their home continent. They just don’t want to list their shares there.
Instead, companies including Irish communications software developer Openet and Prague- based antivirus firm Avast Software, are headed for initial public offerings in New York, spurred in part by mounting investor interest in Facebook’s $5 billion (€3.8 billion) share sale.
While cities such as London, Dublin and Stockholm have proven fertile ground for nurturing start-ups, listing in the US may gradually drive operations there, too, depriving Europe of the full fruits of its tech boom.
“Ten years ago, we would have expected that the majority of the companies we backed would go public in Europe, with a minority in the US. It’s been completely the reverse,” said Barry Maloney, the Irishman who is a founding partner of London-based venture capital firm Balderton Capital.
“There’s a huge opportunity that’s being missed by European economies because most of the value in these companies is created after they go public.”
Last year, four European technology companies led by the Russian search engine Yandex raised a record $1.8 billion in New York IPOs, according to data compiled by Bloomberg.
The companies are fleeing their domestic bourses as US markets, less affected by Europe’s debt crisis, offer higher valuations and greater liquidity.
The average ratio of price-to- book value for companies in the MSCI US Information Technology Index is 3.7, compared with 2.3 for tech companies in the Stoxx Europe 600 Index, as of April 4th.
The investing public in the US “understands the sector better and is more willing to pay for growth”, said Craig Coben, the London-based head of equity capital markets for Europe, the Middle East, and Africa at Bank of America.
The value of tech IPOs in the US last year was $4.5 billion, compared with $389 million in Europe, according to Bloomberg.
Zynga, the San Francisco-based developer of games for Facebook, raised $1 billion in December and has seen its shares climb 19 per cent as of April 5th. LinkedIn raised $389 million in its May IPO.
The last large-scale internet IPO in Europe was in 2010, when Russia's Mail.ruGroup raised $912 million in London.
While the European markets have shown some signs of recovery this year, with Dutch cable operator Ziggo and Swiss marketing group DKSH Holding raising a combined $2 billion, the total amount raised in Europe still lags the US by a third.
Even with some successes, such as online jukebox Spotify, Europe’s tech industry continues to lag the US. Total venture capital investment in the third quarter of 2011 in the US outstripped that in Europe by almost eight times, according to the European Private Equity and Venture Capital Association and the National Venture Capital Association.
Only one of the 10 largest global technology companies by market value, Germany’s SAP, is European. The value of tech companies in the US is $3 trillion, according to Bloomberg, almost nine times the $351 billion in western Europe.
Balderton, whose investments have included stakes in British online loan provider Wonga.com, is planning US share sales for Openet, based in Dublin, and Globoforce, a provider of employee-recognition systems also founded in Ireland that's now based near Boston, Maloney said.
NXP Semiconductor, the Dutch company that held a 2010 IPO in New York, now has more offices in the US than any other country.
Xyratex, a data storage and network provider based in the UK, has four offices in the US and only one in Europe after its 2004 New York IPO.
To close the gap, Europe’s governments have been trying to encourage the growth of technology businesses.
In the UK, prime minister David Cameron has voiced support for plans to turn a gritty stretch of east London into “Tech City,” a European rival to Silicon Valley.
In France, president Nicolas Sarkozy’s government has pledged its support for projects such as the European School for Internet Professions, which offers a three-year programme for aspiring Web entrepreneurs that has opened in the former Paris stock exchange building.
The Irish Government is continuing to implement elements of the innovation taskforce, which reported in 2010 on how the country could enhance its position as a technology hub.
“Money follows success,” said Eric Van Der Kleij, chief executive of Britain’s Tech City Investment. “Currently there are a lot of exits on US markets. Eventually you will get the same in the UK and elsewhere, as investors see there’s value to be obtained.”
In the near term, Europe may lose out as talented technology executives follow investors and customers to the US, Balderton’s Maloney said, matching the example of companies like Qlik Technologies, a business- intelligence software provider founded in Sweden that is now based near Philadelphia and listed in New York.
The Finnish start-up Alekstra, which provides services to help corporations slash their phone bills, may also opt for an IPO in the US, instead of a double listing, if it does not get sufficient subscriptions from Finnish institutional investors to support a share sale in Helsinki, chief executive Toni Toikka said in an email last month.
The company has headquarters in the Finnish capital and Manhattan.
“Most companies list at home because that’s where their customers are,” said Maria Pinelli, global vice-chairman at Ernst Young in London, who oversees the firm’s IPO advisory business, “but when you are a technology company, your customers can span the globe regardless of where you are headquartered.”
For now, US markets continue to offer distinct advantages, said Mike Chalfen, a general partner at London’s Advent Venture Partners, which has backed start-ups including Paris-based video-sharing site Dailymotion.
In the US, he said, “investors are experienced, there’s a lot more capital for technology, and it’s easier to tell your story. If you have the choice right now, why wouldn’t you go there?” – (Bloomberg)
