When it comes to exiting startup mode, making an initial public offering (IPO) is just one potential path a successful business can take to raise a large amount of capital for global expansion. But if you’re a Latin American startup with dreams of going public one day, the future looks brighter than ever. 2021 is shaping up to be a record-breaking year for IPOs across the U.S. and LatAm.
U.S. markets have seen a recent explosion of IPO activity, with Nasdaq reporting 410 new IPOs in the first half of 2021 alone. The Wall Street Journal reports that U.S.-listed IPOs could raise upwards of $40 billion from June through August of this year, smashing the previous record of $32 billion set just last year. That staggering figure doesn’t include money raised by special-purpose acquisition companies (SPACs) either.
Despite all the market volatility created by the global pandemic, Brazil’s stock market (B3) is experiencing a surge of IPOs as well. According to the Financial Times, 41 companies have announced their intention to debut on the B3 exchange in 2021, and B3 saw 28 IPOs last year — the highest number since 2007’s all-time record of 64 IPOs in a single year.
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For Latin American startups hoping to go public – especially emerging technology companies – one of the biggest strategic questions has become: should your company do an IPO in the U.S. or locally with B3?
If you’re a well-known brand with operations in Brazil, going public on the local B3 stock exchange where consumers and potential investors are already familiar with your products and services makes a lot of sense said Nicolás Szekasy, co-founder and managing partner of Kaszek, LatAm’s largest venture capital firm. For emerging technology companies, however, the decision is more complex.
Prior to launching Kaszek, Szekasy was part of the founding team at Mercado Libre, where he served as CFO and was responsible for taking the company public on Nasdaq in 2007, making it the first Latin American company to join the Nasdaq 100.
“Back then it would have been very hard to go public with a company like [ours] in Brazil. The markets in Latin America simply weren’t ready for our story. At that time, there was very little precedent for technology companies going public. The market in the U.S. was deeper and more liquid, and there were [investors] in the U.S. that were less focused on short-term profitability, and more focused on long-term value creation,” said Szekasy.
A lot has changed since then. With each subsequent local IPO, the ability of LatAm companies to scale and grow globally has been proven, boosting local awareness and confidence in emerging-tech offerings, and attracting more international investment to the region as the local ecosystem has matured.
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“During 2020, 83% of transactions in the region included a local investor compared to more than a third (39%) that included an international investor. International investors are increasingly betting on the maturity of the local ecosystem, and this will potentially enable public markets to see increased liquidity events locally in the coming years,” said Carlos Ramos de la Vega, LAVCA’s manager of venture capital.
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While the volume of IPO activity has grown significantly in Latin America, B3 still has a ways to go to catch up to other global markets. B3 earned eight of Brazil’s 13 IPOs from 2018 to 2020, but the U.S. market remains a much more attractive option for high-growth tech players.
Examples include PagSeguro’s $2.61 billion debut in January of 2018 on the NYSE, followed by StoneCo’s $1.5 billion launch on Nasdaq in 2018, and XP’s $2.25 billion IPO on Nasdaq in 2019.
One big challenge for B3 is the chicken-and-egg problem of not having enough comparable companies trading on the B3 exchange to provide a fair market valuation for many tech startups, explained Anderson Thees, managing partner of Redpoint eventures, the first Silicon Valley fund on the ground in Brazil.
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“We don’t have critical mass to [determine] whether there is a liquidity premium reflected in the valuation of companies. For example, if you are a SaaS company listed on Nasdaq, you’re going to be compared to SaaS companies operating in China and India, as well as in the U.S. But if you compare the multiples for a specific industry size as an example, the size multiples in those markets are still significantly higher than what we see in private transactions in Brazil,” said Thees.
B3’s stiffer regulatory requirements also make it hard for tech companies to list locally, according to Thees.
Ownership and governance options are yet another critical difference between B3 and Nasdaq, and this can be a dealbreaker for some startups. “In the U.S., you have the possibility of one class with multiple votes, which is what allows companies like Facebook and Mark Zuckerberg to have less than 50 percent of the equity and still control the company. Founders can retain control and be public in the U.S. and they are doing that. In Brazil, it’s harder and a smaller number of founders will be willing to give up that control. These things still need to be adjusted on [B3’s] regulatory framework,” said Thees.
Until more of this evolution takes place at B3, Nasdaq’s global visibility, higher transaction volume, market liquidity, and more extensive analyst coverage puts it at a clear advantage.
Nasdaq has been capitalizing on this by actively meeting with successful LatAm startups for the past few years, said Ivana Ferreira, Nasdaq’s managing director of listings and capital markets for Latin America. “[Until the pandemic] I was traveling very often, talking to entrepreneurs, and talking to investors of the portfolio companies to help demystify the process of listing here,” said Ferreira.
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Going public on Nasdaq begins with introductory calls six to eight months prior to the desired IPO date. Companies must file an application with Nasdaq which takes four to five weeks, then they must step through the process of both confidential and public filings with related comment periods to meet various SEC requirements. Nasdaq wants a commitment from founders at least six weeks before the IPO to provide enough runway to develop supporting PR and marketing messages for the big day and following weeks.
“At Nasdaq, we don’t view an IPO as just one transaction. We set out to build long-term relationships with issuers and support them throughout the journey toward their IPO and beyond as public listed companies,” said Ferreira.
One thing is certain: successful LatAm startups are in the driver’s seat when it comes to their IPO options.
“10 years ago, companies got to a certain scale and at some point, they would most likely be acquired by a larger global company. Now, I would say nearly 100% of companies that are building and evolving towards an IPO will do so one day, and when the time comes, tactically they will have the choice of whether they should do this locally, on some international exchange, or perhaps even list their company on both,” said Szekasy.
Thees agrees: “I believe you’re going to see more and more companies listing locally, but that won’t preclude some of them from listing in the U.S., as well. We already have institutional investors participating in pre-roadshow, pre-IPO roadshows, and so on, which is great. And you have more international players like the London stock exchange and Canada bringing value propositions to companies and encouraging them to IPO earlier. This is all a part of the natural evolution of the market. As we start to have more and more Latin American companies reaching critical mass, this fight for where to list is becoming more and more frequent. And it’s very healthy for everyone, I think,” said Thees.