London is widely viewed as a great place to establish a tech company, but it struggles to attract investors when it comes to going public. Several high-growth tech businesses in London have learned this lesson the hard way. When the food delivery company Deliveroo went public in 2021, the company’s stock quickly plummeted 30%. Investors largely blamed the legally uncertain nature of Deliveroo’s business. The company relies on couriers on gig contracts to deliver meals and groceries to customers, which has led to concerns over worker rights and benefits. However, venture capitalists say that there is another, more systemic reason at play.
Lack of Understanding of Tech
According to several venture capitalists, the institutional investors that dominate the London market lack a good understanding of tech. Hussein Kanji, founding partner at London VC firm Hoxton Ventures, told CNBC that “it’s not the exchange, it’s the people who trade on the exchange. I think they’re looking for dividend-yielding stocks, not looking for high-growth stocks.” Numerous tech firms listed on the London Stock Exchange in 2021, in moves that buoyed investor hopes for more major tech names to start appearing in the blue-chip FTSE 100 benchmark. However, firms that have taken this route have seen their shares punished as a result.
Brexit and Arm’s Decision
Brexit has clouded the outlook for tech listings in London. Funds raised by companies listing in London plunged by more than 90% in 2022, according to research from KPMG. Hermann Hauser, who was instrumental in the development of the first Arm processor, blamed the firm’s decision to list in the U.S. rather than the U.K. on Brexit “idiocy.” Arm is often referred to as the “crown jewel” of U.K. tech. Its chip architectures are used in 95% of the world’s smartphones. Despite three British prime ministers lobbying for it to list in London, Arm has opted to pursue a U.S. stock market listing.
Regulatory Reforms to Attract Tech Companies
Regulators have sought to attract tech companies to the U.K. market. In December, the government rolled out a set of reforms aimed at enticing high-growth tech firms, including allowing firms to issue dual-class shares on the main market. Last week, the Financial Conduct Authority proposed simplifying the standard and premium equity listing segments as one single category for shares in commercial companies. This would remove eligibility requirements that can deter early-stage firms, allow for more dual-class share structures, and remove mandatory shareholder votes on acquisitions.
Despite Arm’s decision, investors largely remain optimistic about London’s prospects as a global tech hub. While the lack of understanding of tech among institutional investors is a challenge, regulatory reforms and other measures may help London to attract more high-growth tech companies and investors in the future.
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