The City needs to deliver for tech companies

The sight of teal-clad Deliveroo riders whizzing around city streets on L-plated scooters has become one of the most striking features of lockdown life. Speedy deliveries of takeaway food have offered a welcome indulgence when the temptations of home-cooked beans on toast have faded.

This consumer enthusiasm has encouraged Deliveroo to shoot for an initial public offering on the London Stock Exchange next week. The company’s prospectus points to an £8.2bn valuation. That would make Deliveroo London’s biggest listing since Glencore, the commodities group, went public in 2011. It would also be a boost to London’s claims to be Europe’s centre for financing tech-enabled companies.

However, it is far from clear that Deliveroo will flourish as a public company. Although its revenues surged 54 per cent last year as demand increased during lockdown, its full-year losses hit £224m. Following the recent UK court ruling that Uber’s drivers are employees, Deliveroo may come under increased scrutiny for its gig-economy employment practices — which is making some institutional investors cautious. Many potential investors will also recoil from investing in a company in which the founder will retain 58 per cent of voting rights after flotation. 

But similar criticisms surrounded Ocado, the food delivery software group, when it floated in 2010 and it has done better than many predicted. Its £15.4bn market value is now almost three times bigger than that of J Sainsbury, reflecting its success in developing its technological expertise. The recent listings of The Hut Group and Trustpilot suggest that City investors are becoming more familiar with the dynamics and financial logic of venture capital-backed, tech-enabled businesses. Tech IPOs accounted for 40 per cent of all capital raised through listings on the LSE in 2020, according to Tech Nation.

Still, City investors should go much further in supporting the growth of the digital champions of the future. London’s equity markets are dominated by traditional finance, mining and energy companies. The FTSE 100 has failed to keep pace with the spectacular performance of some other markets, most notably the US and China, which boast a higher proportion of racy tech stocks. 

The 2016 sale of Arm, one of Britain’s few globally relevant tech groups, to SoftBank highlighted investors’ disregard for the tech sector. That has led to further loss of tech expertise among investors, analysts and lawyers. It is notable that several of Deliveroo’s biggest pre-IPO shareholders were US-based: Amazon, T Rowe, Fidelity and Bridgepoint. The capital gains from the success of a UK company will largely accrue to US investors.

To some extent, Europe’s big investing insurance companies have been constrained by capital rules that limit their exposure to riskier asset classes, such as venture capital. It is disappointing that family offices commit more money to venture capital funds in many European countries than do institutional investors. But a reluctance to invest at an early stage should not stop traditional investors supporting later-stage companies when they do eventually come to market.

If the post-Brexit UK economy is to flourish it needs to deploy more risk capital to back promising start-up businesses and develop more supportive capital markets for tech companies that emerge as potential global winners. The City has a long history of backing speculative mining ventures, which arguably have a similar risk profile to tech companies. It is time to switch its focus to the potential digital gold mines of the 21st century.