Is AIM replacing venture capital?
Some companies, with huge or global growth potential, may remain in venture capital portfolios longer and go straight to the main market, leap-frogging AIM – for example CSR (Cambridge Silicon Radio), where the scale of financing, rapid growth potential and ambition of the company were clearly better served by being on the main list. But
it has to be said that such companies are the minority in our portfolios. Companies like SPI Lasers are more typical.
SPI Lasers started as a telecoms company targeting the US market and, accordingly, registered from day one as a US incorporated business with the objective of floating on Nasdaq. But soon into its development, when the telecoms market crashed, the team and investors saw a more immediate market for the company’s technology and repositioned it into the industrial laser market – a sector that is stronger in Europe and Asia. After five years of development and two significant rounds of venture funding, SPI Lasers then restructured itself into a Plc in order to float on AIM in 2005.
There are, however, risks in going into the public eye, such as when a company has not reached a sufficient stage of maturity and still has weak revenues, or there are possible changes of strategic direction to be made, management issues to sort out, and/or any sort of restructuring to do. At the first sign of any of these problems, the market can crucify a young company. And once sentiment has turned negative, it is very tough to reignite a positive following. These are all issues best sorted away from the public gaze – and especially out of view of competitors. This is one of the huge advantages of private equity and venture capital over any public market.
Change management matters
What do entrepreneurs need to bear in mind when going on to AIM? Of course, there are the regulatory aspects of being a public company, but in addition there are two psychological points I would advise entrepreneurs to heed. Firstly, it’s a big step moving from having a small number of shareholders/ directors to having independent directors, who do not own shares themselves but act on behalf of a large number of anonymous shareholders. You must learn the discipline of the market, where the market itself acts as governor.
Secondly, do not expect liquidity to come easily. You have to work hard to get your shares traded and it takes time. You need to have something to say and to talk yourself up, which involves public relations and investor relations on the back of corporate activity, including acquisitions, new products, new contracts and customers, big hitters you’ve hired, but not just big spend – that was the kiss of death for the internet companies of the late 1990s.
A report commissioned by the British Venture Capital Association (BVCA) and London Stock Exchange this year* showed that in 2005 annual turnover of shares on AIM was 74 per cent of a company’s market capitalisation, as against 139 per cent on the main market, with these percentages increasing with growth in a company’s capitalisation. Companies on AIM that want liquidity need to be seen to be executing to plan and growing, or they will become stuck with no reason for new investor interest. On AIM, as on the main market, it’s important to deliver to expectations and to continue delivering growth.
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Anne Glover is CEO of Amadeus Capital Partners, the European technology investor. A graduate of Cambridge University with an MBA from Yale, she began her career with Cummins Engine Company in the US. She then spent five years with Bain & Co before joining Apax, where she invested in early-stage companies. Before co-founding Amadeus in 1997, she was COO of Apax-backed Virtuality Group Plc. Anne was Chairman of the BVCA 2004-2005. Email her on info@businessxl.co.uk.