How Founders Can Plan for an IPO

Neil Shah: 0:00

An IPO could be the next great growth round, and it's important to think of this as another funding round rather than an exit. It can be an exit for some shareholders, but not all. What an IPO allows you to do as a management team is essentially replace that early stage capital with evergreen capital.

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‍Amardeep Parmar: 0:20

How founders can plan for an IPO. We look at understanding what an IPO really is, the benefits of it, how it could actually be more of a funding ground rather than an exit, how to access the market and the funding opportunities. The Head of Tech Primary Markets at the London Stock Exchange Group. He's the perfect person to answer these questions for you and to help you understand IPOs. I'm Amadeep from the BAE HQ, and this podcast is powered by HSBC Innovation Banking. So, Neil, so great to have you here today, and it's really interesting talk, because I think so many people have misunderstandings in this area and I think I do too, to be honest as well, so I'm going to be learning a lot today. Can you start off with what actually is an IPO?

Neil Shah: 1:10

Absolutely, Amar. But before we do that, I just want to say I absolutely love everything you're doing. I'm actually ashamed that I hadn't discovered you earlier. I'm so glad we met those Albion drinks. They put on a really good party. But I've been over the last few days listening to some of your podcasts. I didn't realize how many you've done and how many people I know that you've interviewed. So thanks so much for having me. So what is an IPO? I guess it's one of the ways in which a company can go public and, through that, offer its shares to, theoretically, anyone who wants to buy them through the London Stock Exchange. If we were the exchange of choice.

Amardeep Parmar: 1:47

So if I'm a business owner, what does that mean for me? If I go public, what's the benefits for that for a startup owner?

Neil Shah: 1:55

There's another great podcast called IPO versus M&A by Reid Hoffman in the Greylock series, where Reid's just talking about an IPO being a natural extension to everything you're doing. You're building a great business and maybe you've bootstrapped it and you've got to a certain critical mass, or you've taken some VC and at that point some of the angels the VCs want their capital back. An IPO could be the next great growth round. It's important to think of this as another funding round rather than an exit. It can be an exit for some shareholders, but not all, and what an IPO allows you to do as a management team is essentially replace that early stage capital with evergreen capital.

Neil Shah: 2:37

You might go out and you raise 10 million or 20 million if you're a small company, or maybe 1799 million, as Raspberry Pi did, and they were quite unique. They were backed by a charitable foundation. Normally it might be a PE fund or a VC that's looking to get an exit, and that fund won't be looking to sell 100% of their equity on day one. We've seen examples where that's happened, like HG Capital selling out in Max Telecom, but it's very rare. Typically, they might be offloading a little bit with a view to slowly decreasing their holding over time. They're just like a bridge, point in delivery.

Amardeep Parmar: 3:12

So what are some common misconceptions about an IPO? Because I think, like you said, people often think about the huge, mega IPOs, but that's not really the average case, right? So what are the misconceptions?

Neil Shah: 3:28

Oh, there's so many, right that, um, you IPN why would you want to go through all the hassle of doing an ipn in the first place? You know, there's fact that it gives you independence because there's evergreen capital. You don't need to repay this capital. You still remain the captain of your ship.

Neil Shah: 3:39

Public company investors tend to be passive in nature. You know, unlike VC or P fund, you won't expect to give away board seats or board observation rights. You might meet these investors twice a year and if everything's going well, they generally leave you alone. When stuff's not going well, that's when they tend to step in and help you navigate that. But generally these funds are pretty patient. I know several funds that might hold a company for 13, 20 years, which is just great. It allows you to just get on with the business. Of course there's pros and cons, right, you don't want to do that too early because in those early days you might need an active investor, like a VC, to open doors for you, and you can't really expect that from public company investors.

