In the manner of one of its riders turning up with a box of pizza, Deliveroo’s initial public offering came along with apparently good timing just as the London market was keen to show it can attract “hot” tech listings. Regrettably, the pizza arrived cold. The 26 per cent share price fall on Deliveroo’s opening day was a blow to City ambitions to fend off competition from the US and exchanges such as Amsterdam in attracting high-growth companies. It sharpens the government’s dilemma as it considers plans to reform listing rules to make the UK market more enticing, amid some investor unease.
The fact that Deliveroo’s offering fizzled does not, in itself, mean London cannot attract future tech listings. Tech debuts have disappointed before — think of Facebook, or Ocado. Several specific issues, moreover, lay behind Deliveroo’s failure to deliver. The offer proved poorly-timed, with the market appetite for tech stocks waning as bond yields rose. Some investors were wary of its dual-class structure, and potential risks to its model after UK courts ruled Uber should treat its drivers as employees. Some saw the pricing as stretched for a company that made a £224m loss last year despite surging demand for takeaways in lockdown.
Yet the optics were poor. Other jazzy tech, green or life sciences start-ups may follow Cazoo, the used-car sales portal, in opting instead to go public in New York, perhaps by backing into a special-purpose acquisition company — the big trend of the moment. Indeed, the longer London stands aside from the Spac craze, the more it risks hot growth prospects being snatched from under its nose. The more UK institutional investors remain wary of dual-class share structures, meanwhile, the more founder-chief executives — anxious to ensure they can fulfil their vision for the company they created — will go elsewhere. Hence the proposals from Lord Jonathan Hill to ease constraints on both.
Some investors, along with the Financial Times, have warned that regulators should tread carefully in changing rules to allow a rush of Spacs to London. The Hill review proposed removing a disincentive for Spacs to list by no longer forcing their shares to be suspended when they announce a potential acquisition, which can leave investors “locked in” even if they don’t like the target. Spac shareholders would gain protections, such as a shareholder vote on the takeover, and redemption rights. But careful consideration must be given to what kind of financial projections Spacs can and are obliged to offer investors — and the post-deal “lock-ins” required for Spacs’ sponsors.
Proposals to allow companies with dual-class share structures to pursue “premium” listings, provided they have five-year time limits and a maximum weighted voting ratio of 20:1, are reasonable. Deliveroo, despite having a large enough capitalisation, was barred from inclusion into the FTSE 100 because of the outsized voting rights granted to Will Shu, its co-founder and CEO — depriving it of tracker fund investment. Yet given some institutions steered clear of Deliveroo in part because of the share structure, it is clear changing the rules is only part of the story; culture change is needed too.
While some investors may say they could not see a clear path to sustainable profits for the food delivery company, some entrepreneurs suggest UK institutions are less willing to back lossmaking tech start-ups — however strong their outlook — than their US counterparts. Investors have reason for caution. But successful tech investing often means backing a lot of risky companies on the assumption many will fail, but the winners will be worth it.