Growth Strategies

VCs Look for Payday in London

U.S.-based financiers see opportunity on U.K.'s alternative exchange.
Stephen TaubFebruary 3, 2006

It’s no secret that the end-game for venture capitalists is to enjoy a big payday when they take public the companies in which they invest.

However, VCs have been having trouble completing initial public offerings, in large part because compliance with the Sarbanes-Oxley Act has sharply driven up costs for small publicly traded companies. In addition, since the Securities and Exchange Commission’s research settlement with Wall Street, there is much less analyst coverage of small, fledgling companies.

As a result, in 2005 just 56 venture-backed IPOs raised a total of $4.5 billion in the United States, compared with 93 that raised just over $11 billion in 2004, according to Investment Dealers’ Digest, citing data from Venture Economics and the National Venture Capital Association.

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The London Stock Exchange’s Alternative Investment Market (AIM) is coming to the rescue, aggressively offering itself as an option for venture-capital firms looking to take one of their portfolio companies public so they can cash out, according to the IDD.

“To some extent, the AIM is replacing the Nasdaq as the international market for growth companies, and that, increasingly, is of interest to venture capitalists,” Matthew Doughty, an attorney with O’Melveny & Myers, told the publication.

The AIM does not have a required minimum size for a company to list and has no outside regulatory review in most cases, noted the IDD.

At least 3 of the 19 U.S. companies that went public on the AIM last year were VC-backed, said the IDD, although the publication stressed that it could not obtain definitive statistics from Thomson Financial databases or even the AIM.

However, the report pointed out that about one dozen AIM-related seminars are scheduled to take place in the United States in the first quarter alone. “The more we looked at it, the more we said this is a viable answer for us,” Mark Campion told the IDD. Campion is chief financial officer of Polyfuel, a venture-backed developer of a direct methanol fuel cell for mobile applications. His company listed on the AIM in July.

The other two VC-backed IPOs that listed on the AIM last year were Allied Healthcare, with funding from Hyperion Partners, and Clipper Windpower, a portfolio company of Energy Spectrum.