During the last several weeks I have heard several debates on why should European technology companies establish themselves in Silicon Valley. The pro-European or anti-Silicon Valley advocates believe that technology engineers are more cost effective in Europe and comment that the recent valuations tend to fall into attractive ranges. The pro-Silicon advocates describe a venture “investment friendly” environment and well experienced advisory support teams.
I believe that the best determinant between the Silicon Valley and European theatres should be based on the best compensation models. Silicon Valley lives and dies by ISOs (Incentive Stock Options) as far back as that moniker originated back in the 1960’s—discussed in a blog. And ISOs are of no value until a “significant event”, defined by legal documents as an IPO funding or M&A, impacts the true value of that equity. These ISOs create the compensation incentives not found attractive in Europe. In fact, last month, one Polish entrepreneur commented that executives expect to be paid in cash, not ISO equity. ISOs are the tools to attract talent in the U.S., as an earlier blog attests. Why? The likelihood for a “significant event” is much greater in the U.S. than in Europe.
Let’s explore the numbers. At the London Stock Exchange, a total 105 companies made their stock market debut on British markets in 2013, raising £15.7bn ( $26.1 today’s U.S. Dollars) in the process. The notable issuance came from PE firms converting their properties into public equity. Some PE examples included Merlin Entertainments, which raised almost £3.4bn in November. Royal Mail, a privatization of a postal operator, provided the largest flotation. Tech companies did raise over £1 bn, far less than U.S. companies. (Financial Times IPO Report.)
The U.S. markets were more active with 178 IPOs $41.27 bn dollars with each company raising a median fund of $107 million (WilmerHale 2014 IPO report). VC backed IPOs represented 72 of those companies, almost 50%. P.E. firms backed 49 companies. And 61% of the IPOs were technology companies raising over $20 bill.
From these statistics one can only conclude that it pays to be a U.S. technology company pursuing an IPO, being backed by a VC firm. When a company goes public, its stock becomes liquid and the stockholders now can convert that stock into cash or other financial instruments. And that exit strategy is what enhances the ISO value. If the Polish entrepreneur is correct, then European companies have difficulty in promoting ISOs to its personnel on account of the unlikelihood of an IPO path.