By Sandy Campart
The main objective of an IPO – Initial Public Offering – is to raise capital in order to allow a company to grow. However, during a global economic slowdown, investors are increasingly cautious. In times like these, how should you prepare to go to the market?
Reasons for an IPO
A company’s motivation for going public is often linked to the idea of “creating one’s own currency” in order to fund internal and external growth, to diversify future sources of finance and strengthen the financial structure of the company. Listing a company on the stock exchange results in tradability and liquidity, allowing previous shareholders to exit, realising a gain on their capital. It also creates a valuation for the company which will be useful for future succession plans. At a strategic level, an IPO can enable the company to clarify its strategy, refocus its activities, increase its visibility and credibility, and ultimately differentiate itself from competitors.
Nonetheless an IPO will significantly change the way a company operates. Corporate governance has to be overhauled, support functions professionalised and financial communication must be made transparent. All studies show that, when information is withheld, the negative impact on the share price is greater than if the bad news had been announced.
2019: a mixed bag
In 2019, newly listed companies have seen their share price grow by almost 13% on average. However, the figures vary greatly. Software and IT security companies have performed the best with an average of nearly 40%.
Nevertheless, the stock market performances of SmileDirect (dental aligners), Peloton (exercise bikes and fitness) and even Uber attest to the increased scepticism of investors for unrealistic or exaggerated levels of profitability. Uber’s price has been particularly disappointing since the latest results presented were well below the expectations of the investors. In the second quarter of 2019, the turnover was more than 5% lower than expected and the profit – or rather the deficit – per share was 53% greater than expected. Uber’s growth has been slower than that of rival app Lyft, and the restructuring costs associated with many departures, lay-offs and resignations do not seem to be controlled. Additionally, Uber’s CEO, Dara Khosrowski, told his employees that the teams were too large to be compatible with the pace of growth needed, while Uber’s CTO, Thuan Pham, believes it could take decades for Uber to achieve its “vision”, suggesting there could be a later than expected ability to turn a profit.
Towards a better year in 2020?
For a company wishing wanting to maximise its initial flotation price, there are two strategies to pursue: the first is to float when the company is performing exceptionally, the second is to wait until the stock market is in a more favourable position.
In the context of a global economic slowdown, investors have for several months been moving towards “safe haven” shares in order to protect their assets. This, combined with the chaotic path of some recently introduced companies and the abundance of private financing, makes it difficult to see an acceleration of operations in 2020.
Even though the flotation of Airbnb remains topical, Postmates (delivery service) and Endeavor (talent agency) have paused their entry to the stock market. It is possible they are prioritizing interest from venture capitalists and risk capitalists. Palantir (Big Data) and Stripe (internet payments) could also look for private funds instead.
The WeWork failure
WeWork is the most prominent example of our current inability to distinguish a unicorn from a chimera. Investors have to learn – or re-learn – how to resist those appealing equity fairy stories and to see beyond the innovative nature and rapid growth of a concept. Cash flow, debt level and governance remain key decision-making factors. In the WeWork prospectus, the word “technology” appears more than 120 times. The Coué method of repetition is here being used to suggest that traditional valuation models should not apply to this business. There is little doubt, however that WeWork is more of a property developer with an innovative business model than it is a technology company.
About Sandy Campart
Sandy Campart is a lecturer and researcher. He is a member of the Centre of Research for Economics and Management (CREM), part of the French National Centre for Scientific Research (CNRS). M. Campart is director of IUP Banque Finance Assurance de Caen – a finance school in Normandy – and author of “If we dared to invest in the stock market”.
HOW NEW TECH START-UP IS SHAKING UP THE IT CONTRACT MARKET
Neil How, CEO and Co-founder, ten80
1. What is ten80?
ten80 enables cost savings on SAP/software projects by an average of 43%. We do this by switching companies to an on-demand workforce – think Uber and how that has disrupted the taxi industry.
The ten80 marketplace connects companies with around 47,000 verified contractors, using algorithms to match companies with the very best experts that then deliver on projects remotely. This enables SAP customers to utilise a global workforce and break free from geographical borders, as well as take advantage of international market rates. In other words, it gives them the exact resources, when they want them, for however long they need them for and at a cost-effective price.
2. How did the idea of ten80 come about?
I’ve been lucky enough to work with SAP my entire career. My journey first started at the end-user side. I ran my first SAP implementation project in my early twenties and went on to form an SAP Centre of Excellence to allow for long term improvement.
Over the next six years, I ran three other major change programmes before joining the consulting world, and for the next 10 years I worked with various consultancies running numerous projects in a wide variety of sectors, including retail, utilities, banking public sector and government.
But having spent time working both end-user side and consulting side, it became clear that SAP clients were struggling to access the best in class consultants and contractors. Wanting to get this knowledge into the wider world, ten80 was formed to digitally link the global contracting workforce to a global customer base, while allowing clients to digitally access the ‘best in world’ not the ‘best in organisation’.
3. ten80 is solving business problems, but how is it helping contractors?
Consistency of regular work is becoming a challenge for many contractors, and the impact of ‘dead time’ becoming more severe and likely. This is made worse through an ever increasing pool of expert contractors.
