As Arm shuns London, tech investors question UK as an IPO destination

The UK could be a great place to build a tech company – but when it comes to taking the crucial step of floating your business, the picture is not so rosy.

This is a lesson that many high-growth technology companies in London have learned.

when Deliveroo It went public in 2021, at the height of the pandemic-induced boom in food delivery, and soon the company’s stock was down 30%.

Investors largely blamed the legally uncertain nature of Deliveroo’s business — the company relies on carriers on temporary service contracts to deliver meals and groceries to customers. This has been a concern as these workers look to gain recognition as workers with a minimum wage and other benefits.

But for many tech investors, another, more systemic reason was at play — and it’s been cited as a factor behind chip design giant Arm’s decision to forgo a UK listing in favor of a market debut in the US.

The institutional investors who dominate the London market lack a good understanding of the technology, according to many venture capitalists.

“It’s not the stock market, it’s the people who trade on the stock exchange,” Hussein Kanji, co-founder of Hoxton Ventures in London, told CNBC. “I think they’re looking for dividend-paying stocks, they’re not looking for high-growth stocks.”

“Two years ago you would have said, you know what, it might be different, or just take a chance. Now a group of people have taken a chance and the answers have come back. It’s not the right decision.”

Several technology companies have listed on the London Stock Exchange in 2021, in moves that boosted investors’ hopes that more big tech names will emerge in the leading market. FTSE 100 index standard.

However, companies that have gone this route have seen their stocks punished as a result. Since Deliveroo’s IPO in March 2021, the company’s stock has fallen precipitously, dropping more than 70% from the £3.90 at which it priced its shares.

wisea UK money transfer company, is down more than 40% since its direct listing in 2021.

There have been some outliers, like a cyber security company Dark Tracewhose shares jumped nearly 16% from the listing price.

However, the broad consensus is that London has failed to attract some of the huge tech companies that have become household names in major US stock indices such as Nasdaq And with Arm choosing to debut in the US rather than the UK, some fear that trend may continue.

“It’s a well-known fact that London is a very problematic market,” Harry Nelis, general partner at Accel VC, told CNBC.

“London creates, and the UK creates, businesses of global importance – Arm is a business of global importance. The issue is that London’s capital market is not efficient, fundamentally.”

The LSE was not immediately available for comment when contacted by CNBC.

Brexit has cast a shadow over the prospects for technology listings.

Funds raised by London listed companies They fell more than 90% in 2022, according to research by KPMG, as the market slowed due to sluggish economic growth, higher interest rates, and caution about the performance of British companies.

Previously published figures for the first nine months of 2022 indicate that the decline in European funds raised is in the middle. 76% And 80% annually, indicating a less drastic decline than the 93% in the UK.

Hermann Hauser, who was instrumental in developing the first Arm processor, blamed the company’s decision to list in the US rather than the UK on Brexit “foolishness”.

He told the BBC: “The truth is that of course New York is a much deeper market than London, and partly because of the folly of Brexit, London’s image has suffered greatly in the international community.”

Cambridge-based Arm is often referred to as the “crown jewel” of UK technology. Its chip architectures are used in 95% of the world’s smartphones.

Softbankwhich acquired Arm for $32 billion in 2016, is now looking to float the company in New York after failing to sell it to US chip giant Nvidia for $40 billion.

Although three British prime ministers lobbied for its London listing, Arm chose to pursue its listing on the US stock market. Last week, it secretly registered to be listed on the US stock market.

Developing R&D for high-end chips is an expensive endeavor, and Japan’s SoftBank hopes to offset its seismic investment in Arm with the listing.

Reuters reported, citing people familiar with the matter, that Arm expects to generate close to $8 billion in revenue and a valuation of between $30 billion and $70 billion.

Arm said it would eventually like to pursue a secondary listing, listing its shares in the UK after listing in the US.

However, regulators have sought to attract technology companies to the UK market.

In December, the government launched a package of reforms aimed at attracting high-growth technology companies. The measures included allowing companies to issue dual-class shares – which are attractive to founders because it gives them more control over their businesses – on the main market.

Last week, the Financial Conduct Authority, too He suggested simplifying the inclusion of standard and franchise stock sectors as one class of shares in commercial companies.