Europe produces a lot of IPOs. The trouble is that some of the region’s biggest fish are slipping away to New York.
Tech companies founded in Europe overwhelmingly end up listing closer to home—some 94% go to exchanges run by Euronext, Germany’s Deutsche Boerse, or the UK’s London Stock Exchange, according to a report by venture capital firm Atomico. But the few that go to a US exchange tend to be the most valuable ones. “When you look at the stream of where value flowed to, there’s clear evidence of leakage to the US,” said Tom Wehmeier, a parter at Atomico. He says more than 50% of the enterprise value of European unicorns has gone to the US through acquisitions and IPOs on American exchanges.
The average market capitalization for a European tech company listed domestically is $1.6 billion, and the median is $49 million. Those that go to New York have a mean market capitalization of $5.7 billion and median of $970 million, which is around 20 times larger than the median for tech companies on European exchanges. Since 2000, about a quarter of Europe’s tech unicorns have listed in the US.
There are several things going on here. European exchanges tend to have a lot of smaller IPOs. That’s probably in part because the private market in the US is more robust, which gives entrepreneurs the scope to raise a bunch of money without undergoing the glare and scrutiny of listing on a public exchange. Some European markets like London Stock Exchange also go out of their way to cater to smaller enterprises.
Ego isn’t the only reason for Europeans to fight for their startups to list nearby. A listing’s location creates gravity that can attract the company’s corporate headquarters and scores of jobs. It also helps build a local ecosystem in which expertise, from analysts to investment bankers and investors, clumps up around that locale. Some investors have mandates to invest in assets in their home jurisdiction. If a UK firm lists its shares in New York, some portfolio managers in Britain might no longer be able to buy its shares (or else would have to change their mandates).
Every tech enterprise matters, because it’s hard to predict which one could go on to become the next trillion-dollar giant. The world’s top 1% most valuable public tech companies account for about 69% of all market capitalization, according to Atomico data; the top 10% account for 94%. Losing one tech champion to another region could deprive an economy of a titan that generates substantial tax revenue and thousands of jobs. That success can also seed a generation of future entrepreneurs.
Europe doesn’t have a tech giant on the scale of China’s Tencent or the US’s Google, and it can’t afford to let one slip away. The region’s “technological freedom” is at stake, according to Klaus Hommels, chairman of Zurich-based venture capital firm Lakestar. He says the US giants Facebook, Amazon, Apple, Netflix, and Google (FANGs) control everything from semiconductors to data storage, and he is urging the European community to protect the region’s digital autonomy. “Technologies that shape all modern life are being run without European values, ideas or input,” he wrote recently. “Being digitally-dependent has serious financial, political and cultural implications for Europe.”
That said, Europe has narrowed the gap in recent years. After a “lost decade in the 1990s,” European tech companies’ share of global market cap has grown for the past 20 years, according to Atomico data. Consumer-internet group Prosus, semiconductor firm ASML, and SAP, the German software maker, have market caps of more than $100 billion. Adyen, the Amsterdam-based digital payment company that is listed on Euronext, is rising quickly and is worth more than $60 billion.
Venture capital could help turbocharge Europe’s tech sector. Some 80% of the largest US technology firms had VC backing, as did 90% of China’s, according to Atomico. Meanwhile in Europe, as recently as 2017, none of Europe’s big companies had been supported by VC money. The emergence of VC-funded enterprises like Spotify and Adyen is changing that.
Behind the scenes, European executives, from startup founders to investors, have been looking to make the region more competitive. As firms like Index Ventures push for changes to European rules for stock options, which could make it easier for startups to attract and reward top-drawer talent, France has moved forward on overhauling some of those restrictions. Britain is considering reforms to its listing requirements to make London Stock Exchange more competitive with New York for tech IPOs. Among the considerations are allowing dual-class voting rights on the LSE’s premium market, and changes to free-float (how much of a company’s shares are available for the public to exchange) requirements.
There’s other good news. Wehmeier says Atomico crunched some data that suggests European firms may be as likely to thrive on a local exchange as they would in New York. During the past five years, 15 of the 16 companies that added more than $1 billion of market capitalization did so from a European public market. “There’s often this question—to what extent will the public market support growth, value businesses in the right way,” he said. The research indicates that Europe’s founders can get the credit they deserve from investors, without having to go to New York.