Rude VC: Part 2 of the Alternext liquidity conundrum

Jun 18, 2013
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Last week I wrote a fairly critical piece about France’s IPO market for tech firms. Specifically, I claimed that the Alternext, which is the main market on which VC-backed tech firms can go public in France, does not represent an adequate avenue for sustained financing and liquidity potential for these firms.

Rude maybe, but surprisingly uncontroversial

I expected a backlash to my post, notably from the tech investment banks whose business is to take such tech firms public as listing sponsor. Indeed, there was some, though to my surprise, even those people who make their livelihood from tech IPOs, agreed with my assertions. I bring this up not out of vindication, but rather because this highlights two factors worthy of reflection. First, the lack of sufficient tech market liquidity is the sad truth of affairs, and I submit that we all have a vested interest to ameliorate the situation.

Furthermore, a second factor became clear which may provide a clue to possible solutions to this liquidity problem: tech equity analysts in France are few in number. It is the very job of equity analysts to follow the listed companies in a given sector, to explain them to the public, to provide informed analysis, and as a by-product generate more public participation in the stock market, and hence liquidity for the stocks.

By way of rough comparison, the six highest volume stocks on the Alternext are followed by only one or at most two equity analysts. A random basket of Nasdaq-listed companies of similar size boast a range of 5 to 14 equity analysts following their stocks.

Coming back to that silver lining…

I also wrote last week about a silver lining amidst the dismal liquidity desert on the Alternext: life science companies. Last month life science firms (i.e. primarily biotech and medical device firms) accounted for over 70% of the Alternext’s trading volumes (by value), and they represented four of the top six volume capitalization firms.

So why do biotech firms have better liquidity than say, ICT firms?

As a VC specialized in ICT investments, I really wish I knew the answer but I don’t. Here are a few theories of possible explanations:

  • It’s often easier to understand the story of a life science firm’s mission. Everyone can understand the value of a breakthrough drug promising to cure cancer more easily than the next generation internet advertising technology.
  • Similarly, a breakthrough cancer drug firm announcing a successful clinical trial can generate euphoria among the public and spur high interest in buying the stock. Barring outliers like when Apple released its first iPad, news flashes from ICT firms tend to be much more mundane.
  • The very nature of a life science firm’s upside potential (e.g. cure cancer and you’ll make billions) also makes it easier to swallow a high valuation. The higher the valuation, the broader the spectrum of investors for the stock (large institutional funds can only invest in firms above a certain size for capital deployment reasons).
  • Perhaps another factor is that, due to the long development cycles and uncertain timeframes, many life science companies, like biotech firms, do not make short-term financial forecasts (i.e. there are no revenues to forecast in the early years). Public ICT firms, in contrast, always have revenues, usually profits, and often even set expectations for next year’s performance (explicitly or subtly). The nice thing about not setting revenue expectations is that the market is never disappointed about missing them.

There are undoubtedly other, better explanations about the higher liquidity for listed life science firms, and I invite anyone who has some insight to share their wisdom on the matter.