When Huddle, a promising UK internet software start-up, was looking to fund the next phase of its expansion, it looked to the US. Alastair Mitchell, chief executive, said the UK market had proved too “conservative”.
“It’s becoming even harder to raise venture capital in the UK, despite the government’s best efforts to improve it,” Mr Mitchell said.
“So not only do we want to be in the US because it is a big market, but the process of raising money is extraordinarily more simple and successful, which is why you have this big talent drain of companies going from the UK to the US. The VCs have bigger funds, take bigger risks and invest earlier in the lifecycle.”
Huddle, which develops online collaboration tools and has raised $10.2m (£7.1m) from a group of investors led by Massachusetts-based Matrix Partners, is the latest in a string of UK technology companies that have been looking to the US for funding.
Many companies planning to float on the stock market are opting for the Nasdaq over the London Stock Exchange. Sophos, the Oxfordshire-based security software company, for example, was planning a Nasdaq listing, after a failed initial public offering in London at the end of 2007. Before it managed to float, however, it was acquired by Apax Partners, the private equity group.
MessageLabs, another UK IT security provider, was also tempted by the bigger valuations on offer in the US. “We had a huge debate over where to list MessageLabs and we ended up going with London. We knew we would take a big hit on valuation by listing in the UK, but it didn’t make much sense to move to the US. We were tempted though,” said Jos White, one of the company’s founders.
In the event, MessageLabs was sold to US rival Symantec before any float could take place.
“The majority of our UK and European clients contemplating an IPO are considering a US listing,” said Jean Tardy-Joubert, banker at Qatalyst Partners, a technology advisory firm.
“While valuation and the ability to address a significantly larger pool of tech-savvy investors is a consideration, the key driver is having an acquisition currency more widely accepted in the US, where most of the potential targets are located.”
The flotation of Promethean World six weeks ago was the sole technology listing on the main board of the London Stock Exchange since 2007, but its poor performance – the shares have mostly traded below their float price of 200p – has discouraged others.
There are just 44 technology companies listed on the London Stock Exchange, with a collective valuation of $42bn. That is compared with 543 on Nasdaq with a valuation of $2,000bn.
Bankers say there is a disconnect between some of the world-leading technologies that UK entrepreneurs have created and investors’ willingness to invest in them. Cambridge-based Autonomy, for example, is a global market leader in enterprise search, but faces deep suspicion among many of the analysts covering the stock.
“Although there are a number of world-class technology companies in the UK such as ARM, Autonomy, CSR and Sage, the sector remains marginal from an investor’s perspective,” said Mr Tardy-Joubert.
London’s technology ecosystem never really recovered from the dotcom crash of 2001. At the height of the dotcom boom, investment banks such as Goldman Sachs had teams of 30 or so technology-focused bankers in London. Today Goldman Sachs employs only six. The lack of specialist knowledge is making it harder to inspire investors.
“Bulge bracket firms used to have specialist equity sales teams across a number of sectors, but today most banks have reduced the number of specialists as part of the last downturn,” said Thierry Monjauze, a Harris Williams technology banker.
“Equally, contrary to the US market, institutional investors in the UK and across continental Europe are not sector focused. That combination, to a large extent, explains why tech companies looking to go public in Europe are often misunderstood from an equity story and valuation perspective.“
Phil Pearson, head of technology investment at GLG, the London hedge fund, says that technology can be too difficult for non-specialists to get right.
“We need to be constantly on top of the data flows. It is just a lot of hard work. If I were a UK long-only fund, I would probably relax a lot more if I just owned Tesco.”
Paul Guely, managing partner at Arma Partners, the technology advisory firm, warns against technology companies giving up on London entirely. Many UK companies which opt to list in the US can find themselves lost and ignored among bigger US rivals and investors who find foreign companies too exotic.
“If you are a £300m to £500m technology company, you matter in London in a way you wouldn’t in the US. Companies may trade at a small discount in London but the market can be more flexible and supportive. I am surprised and dismayed that so few companies have figured that out,” Mr Guely said.
Additional reporting by Tim Bradshaw