What is the role of public feeder markets in developing technology-based small firms? An exploration of the motivations for listing on AIM since the GFC

Abstract

In the aftermath of the 2007 global financial crisis, stock markets experienced a sharp decline in listings and a marked reduction in initial public offerings (IPOs). This paper explores the factors determining UK technology-based small firm (TBSF) listings on the UK alternative investment market (AIM) and whether this market has a role to play in their future development. A case-study approach is used to contrast the experiences of five recent AIM-listed TBSFs with five TBSFs approaching private equity investment exit, i.e. considering an IPO exit. The paper concludes that macro market conditions, rather than managerial resource-based or AIM market structural factors, were most influential in TBSF pecking-order preferences to undertake IPOs. From a managerial resource-based perspective, lifelong entrepreneurs were more likely than serial entrepreneurs to favour an IPO exit, as it supported their aims to continue to manage and grow UK-based companies. In addition, with a more buoyant and sustainable AIM market, TBSF investors are more likely to choose IPOs. To conclude, AIM played an important role in the development of listed UK TBSFs. A more buoyant AIM could ease the UK finance escalator's flow, facilitating more rapid UK TBSF growth.

Keywords::

• technology-based small firm (TBSF)
• initial public offering
• alternative investment market

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Erratum

Acknowledgements

The author would particularly like to thank the Department for Business Innovation and Skills (BIS) for their funding of some of this research, Dr Salinder Supri for his excellent case-study work, Dr Ian Vickers and the two anonymous reviewers for their helpful advice. The views of this article are solely those of the author.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

^1. UKSMEF 2012 suggests 3%.

^2. Adopted from Sir George Cox's Small Business Review (2013) and allowance of AIM shares for ISAs.

^3. The selected businesses are not ‘matched pairs’ and pre- and post-IPOs are, by necessity, at different stages of development.

^4. Digital Electronic/IT sectors (SIC2003): 3001/2 Office and Computers; 3110 Electrical motors; 3120 Electrical controls; 3210 Electrical components; 3220 TV and Radio; 3320 Measuring devices; 3330 Process controls; 3340 Optical; 3530 Aircraft; 6420 Telecomms; 7210 Hardware consultancy; 7221/2 Publishing software; 7230/40 Data; 7260 Other computing Bio/Life science sectors (SIC2003): 2416/7 Plastics; 2441/2 Pharmaceuticals; 3310 Medical; 7310/20 R&D consultancy.

^5. The recent GFK (2013) report on London's Tech City suggests a recent rapid growth of TBSFs with as many as 1350 in this part of London alone.

^6. Collectively these studies contained 50 UK TBSFs that had sought equity growth finance since 2007.

^7. During the period 2007–2012, the annual average number of UK TBSF IPOs on AIM has been 15. The range of private equity TBSFs seeking IPO in any given year is reported at between 3% (CfEL 2013) and 20% (Revest and Sapio 2012; NESTA 2010), rising with improved market buoyancy. Taking a median of 11.5% (which is in-line with recent reporting from UK government VC schemes, Baldock 2014), the annual number considering an exit would be 130, but the prevailing poor market conditions in this period suggest that fewer would be actively considering exit, whilst in a more buoyant market this could rise to in excess of 200 per annum.

^8. Either the Chief Executive Officer (CEO) or Financial Director (FD).

^9. Serial entrepreneurs start or develop businesses to a point of sale and then move on to managing other businesses.

^10. Businesses receiving private equity investment and then being placed on the AIM market to realise investor returns, but which do not have longer term value or sustainability.