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To IPO or not to IPO? In this edition of NEXT INSiDE, we look at the current fundraising landscape in the gambling industry and debunk some common IPO myths.

For many founders, going public is crucial to their overall business strategy. It is seen as a gateway to new opportunities and increased access to capital. 

Yet, according to one CEO of a public company who spoke to NEXT.io on the condition of anonymity, this isn’t always the case.

“During market downturns, it can be the complete opposite,” the person observed.

The CEO revealed the company aimed to attract fresh capital to develop a new product at scale, attempting multiple fundraising efforts last year, all of which were unsuccessful. 

Faced with slow recovery in the public market, the business shifted its focus to the private market. 

However, the challenge arose when venture funds and private investors exhibited a reluctance to invest in a public firm.

“You would think that being a PLC was a benefit. However, our listing actually worked against us. It stopped every potential investment.”
Anonymous iGaming CEO

“You would think that being a PLC was a benefit. However, our listing actually worked against us. It stopped every potential investment,” the CEO revealed.

At that time, the business was close to breaking even and hoped to future-proof itself. However, nobody was prepared to take the risk.

When asked about reverting to a private status, the CEO explained: “Well, it’s not a straightforward option. You’d have to settle with existing investors, and they were already quite disgruntled. 

“They questioned the decline in value without fully understanding the industry. So, there was no feasible way – there is a legal process to delist and you need substantial funds to buy out all the stakeholders.”

No liquidity but operational advantages

Steven Salz, co-founder and CEO of Canadian B2C operator Rivalry, also debunked the misconception that going public guarantees access to liquidity.

In an interview with The Founder’s Edition, Salz recently highlighted that gambling companies often choose to go public earlier in their lifecycle than companies from other sectors.

This is primarily due to operational advantages. For example, Rivalry previously experienced prolonged due diligence from payment and service providers, which often took months instead of weeks.

Once public, however, Salz noted that such hurdles were eliminated. Rivalry began trading on the TSX Venture Exchange in 2021.

He said going public added “weight” to his role, but that having to spend more time on public activities was “frustrating” since it has distracted from the operational side. 

Would he prefer to have remained private? Salz said it was a chicken-and-egg situation: “Going public did help us access capital to grow the company,” he admitted.

It also granted Rivalry a “speed advantage” when scaling. “It was the thing that allowed us to get to this point,” he added.

Investor demands

Salz, much like our anonymous CEO, emphasised the challenge of meeting investor expectations.

“It’s tough because we’re in a market where everyone expects hyper growth, immediate profitability, with all of it happening in really short timeframe, because that’s just the attention span and investor appetite right now.”

He said that despite these pressures, Rivalry remains committed to conveying a message that emphasises prioritising investments and decisions with a long-term perspective.

Several years back, there was a proposal to eliminate the requirement for Canadian public companies to issue quarterly financial reports, Salz recalls.

Both the EU and the UK have abandoned mandatory quarterly financial reporting, opting instead for half-year reporting. Despite this shift, the majority of companies still adhere to the quarterly schedule.

“Anyone who has built a business knows that a lot of things can happen in 90 days or one quarter that has nothing to do with the actual underlying health of the company,” says Salz.

“It’s a tiny snapshot that you present to the market,” he added, acknowledging that investors will often extrapolate from it and perceive a deep fundamental problem, as if “everything is going wrong”.

A marathon, not a sprint

In 2023, global markets proved unpredictable, with some regions showing economic resilience as others faced challenges.

Lottomatica was one of very few companies in the gambling sector to have pursued an IPO last year.

The group had set an initial target price range of between €9 and €11 per share, but in the first weeks on the public exchange, it constantly traded below expectations.

However, Lottomatica shares started to climb in mid-July and by year-end, shares had gained 19.4% since the IPO in May.

At that time, Lottomatica CEO Guglielmo Angelozzi said“This is a marathon, not a sprint. We are listing at a discounted valuation, but we are betting on longer term growth. We have no regrets.”

Size matters

While venture exchanges and smaller IPOs used to serve as popular avenues for high-growth companies to raise equity, the reality is that size does indeed matter. 

In a market that continues to present challenges, smaller deals become a tougher sell as investors fear getting stuck in losing positions.

One gaming exec from another PLC who spoke to NEXT.io commented: “In my opinion, a listing is beneficial for large operators, but looking at the smaller operators listed on the venture stock exchanges, I am not sure how well it’s working for them.

“Being listed is expensive. It places additional demands on you from a reporting and governance perspective, and it might also impede your agility,” they added. 

It also introduces additional challenges for senior leadership, who frequently find themselves caught between meeting shareholder demands and managing internal pressures. 

A case in point is that “bad news” such as layoffs or cost-cuts paradoxically tend to boost a company’s stock value. 

When companies take early precautions to improve shareholder returns or prevent future losses, investors usually respond positively, regardless of the human cost.

“However, the smaller the business, the more personal it is to communicate these difficult decisions,” the exec highlighted.

The VC perspective

Returning to the question of whether VC investors have a dwindling appetite to invest in listed companies, RB Capital co-founder Julian Buhagiar said it depends on the type of VC and its focus.

“For instance, early-stage VCs would prefer to invest in smaller, non-public start-ups because there is less speculation and more upside, albeit with arguably more risk given the relative stage in their lifecycle.

“On the other hand, growth VCs typically opt to invest in companies that are likely listed; there might be less upside, but arguably lower risk given that it’s likely a more mature-stage company,” he added. 

Buhagiar also emphasised that a “public listing is usually, but not necessarily, size-dependent.”

“Early-stage VCs would prefer to invest in smaller, non-public start-ups because there is less speculation and more upside, albeit with arguably more risk.”
RB Capital co-founder Julian Buhagiar

“It obviously makes more sense for a company to cross a certain threshold in terms of revenue and/or profit to go public,” he said. 

Nonetheless, he pointed out that smaller entities can strategically enter the stock market by merging into a “safe framework” to avoid investor speculation. “This is a very crude definition of a SPAC,” he explained.

He did admit that at this stage, most VCs would sell off their positions, as they would likely have reached their return on investment or simply aren’t prepared to tackle the levels of volatility beyond that.

“Some hybrid VC funds, however, would choose to stay on just for the rodeo,” he added.

2024 IPOs

The current landscape is delicate for private companies contemplating an IPO. 

Prevailing macroeconomic uncertainty, marked by persistently high interest rates, geopolitical tensions, and lingering recession fears, have all cast a shadow over the process.

Despite a year-end scenario where growth has surpassed expectations and inflation has proven lower than feared, the stock market does not always mirror the broader economy.

“The public markets have been challenging for quite some time, with instances of notably irrational behaviour,” the anonymous CEO warned. 

He has since come to appreciate the value of “private investors who not only understand what the business is doing but also share a common vision.” 

A potential candidate

The gambling IPO market is not dead yet, however.

According to the Financial Times, one hot candidate for a listing is geolocation specialist GeoComply.

Founded in 2011, GeoComply secured financial backing from two US private equity groups last year and announced its first acquisition.

The company has experienced substantial growth propelled by the US betting industry, with plans to further expand into financial services, crypto safety and media rights management.

Whether investors consider this a strong enough foundation for a successful IPO remains to be seen. GeoComply – and other iGaming companies or that ilk – should also consider whether the benefits of going public outweigh the drawbacks.

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