“A European Facebook? It’s already here” (says Index Ventures)
It’s often been said that the European tech scene is a bit obsessed by the question ‘where is the European Facebook’ (or Google). Well, says Index Ventures’ Robin Klein: It’s already here. He repeats a point he made earlier: there are dozens of companies in Europe (including Israel, and Russia) that are ready to IPO.
We just don’t see it:
[M]any young internet businesses are now maturing into significant companies, growing by 30, 60, or 80 per cent per annum.
Many are highly profitable – they scale quickly and efficiently. Rightmove, for example, has disrupted the property advertising market, and its profit margins sit at levels rarely seen by publishers before. Investors have benefited from Rightmove and the few other pure internet businesses that have gone public (like MoneySupermarket and Asos). But these are the exceptions.
Most home-grown internet success stories either decide not to go public and sell themselves too early to a large US corporation, or they seek to list on Nasdaq, tempted by higher valuations. That’s a great pity for the UK.
Klein sees a few reasons for this: investors are gun shy after the dotcom bubble, but more importantly: there is insufficient knowledge about how internet companies operate. While this might sound like it comes dangerously close to those ‘new economy’ arguments that fueled the 2000 dotcom bubble, Klein doesn’t mean that internet companies don’t have to make money or don’t need a business plan.
Instead, he says European analysts today lack the experience, tools and categories to properly benchmark them:
Take retail. A [retail] company is [commonly] benchmarked against another on a sales per square foot basis. But there is no concept of sales per square foot online.
Instead of sales per square foot, you might consider on-site conversion rates, the lifetime value of the customer, the cost of customer acquisition, and time spent on site. If I was an equity analyst without in-depth knowledge of how a digital company works, it would be impossible to assess accurately how that business was performing, how it compared to its peers, or whether to advise clients to invest in it.
Here are a few solutions Klein proposes:
1. The European stock exchanges should create a separate class of ‘internet companies’ which do the majority of their business online. This would in turn create a class of analysts specialised in internet companies.
2. While the London Stock Exchange is trying to lure tech companies, that’s just not enough. Investors must bring their best companies to the markets, and the investment community should overcome their fear of investing in these internet companies.
3. Finally, the London Stock Exchange (LSE) should become more attractive for IPO’s: “many [companies] would choose to list in London if only they thought it had an established reputation for internet floatations, and that there were investors who were ready to invest in the sector’s stock.”[CityAM][photo: Kevin Krejci, Flickr]
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