European start-ups are being encouraged to look east rather than west for public funding rounds, with Nasdaq’s Nordic exchanges emerging as the go-to choice for IPOs of fast-growing companies.
While the heady IPO days of the dot-com boom/bust cycle may seem like a long time ago, the major venture capital funding rounds that have created unicorns will eventually have to result in an exit of some kind, in order for investors to get a return.
Exits take numerous forms, and while an acquisition by a bigger company is the exit that too many promising tech companies end up acquiescing to, often before they reach their real potential, the IPO door is slowly reopening.
‘Overall, tech company appetites for IPOs are picking up and that is being driven by the fact that the tech markets have had access to private capital for much longer and deeper than before’
– ADAM KOSTYÁL
Snap Inc is rumoured to be pursuing a $25bn IPO in March 2017 in the US, and the IPOs of Twilio and Atlassian were the focal points of 2016.
While these stellar IPOs may seem beyond the reach of most European tech and biotech companies still in growth phase, Nasdaq is encouraging European start-ups to look to Nasdaq Nordic listings as another option to consider.
Last week, we reported that Nasdaq Nordic has emerged as the busiest and most lucrative stock exchange for IPOs in Europe, surpassing London and the Deutsche Börse in Frankfurt.
Nordic lights
Nasdaq Nordic was named this year as the most active exchange in Europe, with €7.7bn raised from 69 IPOs. The largest IPO on the Nasdaq Nordic exchange was Dong Energy, which raised €2.3bn.
Adam Kostyál, senior vice-president at Nasdaq, told Siliconrepublic.com that tech companies should consider the OMX exchanges, which consist of a main market and a growth market called First North, as an alternative and viable source of funding.
‘We have managed to build up an ecosystem of SME funds, SME analysts, advisers and SME brokerages that are interested in investing in smaller companies or growth companies, whether tech or non-tech, especially in Stockholm’
– ADAM KOSTYÁL
His colleague, Maoiliosa O’Culachain, business development director for Europe at Nasdaq Private Market, said that Nasdaq will be bringing a group of Irish tech and biotech companies and advisers to Stockholm in 2017 for them to explore the possibilities of listing on the First North junior market.
Nasdaq acquired the Nordic OMX exchanges – comprising exchanges in Sweden, Finland and Denmark – in 2008. Around 900 companies are listed across the two markets, the main market and the First North growth exchange.
By the end of this year, around 70 new listings will have been made between the two markets, including between 45 and 50 on the First North exchange.
“This is very much a European offering and very little to do with the US Nasdaq exchange, from a regulatory perspective. However, as well as the Nordic markets, my job is to oversee European tech or biotech companies that are also thinking of floating on our US exchange,” Kostyál said.
While there is a paucity of Irish tech companies listing on the US Nasdaq compared to the speed and alacrity of their highly networked Israeli counterparts, Kostyál said that there is still a regular flow of European tech firms to Nasdaq in the US.
“We have on average 20 companies per year opting to list in the US because they are looking for higher investment valuations and bigger appetites in terms of risk, investor base, analyst coverage and the commercial drive to grow in the US.
“But in order to tap into the US market, you need fundamentals that are not for everyone. The biotech market is a bit more aggressive than other markets because they can go earlier, but for tech companies, you need to be bringing in revenues of $300m and above to justify a US listing.
“Overall, tech company appetites for IPOs are picking up and that is being driven by the fact that the tech markets have had access to private capital for much longer and deeper than before.”
However, Kostyál said what he is seeing in the Nordic market is a different aspect for companies that want to raise more modest capital amounts from a seasoned investor base.
“The Nordics are not so much a stepping stone to the US – it could be for some companies – but overall, it is driven by the fact that the Nordic equity culture is very strong and very incentivised to invest in equity.
“We have managed to build up an ecosystem of SME funds, SME analysts, advisers and SME brokerages that are interested in investing in smaller companies or growth companies, whether tech or non-tech, especially in Stockholm.”
To illustrate his point, Kostyál said that 87pc of the adult population of Sweden, for example, owns equity in some form, whether directly or indirectly through pension funds. “It is in the DNA of the investor appetite, whether retail or institutional.”
Kostyál cited the example of one company that sought to raise €2m, but ended up trading up to €200m. “From that €2m raise to €100m, companies are having success leveraging First North and this is creating an appetite for foreign companies as a potential venue for liquidity and accessing capital.”
First North no longer a hidden secret
So why has First North been a hidden secret? Kostyál said: “We haven’t been marketing it but should be because we see it as a resilient market that is even stronger in the context of Brexit and the UK market disappearing as an option. There is a lot of tentativeness, but there are parallels between Brexit and a stronger Stockholm market for smaller caps and larger caps to raise money.”
The typical profile of companies that should consider First North or the main OMX market, Kostyál said, are firms that are at the stage where they are raising their C and D rounds of venture capital.
‘There are many fast-growth companies operating in countries where their local stock markets are not strong enough or deep enough to support their ambitions’
– ADAM KOSTYÁL
“Rather than go for an E round, why not leverage the possibility of the IPO markets where you can tap into a broader capital base; where you can get the liquidity, visibility, credibility of a Nasdaq listing but also acquisition power that enables you to grow you business beyond just organic growth?”
Kostyál said that the First North market is ideal for companies that want to raise sums under €1bn.
“There are many fast-growth companies operating in countries where their local stock markets are not strong enough or deep enough to support their ambitions. We are trying to get the word out through various venture capitalists and the advisory community that the Nasdaq Nordics are open for business and are a viable funding alternative.
“The whole ecosystem is geared towards SMEs. Until recently, private equity-backed companies had been more geared towards exits than VC-backed companies but now, these businesses are coming to the market.
“They may not be at the scale that would make them want to pursue a US Nasdaq listing, but they realise that listing publicly in Europe is a viable alternative to increase liquidity, visibility and credibility.
“What we have to offer from a Nasdaq-listing perspective could be an interesting option for fast-growing Irish companies,” Kostyál said.