King.com, the company behind the wildly popular game Candy Crush Saga, today filed to list its shares on the New York Stock Exchange. That’s another blow for London, which has been touting itself as the new Silicon Valley. Indeed, even King’s IPO is claimed as a success, with a representative of Tech City, a government-funded body promoting the tech sector in London, calling it “positive news and testament to a world-beating package of policies that the government has introduced to help businesses scale and grow” in an interview with London’s Evening Standard.
Despite the hype inside Britain about its tech industry, “every large tech company is going to go to the US,” says one London-based venture capitalist who preferred not to be named. There are two main reasons British companies tend to look west when it comes time to list, says the venture capitalist.
The first is that there are few routes to the country’s most prestigious market, the London Stock Exchange. Tech companies often have to list on AIM (a submarket of the LSE formerly known as the Alternative Investment Market), aimed at growth-stage companies. That means the largest, most desirable investors, such as pension funds, won’t buy the stock; they aren’t known to be keen on risk.
Nor has the British government’s push to launch a new market, called the High Growth Segment, been particularly attractive to tech companies. They would much rather enjoy the fanfare that comes with listing on the NYSE than be relegated to a small market in London—to say nothing of enjoying the benefits of being able to file confidentially.
Second, bankers and analysts in Britain tend not to have the sort of expertise with tech firms as their American counterparts, says the venture capitalist. (Other British start-ups see it as a problem as well.) That makes pricing shares hard and getting a good valuation harder. When Facebook went public, it was valued at $104 billion on profits of $1 billion. That is not something any firm could expect European bankers to pull off. New York is a more buoyant market and provides better valuations.
The reason London lags behind the US, and Europe lags even farther behind London, is that the “scene” simply isn’t old enough. America’s consumer tech industry, which is driving much of the today’s boom, can be traced back to Silicon Valley in the 1970s. By contrast, despite a long pedigree in hard sciences, Britain has never made much effort to commercialise its inventions (something the investor Mike Lynch is now trying to do). Its consumer tech industry only really got going in the 2000s. Continental Europe started even later. Unsurprisingly, British and European investors have long been complaining (paywall) about the lack of “exits,” or opportunities to sell their investments.
That is slowly beginning to change, Google’s acquisition of Britain’s DeepMind being the most recent high-profile example of a big sale. A few years of such sales should increase London-based bankers’ appetite for and understanding of tech companies. Moreover, Europeans flush with cash from selling companies or off-shore IPOs will tend to channel funds back to new start-ups, creating a virtous circle and the sort of “ecosystem” Silicon Valley-types go on about. That, however, is still a long way away. In the meanwhile, British and European tech firms looking to raise capital will still make the trip to the US.