Rule change on tech IPOs is "first step" Technology entrepreneurs on Thursday welcomed government plans to ease listing rules on the London Stock Exchange as a good first step towards making the UK more attractive for initial public offerings. However, they stopped short of predicting that the rules change would lead to a quick boost in the number of London tech listings, with many believing that there are still deeper-seated problems to solve. These include educating London-based investors about technology and creating a bigger pool of tech analysts in the City. I suspect the pipeline will be pretty thin, not just this year. but also next year. This is not a five minute fix, it is a generational change," says Alistair Warren, head of equity capital markets at Goldman Sachs. Klaus Nyengard, founder and chief executive of Just Eat, the internet fast food ordering company that is beginning to consider a stock market listing, says "Everything helps, anything the government can do to make it easier to list is good . . . but there are other issues to solve as well, mainly around the depth of technology understanding among investors and researchers." Government ministers on Thursday put forward contentious proposals to encourage more listings, which included relaxing the listing rules on the London Stock Exchange, allowing companies to list as little as 10 per cent of their business, down from a current requirement for 25 per cent. The initiative comes as the government is seeking to avoid losing more technology IPOs to the US, following a drought in main market technology listings since early 2010. The biggest hurdle, however, is still convincing investors to put money into technology stocks, says Robin Klein, a partner at Index Ventures, one of the UK's most successful venture capital company, which backs start-ups Just Eat and Mind Candy. "European bankers need to study up on how to properly value internet companies, better understand their business models and assess the competitive advantages of their strategies," says Mr Klein. He adds that investors do not always recognise the outsize returns that high-growth companies can provide. He points out that since 2009, while the FTSE 100 Index has increased by 39 per cent in value, companies such as Asos, the internet-based fashion business, has increased 695 per cent in value, while RightMove, the internet estate agency, has seen its share price rise by 841 per cent. Bankers say that UK investors are interested in high growth companies but often unwilling to pay high multiples. Often a price oif around 15 times earnings is seen as a limit for London investors. It is a number I hear quite often from investors in London. They say that anything more than 15 times earnings is suicide," said one banker. In contrast, US investors have been willing to buy at a multiple of 40 times for Facebook, or more than 600 times earnings for LinkedIn. Facebook shares, however, have fallen nearly by half since its listing. Because there are fewer listed tech companies in the UK, depth of expertise in any particular technology vertical is typically less than what it is in the US. In order to invest in a growth company you have to take a longer term view on what the company could be worth and have conviction about it," said Dominic Lester, head of European TMT and Joint Head of European investment banking at Jefferies. If you understand the fundamental drivers of growth for a company, you are less worried about the short term liquidity of the stock. But UK investors tend to be more generalist. Alasdair Warren, European head of equity capital markets at Goldman Sachs, said plans to lower the free float requirement from 25 per cent to 10 per cent on the LSE would help the IPO market. "If you are only selling 10 per cent of the company, you will be less sensitive around valuation at IPO, especially if it is primary capital," Mr Warren said. Start-up companies will also need to be convinced that London investors will be supportive. Enterpreneurs such as Mike Lynch, founder of Autonomy, have often complained of being given a hard time by analysts over relatively small drops in performance. But others believe the market gets it right in the end. "Listing was a very challenging process," said Werner Leinauer, chief executive of Incadea, an Austrian software company that floated on London's Aim market earlier this year. The effort you have to spend on preparing your accounts and reports is a huge burden. And out of 66 investors we met on our roadshow around 10 expected a valuation that just didn't reflect the value of the company. However, he said, the majority of investors did make offers in a very fair range for the business. "Looking back on it, we would do it again," Mr Leinauer said.