2018 has been a terrific year for the American IPO tech market. We have seen major companies like Pluralsight (NASDAQ:PS) and Dropbox (NASDAQ:DBX) go public, with Business Insider noting that this has been one of the most successful years in some time. Next year could be even better, with reports that Lyft and Uber may finally be going public in 2019.
But even during these boom times, there have been discussion about whether European tech companies could rival the United States. Skype co-founder Niklas Zennstorm said to Bloomberg that he believed “Europe’s stock exchanges now offer a more favorable environment for technology companies to list their shares than the U.S.” Cyber security firm Avast went public on the London Stock Exchange in May, with a market value of $3 billion. Dutch payment company Ayden went public earlier this year with a capitalization of €13.4 billion. While European tech firms have often lagged behind American ones, could we finally be seeing them catch up?
Not quite. Plenty of European firms are going public, and there is reason to think that the European IPO market will thrive in 2019 just like the American market. But European tech firms have a long way to go and challenges to confront if they truly wish to rival the United States.
Economic Ups And Downs
Mr. Zennstorm may believe that Europe’s stock exchanges offer a favorable environment, but other business leaders appear to disagree. In fact, PwC reported in their most recent IPO watch that “European IPO values are at their lowest level for two years,” with the IPO volume decreasing by $3.3 billion in 2018 YTD compared to 2017.
While that applies for the entire EU IPO market and not just tech, the fact remains that EU tech businesses continue to remain significantly smaller. Avast may feel proud of a $3 billion valuation. But if Uber goes public next year, the Wall Street Journal reports that Uber’s valuation could hit a ludicrous $120 billion. Even Brazilian company StoneCo Ltd. is going public this week with a $6 billion valuation.
Part of this is due to structural weaknesses within Europe which hinders what tech companies can accomplish. Brexit is a major blow for European tech IPOs given the importance of the London Stock Exchange, and moves like the EU’s demand for Apple (NASDAQ:AAPL) to pay taxes as well as the GDPR will limit the ability of another Facebook (NASDAQ:FB) or Uber for both good and ill. PwC did point out that the EU had low volatility, and can benefit from continued cross-border investment within the nation-states of Europe. But for the time being, the EU IPO tech market will continue to remain significantly smaller than the United States.
Different Economic Approaches
But while there may be no European tech giants like Uber, that may be because Europe is taking a different, more democratic approach. A major reason why American private companies have waited so long to grow so large before going public is that they know they can rely on private VC money instead of needing to go public. For a variety of reasons, European firms are choosing to go public earlier, which also gives investors a better chance to become part of a growing company. Some star performers include the Fintech company, NAGA AG, which was financed by the multi billion Dollar investment company Fosun Group and performed an ICO and IPO within the same year, to launch the world’s first marketplace for virtual goods. A few examples of smaller companies which have gone public recently include German hardware company X-Fab and French cybersecurity company Wallix. As noted above, cross-border communication and sharing of ideas can lead to better companies in a market with twice the population of the United States.
This smaller approach may sound appealing, but it contains weaknesses. For one, the smaller companies can struggle to stand up in the face of American competition who may merge and acquire them. Spotify (NYSE:SPOT) is a well-known example, as there has been constant discussion for years about whether Microsoft (NASDAQ:MSFT), Apple or another American tech giant may try to buy the Swedish company. The best way to take down those giants will be to create an European variation and avoid being bought out whether publicly or privately. Europe certainly has the population, innovative capacity, and technological know-how to create technological firms whose IPOs can rival the United States, and they are certainly in a better position today to do so compared to a few years ago. But it is still too early to think that European tech companies are the peers of America’s.