Can the Stock Market be an Alternative to Later Stage Venture Capital?
Stock Market vs. Later Stage Venture Capital
Entrepreneurs are the driving force of an economy and are an important source of innovation. Disruption requires investment in equity, not debt, and it’s up to venture capitalists to prove it. The momentum of capital flow is strong in Belgium and new venture funds have been announced in recent months. From January 1, till July 19, fundraising announcements by non-listed Belgian companies reached 441 million Euros (o/w 300 million Euros in the biotech sector). This compares to 366 million euros for the full year 2017. However, there is still much room for improvement. Expressed as a percentage of GDP, venture capital investments amounted to 0.033% in Belgium in 2017 compared to 0.039% in Europe and 0.055%, 0.044% and 0.035% for France, The Netherlands, and Germany respectively. The same lethargic pattern can be observed in the Belgian IPO market. More effort must be allocated towards the support of entrepreneurial activity in Belgium and help maintain local decision centers.
As an effort to improve further access to capital markets for start-ups & established corporations, the Belgian financial watchdog recently implemented a new European directive that alleviates the current constraints of prospectuses for SMEs. The new FSMA rules amend the existing prospectus exemptions. Offers to the public are now exempt from the obligation to publish a prospectus when the total consideration in the European Economic Area is below 5 million Euros. But this threshold will be increased to 8 million Euros if the fundraising is followed by an admission on the multilateral trading facility such as Euronext Access or Euronext Growth.
We welcome this regulation that fills some of the current legal gaps in the venture capital and private equity markets. While answering an identified need and having a promising technology, some projects do not match the criteria of financial sponsors. The reasons vary: some blame it on the niche market where they do not have the expertise, insufficient size, lack of interest of VC in hardware manufacturing, etc. The stock market can then be an alternative for SMEs having a strong economic and technological background by providing financing and increased visibility.
Making the Decision
Beyond financial matters, the choice between the stock market and venture capital/private equity should be based on governance matters and strategy execution. A hands-on financial sponsor, through its board representative, can help management roll out its growth strategy. On the other hand, the wider shareholder base of listed companies allows management to maintain its influence despite dilution.
Regarding the investor side of the table, the Euronext Access and Euronext Growth market segments address sophisticated investors, be it institutional or retail investors. Investors should be aware that the risk and return profile of these companies is often closer to venture capital. Here is the evidence:
– The money raised by companies on the occasion of their listing on Euronext Growth (Paris) averaged 7.7 million Euros in 2018.
– In 2017, companies raised 1,825 million Euros through secondary offerings on Euronext Growth (Paris) compared to 54 million Euros for IPOs. Secondary offerings often occur through private placements which fasten execution.
– From launch, a listing process takes 3-6 months. This compares to 6-12 months for most venture capital rounds.
– A recent article from Zonebourse writer Anthony Bondain mentioned that 29% of biotech constituting the Next Biotech Index trade above their IPO price. While seemingly disappointing, this statistic should be compared with VC statistics whereby over 75% of companies fail or deliver a return below their cost of capital. Despite the high churn rate, investors are right to keep on investing in biotech. From January 1, 2012, to December 31, 2017, the Next Biotech index generated a return of 170% compared to 158% for CAC Mid & Small and 48% for Eurostoxx 50.
– From January 1, 2012, to December 31, 2017, the Euronext Growth All Shares index rallied by 101% This compares to 88% for BEL 20 and 66% for CAC 40.
We believe these encouraging statistics should encourage policy-makers to revive the IPO market.
Finally, the new regulation allows for the combination of both worlds – by raising capital through a private placement followed by a public offer and a listing, companies could benefit from the expertise of reference shareholders and the financial depth of public capital markets. Entrepreneurs weighting their options on public and private capital markets should contact a listing sponsor. Listing sponsors are corporate finance advisors who guide the company throughout the fundraising journey. ONEtoONE Corporate Finance Benelux is accredited as listing sponsor on Euronext Brussels and Paris.
For more information, contact the author: [email protected]
ONEtoONE Corporate Finance Benelux is an entity of ONEtoONE Corporate Finance Group. The Brussels office offers M&A advisory services to mid and large corporates. ONEtoONE CF Benelux also offers private placement services and is listing sponsor on Euronext Brussels
ONEtoONE Corporate Finance is one of the largest independent corporate finance firms specialized in M&A advisory for the middle-market industries. We serve a broad spectrum of clients ranging from privately owned company to large corporations and Private Equity Funds. Since its inception in 2004, the firm has grown to an integrated international network of offices collaborating in 20+ countries worldwide.
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