On the heels of Microsoft’s acquisition of the Berlin startup darling 6Wunderkinder for a price between $100 and $200 million, the debate rages on about whether Berlin startups should be bolder and wait longer for an exit.
The consensus in the Berlin startup ecosystem is that we are still missing one extraordinarily big success. Several recent exits hovered in the hundreds of millions of dollars range, including Sociomantic’s $200 million exit to dunnhumby Ltd., the OpenTable clone Quandoo’s $219 million acquisition by Japan’s Recruit and the aforementioned 6Wunderkinder’s sale to Microsoft. Progress has been made.
Berlin is home to several of the tech world’s mythical unicorns, such as SoundCloud, Delivery Hero and a handful of Rocket Internet companies. However, while both Rocket Internet and Zalando went public on the Frankfurt Stock Exchange last year — quite successfully, I might add — there is little fanfare for German startups in the international community. So what comes next?
The next big thing is an Initial Public Offering (IPO) in the United States (U.S.). We may not have long to wait. Earlier this week, Delivery Hero announced a $110 Million investment from pre-IPO investors valuing the company at $3.1 billion USD. While Rocket Internet owns more than 30 percent of Delivery Hero, and Rocket Internet portfolio companies have thus far gone public on the Frankfurt Stock Exchange, comparable companies are receiving higher valuations in the U.S.
Markus Bauman, a lawyer with King & Spalding, has taken a number of German companies public in both Germany and the U.S. As he explains, “The current macroeconomic conditions, together with recent legislation like the JOBS Act, is making it easier for emerging-growth companies to go public in the United States.”
German Companies On The NYSE
In the past, German companies often listed their shares in the U.S. From 1994-2001, around 25 of the largest German companies went public in the U.S. (Daimler, Deutsche Telekom, Siemens, Deutsche Bank, etc.), which was the gold standard of the time. In 2002, the trend came to a halt with the introduction of The Sarbanes–Oxley Act, which tightened regulations and created a compliance nightmare. For anyone who has filed taxes in Germany, you know that when Germans complain about compliance, it is time to amend the Act.
Cost was also an issue. Spiegel reported that, “German firms cross-listed in the United States spent between €10 and €15 million annually on SEC compliance, a survey conducted by Stadtmann and his colleagues found. Most companies would not disclose the exact amount of money they spent on SEC compliance, but a Deutsche Telekom spokesperson told SPIEGEL ONLINE costs were in the ‘low double-digits’ of millions of euros and another at Daimler said they did not exceed €10 million.”
The American market is once again looking like a solid choice for German companies ready for their IPOs.
Most German companies decided to bail on the U.S. stock exchange and move to Frankfurt. The German companies that remain include Deutsche Bank, Affimed, Aixtron, Elster Group, Fresenius, Orion Engineered Carbons, Rofin-Sinar, SAP and Voxeljet. But with the emergence of high-growth technology and biotech companies in Germany reaching valuations in the several hundred million dollar/euro range, combined with recent legislation that has made governance and disclosure obligations less stringent for foreign private issuers in the U.S., it is time for German companies to reconsider.
Bauman notes, “The JOBS Act gives emerging growth companies a number of important accommodations, from exemptions to internal controls audits under Sarbanes Oxley, to ‘testing the waters’ to confidential SEC review and scaled financial disclosure. Those accommodations are in addition to the exemptions and accommodations given to foreign private issuers as compared to the requirements that are imposed upon U.S. domestic issuers by the SEC.”
So Why Should My Startup Go Public in the U.S.?
Let’s start with the basics: Money. In January, I wrote a post raving about how Berlin startups raised 1.1 billion USD in 2014. While that was amazing growth, during the same year U.S. startups raised $47.3 billion. When it comes to capital markets, we see the same discrepancy in volume.
The NYSE and NASDAQ remain the two most liquid exchanges in the world, with market capitalization (as of November 2013) of $17.4 trillion and $6.0 trillion, respectively. By comparison, the Tokyo Stock Exchange trades roughly $4.5 trillion and London’s big board sees $4.2 trillion in trading.
In addition to offering easier access to the U.S. capital markets, U.S. exchanges provide entrée to broader shareholder and investor bases in the U.S., and U.S. capital markets are viewed as the destination of choice for investors and companies alike.
There also is greater potential for higher valuations for companies in some industry sectors than may be available on other exchanges. Company comparisons are critical when it comes to IPO pricing. Analysts use similar companies as a benchmark; if your numbers are better than the comparable company, you’ll benefit with a bump in price.
As the U.S. is the most liquid market, NYSE Euronext’s equity exchanges trade more U.S. equity volume than any other exchange group, with 2,300 listed companies. In industries such as high-tech and biotech, the analyst community in the U.S. is far larger and more sophisticated.
The Nuts And Bolts
Going public in the U.S. might be a better option when it comes to volatile markets, and, let’s face it, in the startup world, your market will often be described as volatile. Certain features of the U.S. public markets mitigate some of these risks.
Shorter Marketing Period. “U.S. IPOs generally have a shorter marketing period than European IPOs, and are able to calibrate the marketing period to meet critical market windows,” Bauman says. In Europe, the marketing period (the period that the company’s management meets potential investors) is generally four weeks, whereas in the United States it is possible to do this in half the time.
With a shorter marketing period, the IPO is subject to less market volatility and other external factors outside the control of the company, increasing the probability of a successful IPO.
Price Adjustment Leeway. Investors in the U.S. are generally more receptive to adjusting the price range of an IPO, whereas in Europe an adjustment is viewed negatively.
More Flexibility in Size of Offering. U.S. IPOs can be relatively smaller than European IPOs, and issuers retain flexibility to further reduce the size of the offering if demand is low. European listings generally require a free float of 25 percent, while in the U.S. there is generally no minimum free-float requirement.
Follow-on Activity. The U.S. continues to lead when it comes to IPO activity. With increased investor confidence, follow-on activity remains equally strong.
Special Perks. The JOBS Act, which was signed in 2012, has allowed for special perks for Foreign Private Issuers:
- The law extends the amount of time, from two years to five years, that certain new public companies have to begin compliance with specific requirements, including certain requirements that originated with the Sarbanes–Oxley Act.
- More permissive U.S. regulations and financial reporting relief applicable to certain issuers available under the JOBS Act.
- Less stringent governance and disclosure obligations (as compared to the requirements applicable to domestic U.S. SEC registrants) continue to be attractive to Foreign Private Issuers.
Given the nimbler regulatory environment, upbeat financial outlook and the sheer volume of dollars moving through the top floors of U.S. investment banks, the American market is once again looking like a solid choice for German companies ready for their IPOs.
And they will be in good company. Various global enterprises have recently turned toward the U.S. for their IPOs. When John Cassidy of The New Yorker covered the Alibaba IPO he shared, “For a long time, the Wall Street I.P.O. market has provided an incentive for entrepreneurs and inventors to get out of bed in the morning. These days, it appears, the American I.P.O. market is serving the same purpose on a global level.”
Berlin companies are now ready for their turn on the world stage and, given the exceptionally high valuations for online food delivery, this may be the moment Berlin has awaited.