Neil Shah: 4:22

But being public, you know, it gives you the profile, gives you the independence and it also allows you to tap the market when you need it. So you know, the pandemic was a great example. So many businesses could have gone under if they weren't public at that point in time. And you think of Rolls Royce emergency fundraising of 2 billion quid in October 2020. Whitbread that owns Premier Inn same thing. Iag that owns British Airways. Easyjet similar thing. They were just able to tap the market. Weatherspoons, that employs thousands of people around the UK, was able to keep its lights on because they could tap the public markets. And so you benefit of having a profile which also makes it easier to go and hire new staff, make acquisitions. There's companies on our junior market, like Keyword Studios, that have done something like 65 acquisitions since 2013, just using their paper and their cash, and I think the profile of being a London quoted stock really helps in that.

Neil Shah: 5:24

And, of course, you know, always get asked pretty much every day, maybe three times a day, if we're a tech business, why would we bother with London? We'll just go to New York, and I think the reality is that, having done this for a large part of my career, is that scale really matters. You know, 12 years ago, when we're floating businesses in the States you could have $10 million a quarter. Maybe that was acceptable. Fleet Maddox we took public from Dublin had about 92 million.

Neil Shah: 5:52

If you look at the current crop of US IPOs like Reddit $804 million of revenue they are huge in comparison to many British and European businesses and I think that's the biggest hurdle, right, that you've got to really stand out, especially as a an international business. Secondly, if you look at, you know, uh, businesses in the UK, they're typically building in a smaller market. Right, uk has got what? 68 million people, the U S, you know 350, 400 million. It's much easier to grow faster in a large, modest market and typically you find that those US peers have better growth rates and better margins.

Neil Shah: 6:26

When some people see valuation differences, it's usually because the US comp is growing faster. It's not always the case. If you look at Wise versus Remitly, autotrader versus Carscom, rightmove versus Zillow and CoStar, sometimes you find that the British company gets a high valuation. It really boils down to how strong the company's fundamentals are versus its peers and we find it doesn't matter if you're in London or Amsterdam or Singapore. The better company should get the high valuation. So these are some of the myths that we're breaking down all the time that.

Neil Shah: 7:05

Are you going to get research coverage? Of course you are If you're dark trace. They found about 19 analysts covering them, right. The same applies to liquidity. All too often, people are comparing apples with raspberries, right? The US is such a massive market. I loved, I think, the second episode you recorded talking about unfair advantage, and I guess our unfair advantage is the fact that we are smaller than the States and we have to do things a little different. My CEO, dame Julie Hoggart, describes us as young, scrappy and hungry, and that's exactly what the Stock Exchange is. It's there to serve companies of all sizes, and our role is never to force an IPO upon anyone. It's just to make sure that people know what their options are and connect them with people who can help.

Amardeep Parmar: 7:48

And with people knowing what their options are. If they're trying to consider right now is IPO, I want to go down. Because I think sometimes, often people I talk to think about an IPO as post-uniform valuation or something way down the line. How should they maybe consider or think about? Maybe I should do this earlier.

Neil Shah: 8:11

Maybe there's some switches could be maybe in the near term, future, absolutely, and I guess part of the reason for people thinking you need to be a unicorn is there are so many war stories of companies that didn't make it. It's, it's hard, it's clearly not for everyone, and those that get the press are typically those businesses that floated, haven't delivered and then have gone back cap in hand to fund managers asking for capital. At some point people get fed up of funding and if you looked at venture, you'd see the same horror stories, right. But just to give you some examples, in 2017, we had Boku, which is Californian fintech that listed here in payments. They help Spotify and Netflix subscribers in Indonesia and um, Singapore and Malaysia and really all around the world subscribe to um, the likes of Spotify and Netflix, and they came to market with just 17 million dollars of revenue. Now they were backed by the great and good of venture Benchmark Index Kossler, Nea, dag A16Z $70 million of revenue, not really growing loss-making and they raised £45 million of primary capital at £126 million market cap and today it's about £550 million market cap, right. So Forex Phonics was founder, founder, owned and led a guy called Will Neal. He's backed by 170 fintechs. So if you need money, go and speak to will. He. That company was 40 million pounds of revenue, growing about 30 percent 19 percent EBITDA margin and you know that's been a free x on the market and and that was all secondary. So they raised also 45 million. But this capital really went out to Will and other shareholders to reinvest in the startups they chose.

