IPOs, Venture Capital and High- Growth Start-ups

IPOs, Venture Capital and

High-Growth Start-ups

IPOs exits on high-growth stock markets in the EU – Improving opportunities for IPOs

1

1

2

2

3

1

1

2

2

3

Innovative start-ups drive structural change and growth

Technology-oriented start-ups …

ƒ

… make a significant contribution to

economic growth (in addition to

many other factors).

ƒ

… are instrumental in creating new

jobs.

High-tech start-ups need venture capital and advice

„ They depend largely on outside funding since they normally have little money of their own when starting out.

„ Owing to a lack of collateral, high probability of default and pronounced information asymmetries, they are often unable to secure sufficient funds in the form of bank loans.

„ The issuance of shares or debt securities does not emerge as an option until very much later.

„ Inventors often excel in their subjects but lack business and market knowledge.

Exit option crucial to VCs

Trade sale IPO Buyback Failure

I n v e s t m e n t E x i t Investor 3 EUR 32 m Investor 2 EUR 34 m F u n d r a i s i n g

IPOs: Silver bullet for VC financed start-ups

Special quality of the IPO as exit

ƒ Successful IPOs compensate for the high failure rates of VC portfolios.

ƒ VC companies build up reputation by repeatedly executing successful IPOs.

ƒ The cost of capital for acquisitions falls when the companies are listed.

ƒ Owners and founders remain at the wheel.

ƒ The bookbuilding procedure and the market price of listed companies may function as benchmark for a company’s valuation.

ƒ Stock options can only be exercised if companies are listed on the market.

1

1

2

2

3

PE in Europe:

Buy-outs driving growth; start-up financing drying up

13.3 10.9 16.9 18.4 20.9 14.4 0 5 10 15 20 25 30 35 40 1999 2000 2001 2002 2003 2004 Buy-outs dominate PE investment in Europe Buy-outs Replacement Capital Expansion Start-up Seed EUR bn

Boom in buy-out markets … „ … leads to stable growth in

overall European PE markets…

„ … hides the weakness of early stage financing …

„ … and diverts attention from structural problems of

financing high-growth start-ups.

European IPO markets vary from country to country

16 113 8 15 2 2 4 4 3 9 6 5 8 8 3 3 10 13 10 10 12 0 20 40 60 80 100 120 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 London Stock Exchange

Euronext

Deutsche Börse Stockholm

2 0 0 3 2 0 0 4

Success story - AIM

Num ber of listed com panies

*March

Main differences to main market

„ No minimum shares to be in

public hands (vs. minimum 25%) „ No trading record requirement

(vs. 3 year trading)

„ No prior shareholder approval for transactions

„ No minimum market capitalisation

1

1

2

2

3

Regaining private investors‘ trust

Dot-com crash caused … … wealth destruction. … mistrust of high-growth stocks.

Time for a new start

To-dos:

„ Sufficient liquidity

„ Provision of research

„ Harmonisation of rules

„ Local knowledge

necessary

„ Commitment of

institutional investors

No-goes:

„ Simple relaunch of closed high

growth exchanges

„ Too strict investor protection

„ One solution for all countries

„ Exclusion of traditional sectors

„ High market capitalisation barriers

Establishment of low-regulation stock exchanges attractive to high-growth firms

CONTACT

Download publication

Private equity in Europe:

buy-outs driving growth; start-up financing drying up

Dr. Jürgen Schaaf DB Research +49 69 910 46830

Where the liquidity is

2004