To IPO or ICO? That is the question

With ICOs trending and tech IPOs back in vogue, which route should tech firms and investors really consider? John Kennedy examines the pros and cons.

Dropbox’s long-awaited stock market debut on Nasdaq happened on Friday (23 March) to much fanfare. The cloud storage company, which began in 2008 with a cheque for $12,000 from Y Combinator, closed on Friday night with a valuation of around $12bn.

It was the biggest tech initial public offering (IPO) since Snapchat creator Snap’s IPO last year.

There is a giddy feeling that it may signal the beginning of a slew of tech IPOs from so-called unicorns (the exclusive club of tech firms valued at $1bn or more). Now, all eyes are on companies ranging from Airbnb to Uber and Stripe, the payments technology firm founded by Irish brothers John and Patrick Collison, which was estimated to be worth $9bn in 2016.

The drip-drip nature of tech IPOs over the past decade – from Google, to Facebook, Twitter, Atlassian and others – is nothing compared to the roaring tides of 1999 when IPOs of dot-com firms were almost a daily occurrence, until a major market correction of March 2000 that set the industry reeling for a decade or more.

Before that, IPOs were unheard of and venture capital wasn’t even a thing really until an Irish company called Iona Technologies – quietly started in a Trinity College Dublin research lab by Chris Horn, Sean Baker and Annrai O’Toole – made history. In 1997, Iona became the second ever Irish technology company to go public on the Nasdaq exchange, the fifth-largest IPO in Nasdaq history at that time, raising $137m in the process.

I met Horn at Iona’s offices in Ballsbridge in 2000, and he gestured to three of four gigantic volumes that looked like phone books and he said that these were just the application documents for filing for an IPO. It was a salutary lesson that IPOs are hard work and that nearly everything pretty much starts again for a company. Horn eventually sold Iona for $162m in 2008.

Other companies that were part of that brief Irish IPO era such as Trintech and Baltimore are now just footnotes in Irish tech industry history, but were lessons in their time that going public and putting your company’s fate in the hands of investor sentiment is a big gamble.

That said, going public is nevertheless a good indicator of a nation’s tech acumen and, sadly, Irish tech firms have never managed to match the pace of similarly sized nations such as Israel. Unlike Israel, Ireland doesn’t have a massive military-industrial complex that spews out legions of cybersecurity founders and start-ups.

But Irish tech IPOs have been happening and they are picking up pace.

In recent years, companies such as cloud fleet management player Fleetmatics have showed how it is possible to go from a small office above a newsagents in Templeogue, south Dublin, to be a company with a listing on the New York Stock Exchange. Fleetmatics was acquired for $2.4bn in cash by US telecoms giant Verizon in 2016.

In recent weeks, two more IPOs by Irish tech firms caught my attention.

Zutec, a construction software company from Dublin, listed on the Nasdaq First North market in Stockholm to raise €5.7m from a share sale.

Just a few days later, a Waterford software company called Immersive VR Education made its IPO debut in a dual listing on the Dublin Enterprise Securities Market and the AIM in London, raising £6m (€6.7m) in investment.

Does it signal a return to the heady days of IPOs for Irish tech firms? Possibly. And, if so, it is about time.

Coining in on crowd wisdom

The primary route to funding for Irish tech firms is still venture capital. According to recent figures from the Irish Venture Capital Association, Irish tech firms raised close to €1bn in venture capital in 2017.

Figures from TechIreland peg more conservative numbers at €580.2m for 2017, pointing out that companies led by women founders secured just €79.4m of this, prompting a new campaign to push this to €100m in 2018.

The CEO of Enterprise Ireland, Julie Sinnamon, revealed recently that 35pc of all high-potential start-ups (HPSUs) backed in 2017 were women-led. She told Siliconrepublic.com that she wants to see this reach 50pc.

In 2018, the funding options for Irish tech firms are more varied compared to the wasteland that existed between 2000 and 2012.

Many tech firms – partly at the behest of venture capitalists in order to prove their products’ likely market reception – embark on the crowdfunding route.

Recent examples include Dublin fintech Flenders (£500,000), House My Dog (£206480) and Jane Ní Dhulchaointigh’s Sugru (currently nearing £9.4m in both crowdfunding and venture capital).

Another new tantalising route is the initial coin offering (ICO) whereby firms effectively create their own cryptocurrency, just like bitcoin using blockchain technologies.

For some, myself included, ICOs driven by current cryptocurrencies are risky and could represent the Dutch tulip auctions of our age, or dot-com 2.0.

Basically, a company creates a currency to raise money using the blockchain ledger. However, ICOs are not regulated and therefore are fraught with risk. In recent weeks, Google followed in Facebook’s footsteps to ban all ads for cryptocurrency trading or upcoming ICOs.

Despite the fluctuations of cryptocurrencies in the past year – which saw bitcoin surge to more than $20,000 in value per coin, and the rising spate of ICOs leading to $5.6bn raised in 2017 – there is a growing sense of cynicism around the cryptocurrency craze.

ICOs are still only in their nascent stages in Ireland and it was recently reported how Enterprise Ireland ordered two locally based fintech firms, MingoCoin and Confideal, to remove website information that appeared to suggest that the State agency had endorsed their upcoming ICOs.

In recent weeks, we reported that Dublin-based Blocknubie had raised $5m in a private pre-sale from a diverse range of investors from the blockchain ecosystem around the world. The company is modelling itself as a go-to resource for blockchain start-ups.

ICOs could eventually eclipse venture capital as a funding route. However, these markets are not regulated, so there are no options to protect investors.

And that’s the big question: are ICOs a craze fuelled by a gold-rush mentality?

If so, then the wild west days of ICOs could soon be over. According to MIT Technology Review, the US Securities and Exchanges Commission, which oversees all public markets, is about to put in place a regulatory framework governing ICOs.

That is welcome news because at least it potentially protects investors – remember, all speculation is gambling anyway – but may give some credibility to ICOs that have some value.

The return of Irish tech firms to the IPO stage is also welcome news and we need more of these. Being able to trade publicly also means having the ability to use shares to acquire other companies.

The venture capital stage is getting more interesting now that Irish women founders are being tracked more closely. It will cast the right spotlight on ensuring women tech leaders are taken seriously in investor negotiations.

Crowdfunding is a good way to get your name out there and prove potential market demand for your product. There is always wisdom in a crowd.

ICOs are still unproven but nevertheless tantalising proof of blockchain in action. The onset of regulation is good news.

So, to IPO or ICO? It’s good to have choices, but ultimately you have to consider the long-term vision for your company.

ICOs can be good marketing, but IPOs are about the company you are building and a serious statement of intent. They are harder work, and the hardest work involves keeping investors on side. IPOs signal credibility; ICOs may yet be unmasked to be a fad.

Like all punts and investments, best to adhere to caveat emptor – let the buyer beware.

The Fearless Girl statue facing the Charging Bull in Lower Manhattan, New York City. Image: Quietbits/Shutterstock

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