Neil Shah: 9:54

One of my favorite examples, Amar, is a company called Alpha Group, so this was also a 2017 IPO. It was found by a guy called Morgan. Eight and a half million pounds of revenue, 65 percent growth, doing a couple million of EBITDA, and they raised 30 million of primary, a bit of secondary 64 million pound market cap. They priced at about two pounds a share and that's about 23 quid. Now it's just sent to the FTSE 250. And Morgan owns 13 percent of it. It there's also 100 employee shareholders. I think IPO is the most democratic way to fund startups and there's so many brilliant uh Asian businesses in the UK that they might be thinking about succession planning or you know where next and um, I think they should really think about using the market at the fund and not just uh be put off by what they might have read in the papers it's been.

Amardeep Parmar: 10:52

We hope you're enjoying the episode so far. We just want to give a quick shout out to our headline partners, HSBC Innovation Banking. One of the biggest challenges for so many startups is finding the right bank to support them, because you might start off and try to use a traditional bank, but they don't understand what you're doing. You're just talking to an AI assistant or you're talking to somebody who doesn't really understand what it is you've been trying to do. HSBC have got the team they've built out over years to make sure they understand what you're doing. They've got the deep sector expertise expertise and they can help connect you with the right people to make your dreams come true. So if you want to learn more, check out hsbcinnovation banking. com.

Amardeep Parmar: 11:29

It's interesting mention about the succession plan, so I think that's always something which is difficult for founders, right where they, especially at the beginning, to have the honeymoon phase of they want to run this forever. But then, when they don't want to run it forever, it's making sure they've got themselves a position that they can hand it over, and if you go public, for example, then there's less dependence on the founder. Generally, right over time, it's easier to get more people involved, I guess, and if a founder is trying to think about okay, I do want to IPO in the future, how can they prepare themselves for that? How can they make sure they come with the right state that it could list?

Neil Shah: 12:06

So I think another misconception is you need to have done an IPO before to IPO absolutely not true. In fact, most of our CEOs are first-time CEOs. Same for CFOs. So if any founder does want to IPO and you're a sensible, rational person, there's no reason why you can float. You know guys and girls. We see a number of female tech entrepreneurs as well, so something I'd absolutely love to see.

Neil Shah: 12:30

But building companies is hard and I get it right and maybe you've been running around for the last 10, 12 years and you've got to a point where you need someone else to drive this forward and maybe you're a bit bored. But my advice would be bring in someone to help you on the next stage of your journey. Now again, they don't necessarily need to have that experience, but it might be helpful if they did. It's always helpful if investors see someone they can trust that might have made them some money in the past and this is pretty common in the States and in private equity or bring in a professional management team. So absolutely possible, but no reason why you have to step away from the business. You could still be involved as a chairperson, as a ned or head of strategy or or something, um. So I would recommend, you know, going to to meet some advisors um, advisors. We have our equivalent of entrepreneur first in this nomad and banking community, where there might be someone like Jay Patel, who's recently sold IMI Mobile to Cisco, where he's a divisional head, where someone like Jay might be able to either step into this business or offer advice, make connections, and I think we're starting to see that flywheel build in the UK, and this is really why I care so much.

Neil Shah: 13:53

What we get up in arms about companies migrating to the US or being by US markets is I think it's to the detriment of the UK to the US, or being about US markets is I think it's to the detriment of the UK.

