After years lamenting their local technology scene, Europe’s startups and their venture capital backers are finally bullish about building businesses on their home continent. They just don’t want to list their shares there.
Instead, companies including Irish communications software developer Openet and Prague-based antivirus firm Avast Software BV are headed for initial public offerings in New York, spurred in part by mounting investor interest in Facebook Inc.’s $5 billion share sale. While cities like London, Dublin, and Stockholm have proven fertile ground for nurturing startups, listing in the U.S. may gradually drive operations there, too, depriving Europe of the full fruits of its tech boom, Bloomberg Businessweek reports in its April 9 issue.
“Ten years ago, we would have expected that the majority of the companies we backed would go public in Europe, with a minority in the U.S. It’s been completely the reverse,” said Barry Maloney, founding partner of London-based venture capital firm Balderton Capital. “There’s huge opportunity that’s being missed by European economies because most of the value in these companies is created after they go public.”
Last year, four European technology companies led by the Russian search engine Yandex NV raised a record $1.8 billion in New York IPOs, according to data compiled by Bloomberg. The companies are fleeing their domestic bourses as U.S. markets, less affected by Europe’s debt crisis, offer higher valuations and greater liquidity. The average ratio of price-to-book value for companies in the MSCI U.S. Information Technology Index is 3.7, compared with 2.3 for tech companies in the Stoxx Europe 600 Index, as of April 4.
The investing public in the U.S. “understands the sector better and is more willing to pay for growth,” said Craig Coben, the London-based head of equity capital markets for Europe, the Middle East, and Africa at Bank of America Corp.
The value of tech IPOs in the U.S. last year was $4.5 billion, compared with $389 million in Europe, according to data compiled by Bloomberg. Zynga Inc., the San Francisco-based developer of games for Facebook, raised $1 billion in December and has seen its shares climb 19 percent as of April 5. LinkedIn raised $389 million in its May IPO.
The last large-scale Internet IPO in Europe was in 2010, when Russia’s Mail.ru Group raised $912 million in London.
While the European markets have shown some signs of recovery this year, with Dutch cable operator Ziggo NV and Swiss marketing group DKSH Holding Ltd. raising a combined $2 billion, the total amount raised in Europe still lags the U.S. by a third.
Even with some successes, such as online jukebox Spotify, Europe’s tech industry continues to lag the U.S. Total venture capital investment in the third quarter of 2011 in the U.S. outstripped that in Europe by almost eight times, according to the European Private Equity and Venture Capital Association and the National Venture Capital Association. Only one of the 10 largest global technology companies by market value, Germany’s SAP AG, is European. The value of tech companies in the U.S. is $3 trillion, according to Bloomberg data, almost nine times the $351 billion in Western Europe.
Balderton, whose investments have included stakes in British online loan provider Wonga.com Ltd., is planning U.S. share sales for Openet, based in Dublin, and Globoforce Ltd., a provider of employee-recognition systems also founded in the Irish capital that’s now based near Boston, Maloney said.
NXP Semiconductor NV, the Eindhoven, Netherlands-based company that held a 2010 IPO in New York, now has more offices in the U.S. than any other country. Xyratex Ltd., a data storage and network provider based in the U.K., has four offices in the U.S. and only one in Europe after its 2004 New York IPO.
Closing the Gap
To close the gap, Europe’s governments have been trying to encourage the growth of technology businesses. In the U.K., Prime Minister David Cameron has voiced support for plans to turn a gritty stretch of East London into “Tech City,” a European rival to Silicon Valley. In France, President Nicolas Sarkozy’s government has pledged its support for projects such as the European School for Internet Professions, which offers a three-year program for aspiring Web entrepreneurs that has opened in the former Paris stock exchange building.
“Money follows success,” said Eric Van Der Kleij, CEO of Britain’s Tech City Investment. “Currently there are a lot of exits on U.S. markets. Eventually you will get the same in the U.K. and elsewhere, as investors see there’s value to be obtained.”
In the near term, Europe may lose out as talented technology executives follow investors and customers to the U.S., Balderton’s Maloney said, matching the example of companies like Qlik Technologies Inc., a business-intelligence software provider founded in Sweden that’s now based near Philadelphia and listed in New York.
The Finnish startup Alekstra, which provides services to help corporations slash their phone bills, may also opt for an IPO in the U.S., instead of a double listing, if it does not get sufficient subscriptions from Finnish institutional investors to support a share sale in Helsinki, CEO Toni Toikka said in an e-mail last month. The company has headquarters in the Finnish capital and Manhattan.
“Most companies list at home because that’s where their customers are,” said Maria Pinelli, global vice chairman at Ernst & Young LLP in London, who oversees the firm’s IPO advisory business. “But when you are a technology company, your customers can span the globe regardless of where you are headquartered.”
For now, U.S. markets continue to offer distinct advantages, said Mike Chalfen, a general partner at London’s Advent Venture Partners, which has backed startups including Paris-based video-sharing site Dailymotion. In the U.S., he said, “investors are experienced, there’s a lot more capital for technology, and it’s easier to tell your story. If you have the choice right now, why wouldn’t you go there?”