Seven Learnings From Listing A B2B Tech Business In London

Photo by Benjamin Davies on Unsplash

Should you IPO?

Keith Jones, Sw7 Cofounder & CEO reflects on the journey of spending twelve years building and scaling a market-leading product-led business intelligence business and taking it through to an IPO by reversing onto the London AIM Exchange.  Is a listing the right goal for you and your B2B tech business?

We were a bootstrapped, small, profitable sales and product-led B2B tech business looking to create an engine for growth and a platform for international expansion.

“There are two types of businesses that list,

‘Because I can’, and ‘I have a plan”

Why List?

There are two types of businesses that list, ‘Because I can’, and ‘I have a plan’. Many small and medium businesses that are not VC backed tend to fall into the first category, as did we.  It’s a bucket list goal for many entrepreneurs and it takes you on a journey that offers as many challenges as it does rewards.

1. Listing creates direct and indirect value driven by share price and liquidity. The direct benefits are cash liquidity (access to capital) or stock liquidity (access to easily tradable shares).  The indirect benefits are the valuation, staff retention, access to additional capital instruments and customer engagement.

“Listing is the start of a new growth journey,

it is not an exit for founders”

2. Listing creates an open market valuation which tends to be quite a bit higher than closed market valuations.  A privately owned product-led tech business valued at a PE of 8 in a trade sale could achieve a listed valuation with a PE of 16.  The goal of listing is to improve liquidity by attracting institutional investors with their larger pots of cash.  The listing process takes your private business from uninvestable to high risk for institutional investors.  To attract these type of investors you need to promise high growth.

3. The indirect benefits of a listing are fixing a price for your business and creating stock liquidity.  Stock liquidity (tradeable paper) creates easily accessible shares allowing investors to come and go with relative ease.  This works if the share price is good and relatively stable or trending up.  Listing is perhaps one of the best tools to fix an open market price to set the business up for a full exit.  The share price sets the value and the structures make the acquisition process relatively straightforward.  A good share price makes it easier to attract and retain staff and gain access to debt. Tradeable assets at a recognised market value make you lower risk and increase your options of funding growth through debt.  This overflows into customer engagements, where larger risk-averse customers are less resistant to signing large deals with you.

“List where the markets understand what you do and

where the type of liquidity you seek is guaranteed”

Where To List

We listed on the London AIM (Alternative Investment Market) Exchange, part of the LSE.  Western exchanges can create very frothy valuations for tech; in the above business a PE of 32 would be possible with the right story.  There is a vague correlation between your business fundamentals and the share price, however, this is largely a 'marketers' game based on the story you tell and the perception you create. Emerging market exchanges tend to value businesses more on business fundamentals. List where the market understands what you do, where they will accept your story and where the liquidity you seek is guaranteed.  Launching into the UK was a key part of our strategy, the listing was not.  We found a cash shell on AIM through our network which we reversed into and entered a liquid market.  This decision was more opportunistic than strategic.

Like M&A, It’s Fun For The First Three Hours

Listing is a planning, compliance and reporting exercise and it’s as much fun as compliance and reporting can be.  Everyone sees the champagne when the bell rings but most shares are sold in blocks prior to the listing.  There is a lot of pitching and horse-trading that goes on before the listing.  Some shares (the IPO) will be available for the open market to set the price but like everything in business, the listing should happen according to the plan. The plan is to list at a price that goes up on listing and stays up afterwards so the right story starts to unfold. Expect months of long hours working on spreadsheets, going through legal documents and pitching to spreadsheet jockeys. 

An Engine For Growth

Listing creates an engine for growth which will primarily be through organic growth or acquisition.  Organic growth is great if you can deploy the cash effectively to lift your topline through sales. This would mean a well-established sales function. However, if you can’t grow fast enough organically to meet your market promises, you will need to acquire and you may consider a roll-up. A roll-up means you buy private businesses at a PE of say 8 when your listed PE is 16. Your business receives an immediate lift. Rollups are based on the ability of the acquiring team to convince business owners to sell their businesses at the right price and often not for cash. We listed for organic growth and became a roll-up very soon after listing. Before you list, know what your primary growth engine will be. 

Be Careful What You Wish For

You can list by offering as little as 15% of your shares. This may fool you into thinking you have control. This is an illusion. You report to the market, declare your earnings, keep GAAP and stock exchange compliant books, have expensive auditors, a broker nomad relationship to maintain and analysts to keep happy. 

“I don’t have control issues, other people do”

The listing process is a surrendering of control, to shareholders, the board, the regulator, the market. Shares, options, title, position and reporting structures will become significant issues and create a politicised environment.  The loss of control and the introduction of politics will be a deeply uncomfortable process for most Founder CEOs.  If you like doing things your way, plan to place yourself in an autonomous role away from political and reporting structures.

