US start-ups get greener funding in London
Bedford, Mass. — The word is out. In the last 18 months, a clutch of young New England companies have found fame and -- more important -- financing in London. Now, others are taking the transatlantic route. ``This is really taking off,'' says Tara Dantzig, a Boston-based partner in the Touche Ross accounting firm, who was involved with two recent London offerings. ``It's a good alternative to the US market.''
There are plenty of pluses for American companies going public on the Unlisted Securities Market in London, cost and time savings for starters. Qualifying start-ups can get listed for half the cost and in less than half the time it would take to do an initial public offering in the United States.
But the kicker, for most, is the ability to raise bigger bucks. In the US, companies are evaluated based on past earnings. This can limit the stock's offering price. In the United Kingdom, a company is allowed to forecast profits. So initial stock prices are generally higher.
Over there, ``the prospectus is more of a selling document,'' Ms. Dantzig explains. ``It positions the company with a forward outlook. And there's no risk disclosure.''
It sounds risky for investors. But Dantzig points out that the underwriting broker and a major accounting firm verify the earnings forecasts. ``Very few companies have missed this forecast,'' she says. And with profit projections built into a stock price, British investors are quick to dump their stock if companies don't live up to their promises. Brokers and accountants aren't eager to be left with egg on their faces, either.
This oversight, combined with the London Stock Exchange's individualized investigation of each listing, means that companies are scrutinized much closer than in the US, those involved say.
``In the US, there's much more regulation, legal expense, and documentation when a company goes public,'' says Joseph E. Lavangie, chief financial officer of Colorgen, a Bedford, Mass., start-up that recently raised $2.8 million in London. ``The irony is that the US underwriter comes out not knowing as much about your company as the London broker with his procedures. The due diligence is there,'' Mr. Lavangie insists.
Colorgen is one of 10 US companies traded on the Unlisted Securities Market (USM). This fall it joined several other Route 128 companies on the USM: Optometrics in Waltham; CVD Inc. in Woburn; Pacer Systems in Burlington. Another recent addition was InfraRed Associates, based in New Brunswick, N.J.
The five-year-old USM is similar to the US over-the-counter market. This ``parallel market'' is a younger sibling under the guardianship of the venerable London Stock Exchange. Its original purpose was to help raise capital for small British companies unable to met LSE listing requirements. At present there are some 325 companies traded on the USM; 15 are foreign-based.
Richard A. Reichter, president of Eaton Financial Management, has helped orchestrate the listing of five of the 10 US companies listed in London. And those successes have cash-hungry entrepreneurs flocking to his door.
``On average, we receive more than 50 inquries a month,'' Mr. Reichter says. He now has 14 US companies ``in the works'' -- half going public and half getting private financing in London. ``We expect those to go through in the next three to five months,'' he says.
While Reichter splits his time between Andover, Mass., and a home in London, he is not confining his business to the US and the U.K. The approval process is under way for his first listing on the French equivalent to the USM, the ``Deuxi`eme March'e.'' And he has another ``three or four'' offerings under review for Amsterdam's secondary market.
Reichter warns that US start-ups should not seek asylum in an ``easier'' foreign market. It won't work. For instance, on London's USM, even to be a candidate a company must have a three-year audited history, be making a profit, be well managed, have a product or service with potential in international markets, and be in a rapid growth phase. The USM offers many advantages, but this route is ``wrong for companies that don't meet this profile,'' Reichter says.
For those that meet the profile the list of advantages includes:
An almost immediate payoff for company founders. In the US, Securities and Exchange Commission Rule 144 restricts the timing and the amount of shares that can be sold by existing shareholders after a public offering. In London, ``it's not take the money and run,'' says Ms. Dantzig at Touche Ross, ``but a more healthy attitude of recognizing that the founder should get some of his sweat back.''
Fewer required financial reports. This frees management of small, fast-growing companies from a time-consuming, expensive chore.
Entry into new markets. The underwriting broker opens doors that could take considerable time for a foreigner to gain access to. ``The sponsors know the company and are out marketing for you. They're almost an offspring of the company,'' says Lavangie at Colorgen.
Colorgen's product is an inexpensive machine for paint dealers which ``looks at'' a paint, rug, or cloth and provides the proper paint formula for an exact color match. The marketing has been focused in the US. But through the efforts of the British brokers, ``some very nice welcome mats are being put out'' in Britain, Lavangie says.
``That has accelerated the setup of our London office.'' And he notes that plans for an assembly plant there are taking form. Such opportunities for growth more than offset the additional costs of serving shareholders in London, he says.