Neil Shah: 14:01

Right that you know I could have moved to California in 2012 at my H-1B, but I found out my wife is pregnant and it's been a blessing. Right that I don't think the grandparents would have ever let us leave, but I want there to be something for our kids to look forward to in the future and if every time we see a great business and it kind of moves to the US or the Middle East or wherever, that's not really good for the UK and I think we can really make the UK great, and when someone wants to go and find a head of sales or a CFO, there's an ecosystem into which they can tap into, and sometimes these companies don't have to be successful. You look at some of the well-funded, vc backed startups that have had some challenges. They've still thrown off so many people who go and found what could be other great businesses.

Amardeep Parmar: 14:54

For some of the companies now right, especially if they're a startup, where they don't have VC money and they're bootstrapping but they're doing pretty well. I think sometimes, when you don't have the external investment or you don't have, maybe, advisors externally, you can have things that maybe are unconventional, but this can maybe disqualify you from listing. Is there anything like that that fans can think about from the early stages to make sure that they don't make this path more difficult for them in the future?

Neil Shah: 15:19

I think this route's open to so many businesses, many more than people assume. I think the only disqualification would be that if you're running a lifestyle business, right that, if you're 100% shareholder and you don't like answering to anyone else and it's about clipping dividends and maybe not pushing the boat out in terms of growth, then perhaps the best thing is to just stay private and, you know, not ipo, but think about not taking on any external investment. But if you want to build a globally consequential business, um, you know what better way to to build that than the public markets? And if you look at the the biggest companies around the world, um, they tend to be on the public markets and sometimes some come earlier, others, uh, wait a while. But I mean, there's no right answer in that. There's no, there's no playbook. Both work and we've got great examples to show what the art of the possible is.

Neil Shah: 16:13

So we'd love to speak to businesses as early as uh, they're open to it.

Amardeep Parmar: 16:18

You mentioned a few success stories so far, like during the other answers, about people who've done very well and been able to list and that's helped them. So you mentioned, for example, Weatherspoons has kept them afloat because they've listed. Have you got any examples you want to share from recent history or come to understand very well in the UK and it's showcasing that strong London tech talent and what's possible?

Neil Shah: 16:40

I think there's no better example than raspberry pi that um ipo'd with us um earlier this month. Um, you know, this is a business founded in in 2012, um, and they design high performance single board computers that they think of a little printed circuit board with the processor memory, all the interfaces attached, and it's literally what defines plug and play. You just plug in your monitor and your keyboard and your mouse and you know, off your speakers and off you go right, so that little device can be plugged into industrial iot applications. Right, it might be controlling, um, you know, uh, fans and swimming pool sensors or lights above a shop window. It's used by kids when they're learning how to code and there's a company that designs in Cambridge and manufactures in South Wales. They've shipped about 60 million of these devices so far.

Neil Shah: 17:40

And a great British success story about 265 million of revenues, 43 million of EBIT so far. And you know, great british success story about 265 million of revenues, 43 million of ebitda, growing 40 and I think that's what really underpinned, um, their strong ipo. You know, 70 of the demand for that float came from uk institutions. You always hear this that, oh, uk institutions don't understand tech, they don't like tech. Um, they absolutely got behind this story because you know there was very little not to like and you went to next, I think, in 2024.

Amardeep Parmar: 18:07

There's a lot of, I'd say, a cloud over some in the tech space in some ways, of people worrying about the m&a markets and exit opportunities and things like that. What's been your experience in terms of how the markets are looking over time and the trends and where do time and the trends and where do you see the market today and where do you see the market going in the future?

Neil Shah: 18:26

So I'm a little bit older than you and I've had the benefit of seeing a few cycles and there has been a lot of frustrations. It's been on both sides of the Atlantic, right that, if you open the papers here, there's a lot of frustration. If you open the papers here, there's a lot of frustration. You see it on social Now. I'd encourage you to go and read Jamie Dimon's shareholder letter earlier this year and you'll see pretty much the mag seven in the indices. There's people like david ironhorn, who runs green light capital, bill girley saying exactly the same things. Uh, there and I I think, various issues being conflated right now.