In addition, selling time for money is not a sustainable model for financial freedom, and contractors are tired of being capped at an ever decreasing day rate. Contracting also puts a huge pressure on family life, especially if you have to be on-site away from home — missing out on time with family and loved ones is a huge drawback, and there is little work life balance.
With ten80, contractors can benefit from the following:
- An ‘always on’ demand for work
- The ability to sell their knowledge and capabilities rather than a day of their time
- Being able to carry out their role wherever in the world at any time, with total bulletproof security
4. What are the main challenges for your business?
ten80 is operating in a completely new area — outcomes-based delivery, so not being able to be ‘put’ us in a specific vendor box type is a challenge. Often corporate organisation’s procurement processes want to categorise us as a systems integrator or recruiter, but we are neither.
Being the first to market is always hard. We are offering some really powerful benefits to businesses and contractors, but we have no one to follow and are learning at every step of the way. There is a great saying that I have always believed in – “Success leaves footprints.” The big difference with ten80 is that we are making them! We are running agile processes on each stage of our journey. Everything is tested, iterated, refined, repeated. It’s the curse of being the first, but actually embedding continual improvement into our business has been one of our rocks of success.
Another challenge has also been controlling deal size. Big corporates have latched onto the benefits of what we are offering and are immediately referring us globally. It’s great but can quickly escalate and then take longer to close.
5. What’s next for ten80?
Our focus/goal is to secure a major investment over the next six months. That’s the first ticket to the major league and will give us the potential to grow to 150 people and some pretty big numbers revenue wise. We are entertaining some pretty important investment houses and are looking forward to one of them closing.
Running alongside that we have some really amazing companies in our pipeline, and I am looking forward to welcoming them onto our platform.
GOING FOR INVESTMENT IN CENTRAL EUROPE: START-UP LIFE OUTSIDE A TRADITIONAL TECH HUB
A Q&A with Bence Jendruszak, Co-founder and COO at SEON
- At what stage did you realise you were going to need an investor onboard?
During the early stages of the development (when completing our minimum viable product), we managed secure a Central European payment gateway in order to start using our system (free of charge). From this point on our product development was user feedback driven. It was at this stage, that we realised that our product has gained enough proof of concept, that we were ready to pitch the idea to investors.
- How important was the investment to getting your business to the current point?
Our pre-seed investment (50k EUR in January of 2017) was the initial kick-start to arriving to the current point. That micro-investment allowed myself and Tamas (Co-founder and CEO or SEON) to start working on the project full time and also to scale up the development team (from freelancers to full time programmers).
- How did you start the process of looking for an investor?
We started by setting up our very first pitch deck. Of course, a lot of market analysis and USP shaping went into this. Once we had our first deck, we started contacting investors and started pitching the project to them. That specific pitch deck was very different to what the current version looks like.
- Were you aware of the challenges you could potentially face as a tech start-up in CE?
We were very well aware of the challenges. The European investment mentality is different than that of the US investment mentality, for example. Investors tend to be more conservative in the EU. Now imagine what the investment mentality may be like in the CE region. Nevertheless, we were also aware of the advantages of setting up a tech start-up in the CE region. The talent pool of
engineers and the cost of labour is by far the best in our home-turf – so the challenge was worthwhile.
- What was your journey to finding an investor like? Challenges / milestones?
Initially, we were faced with multiple unacceptable deals. The terms and conditions weren’t right for us in the long term. We were always aware that in order to build an international start-up (that would later develop into a scale-up), we had to on-board investors that we were fully comfortable to cooperate with – and vice versa. We needed to be on the same page and have a shared vision for SEON’s future.
- How did you find your lead investor, Portfolion? What else do they offer in addition to financial investment? (international network etc.)
We met them by introduction from an acquaintance. Portfolion is a well renowned VC in the CE region. They seemed like a partner that we could on-board into our boat and we could steer the ship together with them. They are the subsidiary of OTP Bank, one of the largest banks in the CE region. A potential gateway to partnering with a major bank seemed like a mutually beneficial setup. Aside from receiving a financial investment from the fintech fund of Portfolion, we can happily say that we are providing our fraud prevention services to OTP Bank as of today.
- What have you learned about the investor landscape in CE?
We found out that European investors are even more sceptical when it comes to CEE countries. They tend to avoid start-ups that aren’t located in hubs like Berlin or London. For them, Hungary is still seen as a former Eastern bloc country playing catch up with the rest of Europe in terms of living standards and infrastructure.
That said, there are a lot of investors in the region, but you really have to focus on getting in touch with the right organization. Onboarding an investor is a long-term partnership, there has to be a fundamental alignment in terms of the vision and mission of the two teams. We believe that we’ve managed to partner with investors who share the same vision and mission as us (up to date).
- What role will investment play in the next growth stage of the SEON?
The next growth stage is focused on international expansion. We will be seeking an investor that can provide not only funds, but also somebody that has a solid portfolio of fintech companies and a partner network of financial institutions.
- Do you have any advice for other businesses in your position that are looking for funding in the CE region?
Do not rush into any deal that is in front of you, time is on your side. If you are in an early stage, make sure to approach as many investors as possible, in order to be able benchmark each opportunity.
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