Lessons from a young Scottish company that listed on the stock exchange
10 min read
09 February 2017
Ed Molyneux, CEO and co-founder at FreeAgent, shares his experience of listing on the London Stock Exchange and explains what not to forget.
After piloting RAF Harrier Jump Jets for nearly a decade, I didn’t think my career could hit higher heights – but then I took my company public on the stock exchange. In November, FreeAgent, the cloud accounting software startup we founded in Edinburgh in 2007, listed on London’s AIM index, raising £10.7m.
It’s been a strange, exciting roller-coaster of a journey. Alongside my two co-founders, we’ve seen FreeAgent grow from a side project that we developed as freelancers to help us manage our own finances better through to an established Scottish tech “foal” with 100+ employees.
Back in 2007, I don’t think any of us really envisaged running a company traded on a stock exchange. Even when we took on our first wave of proper customers and started seeing FreeAgent as a full-time job, we were simply focussed on building a great product and the idea of flotation was just a pipe dream. But with every leap that we’ve taken over the years – for example, either through attracting new investment or agreeing key strategic partnerships – we set the bar a little bit higher to the point where listing became not just a possibility, but a likelihood.
While it’s certainly exhilarating to take the plunge into the public market, I’ll admit that it’s not quite as thrilling as flying a military fast jet. Listing involves a lot of preparation, paperwork and calculations, so it isn’t the same white-knuckle, adrenaline ride. So why did we do it, and how did it go?
Growth was always on FreeAgent’s agenda – not only for our customers’ businesses, but also our own. Many software markets have a winner-takes-all dynamic at play, so we knew that our business would not only need to be impactful, but also aim to be at the front of the field. Settling for sixth place in a competitive market is a very cold place to be!
So we looked to external investment to help us achieve these ambitions. Between 2007 and 2015 we raised more than £7m, including angel investment, debt finance and a successful crowdfunding round. But, when it came to financing our next wave of expansion, we had a decision to make. Venture capital is a hits business, betting on a spread of startups in a search for high-growth next-big-things.
That much became clear when we spoke with venture capitalists. But we didn’t want to sell them a story of hyper-growth, as FreeAgent’s growth has actually been gradual and responsible, and we didn’t want to change our approach to fit that model.
Neither did we want to sell up to a bigger player, despite having had those conversations, too. So, when we examined our options, a stock exchange listing became more attractive.
The stock market would allow us to kill several birds with one stone. As a company dealing with people’s financial information, the enhanced scrutiny and governance that comes with floating would give us greater credibility in the market. And the float would give our investors the option of cashing out (though, as it turned out, I’m happy that most have stayed aboard).
The decision to list wasn’t a single decision. It was not as though we woke up one day in 2016 and decided to fire the IPO gun. Rather, it was a series of examination and consideration exercises over the last couple of years, like an alignment of the stars.
When you start out on the journey, you absolutely must hire an advisory firm to help you explore all the options and to start getting your company ship-shape. You need to find people you can get along with. You will be working closely with them for what may be an extended period – nine months, in our case. We went through our own selection process on brokers, accountants and lawyers, and ended up with a great team.
Our advisor N+1 Singer was a godsend. Over the years I’d learned a bit about finding investors for early-stage businesses, but preparing your company to float is completely new territory. It is vital to have stock exchange specialists helping you cut through the complexity and paperwork.
With the team on board, we carefully considered timing. Would Brexit happen and would it affect the markets? What was the outlook for our own industry and business? Had we anticipated the UK voting to leave Europe, we may have brought things forward. But everyone concluded that, fundamentally, investors are always looking to invest money in growing companies with good prospects in growing markets. In our sector, good headwinds – like digitisation of the tax system and regulation to give apps access to bank account data – were parts of the story we were able to sell to investors.
As you go through this process, it is important to keep your staff, your shareholders, fully briefed. Whilst such a high-level decision is for the executive team alone, transparency about current thinking, plans and progress is a valuable inclusion exercise.
Nobody on our staff had worked at a public company before and there was a degree of trepidation over whether our culture, which we are proud is relaxed and comfortable, would become corporate. It was important for us to allow these concerns to be voiced and reassured.
We spent the first half of 2016 putting the groundwork in place, evaluating whether to float or not. By August, the decision was made to go ahead with a November IPO. Then it became a period of engaging with investors, playing the story to test the reaction. Had we received a cold response, we may have concluded to go back to the drawing board. Thankfully, the reaction was very positive, so we went right ahead.
Of course, when you list a company on a stock exchange, many things do change. But our chief financial officer and I try to insulate the rest of the staff from the differences and new practices, so they can focus on continuity.
Investors have expectations of forward-looking performance, analysts have growth models which set out your targets on your behalf. If, as CEO of a public company, you start heeding these too much, the tail starts wagging the dog of your firm. It is more important to manage the company in the right way, to deliver good long-term outcomes, rather than to meet short-term expectations.
Our organisation has always been a very transparent one internally, sometimes even to a fault. But now we have to be aware that certain information is price-sensitive. That means segmenting your internal communications appropriately to enjoy an extra level of confidentiality.
I wish I could say that taking a company to market were as exhilarating as flying a Harrier around the Scottish glens, but our IPO journey, thanks mostly to our excellent advisors, was very methodically examined, assessed, planned and delivered. By the time we went to the London Stock Exchange to open the markets, there were no nerves or uncertainties – we were certain our listing was going to take place. So much was the floatation a piecemeal process rather than an event, I even found it rather hard to celebrate at the time.
I do now get an adrenalin kick, and no small sense of pride, from seeing FreeAgent’s stock price on my smartwatch. I enjoyed the whole journey, which was a whole new odyssey for me, and hearing great investors say they would love to come aboard has been a validation for all the hard work we have put in over the last ten years. We are now in a great place to embrace the next decade, too.