Neil Shah: 19:13

So this kind of us versus uk debate, I think, is more about public versus private and and right now you've got a lot of perhaps overinflated valuations in the private market and public markets down here. Right, you hear benchmark capital with their bcv index talking about this. Sorry, um bessemer, bc, bc, vp, um, you're tracking about six times uh median revenue for high quality software companies and, as one vc said last week that the ipo market is wide open. It just depends on the price you're willing to accept. So it's a bit like trying to buy a house right now. Sellers' expectations are here, buyers are here and I think over time those two are going to merge. I think some of the issues also being conflated with where we are in the rate cycle. Some of these things are cyclical. Clearly, we're going to be in a better place in a year's time. If Rishi Sunak got in a little earlier, maybe he wouldn't be in this mess right now, but it is what it is and maybe the next government maybe Labour government might be able to help fix this.

Amardeep Parmar: 20:21

And, yeah, looking forward to the future. Do you think that? Have you seen more people attempting ipos in the recent history, or is what's the trends on that side? Do you see more people looking at this as a viable option, or what options are people tending to take now?

Neil Shah: 20:35

yeah. So I don't think there's any notable trend there, um, because it is very cyclical, right that? Um. So I joined the exchange in um july 2020 and we had eight ipos from that September to December as the markets opened up, and then 37 tech and tech enabled IPOs in 21. And then a bit of a dearth. I think it was like four or five IPOs in 22, 23. And this year we've had eight, of which Raspberry Pi has been the only tech float so far this year, but if you look across Europe there's been two tech floats. In the States there's been about seven. So we're starting to see markets open up and I think IPOs are just part of the story, right?

Neil Shah: 21:16

The other indicator is the bread and butter of equity capital market desks in banks. We've raised £18 billion year to date and it's not published anywhere. It really frustrates me, but in Q1, we had the largest equity deal globally, a company called Halion, where Pfizer was selling their shares. A lot of that was through London. And then Q2, we had the largest primary raise by a company called National Grid, right Seven billion pounds towards, I think, a £50 or £60 billion energy transition programme. It was the largest in the world until Aramco decided to do something, so it's still pretty notable and again really frustrating. Not in the headlines, but I think capital was available for these good stories.

Amardeep Parmar: 22:04

And it's interesting that you mentioned about the tech folks as well, and I think a lot of people think about the IPO markets more in the tech kind of space and that's probably because of the American influence, right. What we see in the news, what we hear in the news, we hear the tech ones more than maybe we hear the other ones. And if somebody's now is building commerce, not from the tech background, is the process fairly similar or is there different ways to think about if you're a tech founder versus a non-tech founder?

Neil Shah: 22:28

No, it's pretty much the same, amr. I mean, ultimately, investors are looking to make money, right. If they're a retail investor, if they're a fund, it's being convinced that this is a good idea that's gonna make them money right. Having a good company isn't enough, right? And it could be a house builder, it could be, you know, a shipping company, it could be a tech company, um, but it needs to be, you know, positioned right.

Neil Shah: 22:51

So the beauty of the uk market is that you can go and meet investors with a deck right, very similar to meeting bcs, and you could do that, you know, a year in advance. You could do it three years in advance, um, and the beauty of doing that is that you you get a sense of if you've got an IPO worthy proposition before you've really spent any money, and so we call these early looks. You basically find a bank that you get along with. I think they're all great got to say that, but it's generally true. I think there's a lot of capability in London and it's really about finding who you get along with. Find a bank, get them to take you out, meet some investors, see if they like the story and if they do, go and spend money on lawyers accounts to help you with the DD. Work with the bank to get the prospectus ready.

Neil Shah: 23:38

If it's a main market, float an aim and mission document. If it's an aim deal and you could IPO theoretically in 10 and a half weeks, wouldn't recommend it. I recommend that you take longer and take your time of this process. Don't hire a board the week before the IPO. Have them bedded in, test the systems to make sure that you can actually hit your guidance.

