Image courtesy Westwick Partners
The IPO window has been shut down for a while. The January crash put a padlock on that window. According to Renaissance Capital, 22 IPOs raised about $3.5 billion up to mid-May, which is down 63% by deal count from the same period last year. The IPO window is starting to re-open and one of the first ventures to go through is the BATS (Better Alternative Trading System). We covered BATS in an earlier research note on Fintech in action on Western Stock Exchanges. The key point is that BATS is number 1 in ETFs. This is important because ETFs are powering Robo Advisers. In this research note we look a bit deeper at BATS and their recent IPO.
Started by a Programmer 10 years ago in Kansas
Far away from any Fintech Capital, Kansas is too low profile to even become a stop on our 19 stop Fintech Global Tour. Then we reckoned we had missed some and so we added the Alternative Fintech Capitals. Even on that tour we missed Kansas. Sorry Kansas! Kansas is in the “show me” state of Missouri which is appropriate to this story as investors are in a sceptical show me state of mind.
So lets go back an eon to June 2005 when BATS was founded by a computer programmer called David Cummings. What could be more Fintech credible than being founded by a computer programmer? This is no old school financial institution. According to BATS entry in Wikipedia:
“Cummings said he was inspired to start the company after observing Archipelago Holdings be acquired by the New York Stock Exchange and Instinet be acquired by NASDAQ within a week of each other in 2005. After the launch of Bats, other brokerage firms, hedge funds and other clients became involved with the company. Cummings publicized the Bats service by sending emails to companies highlighting the niche that could be carved out by trading on platforms other than the big two—NASDAQ and NYSE. The niche that he sought for the company was for it to be “a neutral, private, broker-dealer owned, semi-profitable utility” with no party owning more than 20 percent. He noted that the consolidation of the New York Stock Exchange and NASDAQ eliminated competition and they raised prices for their services. The Bats system was intended to charge less. Among the items it did to draw customers was to offer free listings to companies with shares that traded a certain amount each day.”
Back from the dead to IPO
BATS made an aborted attempt to go public in 2012 and withdrew due to a disastrous tech error (hint to Fintech entrepreneurs – it has to actually work, not just be a disruptive proposition with a great UX). The price dropped from $16 to 4¢ a share. There was a management reshuffle.
Amazingly the company recovered from this. In December 2015 they announced plans to IPO again. The company was clearly ready. The market was obviously not ready. So they waited until April 2016 to price and in May delivered some good earnings results. As of time of writing their valuation is over $2.5bn and the price is over the IPO price (which may not mean much, performance post IPO needs longer to find an appropriate level).
The Fintech slough of despond and Lending Club
Some earlier Fintech IPOs – notably Ondeck and Lending Club – have been a disaster for investors. In the case of Lending Club this was an over reaction (as we outlined in this post). If you were lucky enough to get in at that bottom of 3.51 you got some appreciation (disclosure, I bought the day after posting this and did get in at 3.51).
The IPO window is open but only the best can get through. The headwinds are still there for Fintech but skilled sailors are needed to ride the wind through turbulent weather.