The Vital Role of Public Markets for Startups

Introduction

In today's rapidly evolving tech ecosystem, the public market plays a crucial role in the success of both private and public companies. Serving as the Listings Manager at the Australian Stock Exchange (ASX), Amit Verma has had the privilege of working with a wide range of companies, from early-stage startups to those on the verge of listing. In this article, he will explore the intimate connection between the public and private markets, the current state of the public market, and the implications for companies looking to go public.

The Intimate Connection between Public and Private Markets

Many founders and entrepreneurs often perceive that the public market is disconnected from the private market. However, this couldn't be further from the truth. The health of the public market directly impacts the private market, albeit with some lag and variations in size and sector. As companies grow larger, they are inevitably compared to their public market counterparts. This comparison trickles down to the early-stage companies as well, albeit with a longer timeline. Therefore, a healthy public market is vital for the success of the entire tech ecosystem.

The State of the Public Market

The ASX has witnessed record-breaking years in terms of listings and capital raised. In 2021, the exchange saw 241 listings, marking the highest ever, and raised $52 billion, setting an all-time record. However, there has been a significant slowdown in 2022, with only 107 listings, and it is projected that 2023 will conclude with around 45 to 50 listings. Despite this deceleration, there are signs of recovery, with notable listings in recent months. Companies such as Light & Wonder from the US, Abacus, and Freightways from New Zealand have successfully listed, though they are traditional businesses with large scale and profitability. The market is not yet ready for unprofitable technology businesses, as it was in 2020 and 2021. However, there is a massive pent-up demand for liquidity in the system, both domestically and internationally. Investors and companies alike are eager for opportunities to access liquidity.

The Role of the ASX in Growing the Pie

As the Listings Manager at the ASX, Amit Verma holds the primary responsibility of identifying suitable companies for listing on the exchange at opportune moments. The focus is on expanding opportunities within the technology and healthcare sectors, aligning with high demand from investors. The ASX stands among the top ten exchanges globally, boasting over 2,000 listed companies and a total market capitalization nearing $3 trillion. Furthermore, it holds the top position globally for follow-on capital raising, with over 1,000 transactions in 2022. This advantageous position facilitates listed companies in returning to the market for additional funds, a feature successfully leveraged by companies such as Afterpay, which raised capital multiple times to support their growth and acquisitions.

The Ideal Time to IPO

While early-stage companies might find the idea of an IPO tempting, it is generally advisable for them to wait until reaching a certain scale. Institutional investors typically set a floor benchmark of around $100 million in market cap, and companies below this threshold may face challenges in attracting their attention. In the case of technology and healthcare businesses, the recommendation is to contemplate an IPO when they reach the $200 million mark or higher. At this stage, they are more likely to capture the interest of institutional investors and stand a better chance of success in the public market.

Access to Indices and North American Investment

Listing on the ASX offers notable advantages, including early access to indices. While entry into the S&P 500 demands a market cap of nearly $15 billion, the ASX 200, ASX All Tech, and ASX 300 have considerably lower thresholds ranging from $200 million to $600 million. Inclusion in these indices enhances a company's appeal to institutional investors, given the popularity of ETFs based on these indexes. Moreover, the ASX draws a substantial amount of investment from North America, with over 25% of funds invested in ASX companies originating from this region. This presents an excellent opportunity for companies seeking access to both liquidity and North American capital.

The Arbitrage between the US and Australia

Many people often ponder why a US company might opt to list on the ASX instead of the US market. The explanation lies in the valuation multiples. Companies outside the S&P 500 frequently encounter lower valuation multiples in the US market. However, on the ASX, companies with market caps ranging from $500 million to $5 billion can attain valuation multiples of four and a half to five times enterprise value-to-sales. This renders the ASX an appealing choice for companies that are too small for a US listing but still aspire to access liquidity and secure a fair valuation.

Conclusion and Future Outlook

In conclusion, the public market maintains an intimate connection with the private market, and the prosperity of the entire tech ecosystem relies on a healthy public market. Despite recent slowdowns, signs of recovery are evident, accompanied by a significant pent-up demand for liquidity. Being a globally ranked top ten exchange, the ASX presents distinctive advantages for companies contemplating a public listing, encompassing access to indices, follow-on capital raising, and investment from North America. By comprehending the ideal time to IPO and the arbitrage between the US and Australia, companies can make informed decisions regarding their listing strategy. Looking ahead, it is crucial for companies to view the public market as a viable avenue for growth and access to capital.