Neil Shah: 24:03

That's the fundamental mistake that so many companies make, right that they promise enough and then they underdeliver. It's probably OK in VC land if you're a hyper growth company and you miss your forecast by 10 percent. In the public markets you'll get absolutely crucified and we see that with even the largest companies like Salesforcecom. So really important to learn how to manage those expectations hold some of the excitement back and I think the right time to IPO is really when you've got a good handle on that ability to forecast. You're trying to go early is super hard Now if you're a biotech or in certain sectors there's there's some exceptions. People are focused on other KPIs, but generally people are looking at those financials pretty closely.

Amardeep Parmar: 24:50

Just before we go into quick five questions. You mentioned a few times about you obviously love in London and what we're doing here. What are you most excited about for the UK tech scene in the future?

Neil Shah: 25:01

What gets me out of bed is just the sheer number of scaled, growing high, profitable, well-run businesses that are waiting in the wings. Right, when I was a banker and I see referrals from the stock exchange from all around the world. They tend to be much earlier stage businesses and you sort of questioned you know if, if they'll be able to make it right, nor will have product product market fit, and I think we're at a fundamentally different stage of the cycle and private markets are so much more developed. We've seen an influx of US venture capital into London and so much investment and that ecosystem is building right, and the question really is who wants to fund these companies? They're going to get funded regardless. Right, the Americans are there, the Saudis are there, the saudis are there. Um, you know asian investors there. India's rising. Right, these companies will get funded.

Neil Shah: 25:50

Um, I'd hate for them to move and this is why we've been advocating for, uh, pensions reform in the uk. Right, I think it's ludicrous that about one percent of the mps pension pot goes into equities. Should be a lot higher. They need to be setting that example and we need to be backing our own, not just in public markets but in venture and growth. So companies like Wave, cutting edge of autonomous vehicles in King's Cross, can find investors in the UK. Companies like Pragmatic IC can continue to fund their development of flexible semiconductors in Cambridge and Durham. Companies like Quantexa here in London, run by Vishal Marria, continue to get the funding they need to produce world-class software that's used by so many global enterprises. Companies like Fort Machine continue to grow. So these are the sorts of things that get me out of bed and it's so much fun.

Amardeep Parmar: 26:55

Awesome, so we're going to move into quickfire questions now.

The first one is who are three British Asians you think are doing incredible work and you love to shout out?

Neil Shah: 27:01

So it would be amiss of me not to shout out Bindi Karia, um, who's been, you know, incredibly supportive to everything we I'm doing here at the LSC. Uh, we met on a trip out to India with a chap called rush shore who again, is a fantastic individual, um, super connector, and Bindi's been super connecting me. Uh. So give her a shout out. Um, I have to give a shout out to Jay Patel, who I mentioned earlier. Um, who showed me what the art of the possible was on the AIM market. I've got to know him over the last sort of five or six years doing brilliantly. Vishal. Again, I love what he's doing at Quantexa. Amar, I'm probably going to get shouted at by about 100 people. I've actually made you a list because I love all the podcasts you recorded. I think I've got a. I found 100 more for you to do.

Amardeep Parmar: 27:50

Perfect, that's what I like to hear, so thanks so much for that. If people want to find out more about you and find out more about the London Stock Exchange, where do they go to?

Neil Shah: 27:59

Come and connect with me on LinkedIn. On Twitter it's Neil Shah UK. My email address is neil. shah@ lseg. com and I'd love to help anyone I can.

Amardeep Parmar: 28:11

And is there anything that you need help with right now yourself or that the LSE needs help with?

Neil Shah: 28:17

Guys and girls, just keep your eyes and ears open.

Amardeep Parmar: 28:18

Thank you for watching. Don't forget to subscribe. See you next time.

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