Special Report: Dirk Steller, founder of fintech venture capital fund Seed Space, says listing publicly can still add value, but it’s important to get the timing right.

As Australia’s fintech industry develops, successful startups will increasingly need to consider how they access capital markets to finance the next phase of growth.

The ASX boards now include a number of fintech companies that grew successfully from startups to listed entities – and many of them are performing well.

But while the ASX is viewed as the primary point of exit for most local startups, Steller says rushing the process can sometimes be counter-productive.

Speaking with Stockhead, he said it’s often more beneficial to build out and establish the business model with assistance from a network of strategic investors, without the spotlight of a public listing.

“One of my concerns about early-stage listings is that early investment really is the space for professional investors,” Steller says.

“And the reason for that is early stage companies come with significant risk, with complex operations, and it takes professional experience and access to market networks for investors to be able to take meaningful decisions.”

Size matters

By definition, once companies list the ability to investment is made more accessible for smaller retail investors – most of whom have less expertise in investing and access to due dilligence data.  That, however, does not always mean that the those listed early stage companies have less risk.

“Part of the problem is that the risk profiles of early stage companies aren’t really suited to retail investors – and that applies to mining just as much as it does to techor any other sector,” Steller said.

That differs from a fund such as Seed Space, which has offices in Sydney and Geneva, Switzerland. The team is focused on early-stage fintech innovation and conducts extensive due dilligence on the technology, the market opportunity, the competition and the funders themselves before making any investment.  This level of investigation would be really difficult for an average retail investor.

“It requires a certain level of experience. You don’t want ‘mum & dad’ investing their super in a couple of early-stage concepts that have a relatively high failure rate as a standard across the market.”

In view of that, Steller is often wary when he sees companies find their way onto public markets early in their lifecycle.

“It raises doubt in my mind where I think — why are you listing? There’s plenty of private capital to available invest in growth stage business. You want founders to have skin in the game and by having founders exiting early it can potentially create problems.”

Global trend

While going public too early can be problematic, fintech start-ups are also now in a position to take advantage of an established global trend – the shift of large capital flows towards private markets.

At the top end of town, the world’s largest private equity firms currently have around $US2.5 trillion ($3.6 trillion) of capital to deploy — a record-high.

And Steller said as Australia’s private capital markets continue to develop, more companies will have avenues to stay private for longer.

“Australian companies often rush for a listing, and part of that is due to the immaturity of the private markets here. But Australia is catching up,” he said.

“The growth of private markets – including venture capital and later-stage private equity – means companies don’t have to go and list.  They have options now.”

“And that takes a whole lot of pressure off companies, because it’s easy to lose focus when you have the extra reporting requirements and public scrutiny that comes with a public listing.”

Ultimately, the trend globally is that more companies are taking advantage of the extra capital flows to stay private for longer. That doesn’t mean Australian tech startups will avoid the ASX, but rather there’ll be more opportunities to optimise the timing.

“I’m a big believer in the Australian tech sector,” Steller said. “There’s a lot happening in the ecosystem, and as the industry grows more capital is coming in.”

“I absolutely think the ASX should have a strong tech component, it’s just the stage that companies list is likely to be trending towards being be a bit later.”

This story was developed in collaboration with SeedSpace, a Stockhead advertiser at the time of publishing.
This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.