What to Expect

Listing is the start of a new journey where you deliver on market promises, irrespective of internal and market dynamics.  You have to be very careful what you say and to whom as it could be deemed to be insider trading. Everything changes.  Founder shares will have a lock-in period of usually over 12 months, where they are not allowed to sell their shares because of the market perception of offloading that may tank the share price. Listing is yet another delayed gratification journey for founders.

Did We Create Value?

We did.  We reversed onto a cash shell of £1.5M GBP (ZAR30m), did a follow-on cash raise of £5M GBP (ZAR100m) and acquired six businesses in eighteen months. One turned out to be a winner that created value above the listing price.  We created a market cap of around £60M GBP (ZAR1.2Bn). 

Markets Are Sentiment Driven

In the tech sector, your share price is directly linked to the story you tell and how aligned this is with the market’s view of the future.  Any negative press stays with you and is hard to recover from, so it has to be avoided at all costs.  Be prepared to play the game and work hard on your story and engage the market to drive sentiment.

What Does It Cost?

You won’t get much change out of £500K GBP (ZAR10m) in the UK whether you list directly or reverse and take over a cash shell as we did.  A reversal gives you higher dilution but often comes with some cash, established market access and reporting processes, existing shareholders and some profile.  A direct listing would have yielded higher shareholder value but we didn’t have £500K GBP in cash kicking around, we used the cash in the shell for this and needed the cash in the shell to fund growth.

Listing Is NOT the Main Event

A listing may be a goal to be celebrated but it's not the main event.  Champagne, parties and press are great. It’s the culmination of years of work to build the business and many months of long days preparing.  It should be celebrated but the listing is a doorway into a new market. What you do after you list and how you behave in that market defines your success. The eighteen months after you list sets the tone for your business and how the market will see you. The first nine months after you list is the main event that you should prepare for.  We listed to drive organic growth supported by acquisition and had to change in response to a significant market shift (Microsoft pulled Performance Point).  We had to scramble to create a new strategy within a month of listing. From being a globally focused Microsoft based business we became a roll-up, creating the largest IBM Business Intelligence business in EMEA. 

Who Is On The Bus?

The listing journey can be bumpy. Working with a team where the personal value systems of the team are aligned makes it a lot easier.  Some people adapt and make the journey and some do not have the appetite for the amount of change required.  Expect to  ‘lose’ about a third of the executive management team, they may stay but they may not step up to take an active higher-profile leadership role with increased accountability. What are the credentials of the team?  Problem solvers are good, anyone sales focused is an asset, narcissistic sociopaths don’t make good team players, particularly in leadership roles.  The credentials that matter are people who have gone through the same kind of growth spurt with increased pressure and organisational change in a business your size and in your sector.  If their experience is with smaller businesses, they may not know how to adjust and if their experience is with corporates, they may not be able to adjust at all.  Homegrown is best.

“A smooth sea never made a skilled sailor”

Is It Fun?

For sure.  It’s exciting in the way climbing Everest or sailing around South America the wrong way (another story!) is fun.  The idea is enticing, the reality is long hours, high discomfort and often when you get there you are not sure why you did it.  Listing is on many entrepreneur’s bucket lists.  If creating and launching a tech startup is your MBA then listing is your PhD.  It is perhaps the best accelerated business learning experience that exists after building and launching a product-led tech business.

Would I Do It Again?

I would, as long as the business fell into the “I have a plan” category and my role was defined by “I am going to do the fun stuff without the admin or politics”.  I would also only consider it at a later stage, after we had raised some capital, done a couple of acquisitions and built the story out for the market a bit more.  Organic growth is more fun and allows you to focus on sales, your team, product, business and culture.  This is a personal preference, there are people who do enjoy acquisitions, spreadsheets, contracts and organisational change.

Seven Lessons Learned

1. Start with the end in mind.  Know why you are listing and what kind of business you will create and make sure you want to be part of it! 

2. List where there is proven market liquidity, you can’t create it. 

3. Know before you list that listing will create the kind of liquidity you seek. 

4. Understand how you will turn this liquidity into an engine for growth and what your primary growth engine will be. 

5. Be prepared for the loss of control and increased politics. 

6. Engage the market, build the story before you start and prepare more for the nine months after you list than for the listing. 

7. Do your best to have a great team around you for the first 18 months. It won’t go to plan but if you have a good team you can adjust fast enough and you can figure most things out. 

Keith Jones is CoFounder of Sw7, Africa's Go To Market Accelerator Platform for B2B Product-Led Technology Businesses Focused on Growth and Scale. Connect if you are currently growing, scaling or looking to list your own product-led technology business.