VC-backed tech companies have a long history of going public on the Nasdaq, but more and more are beginning to choose the once-stodgy NYSE. Examples from the past month include Calix and Max Linear.
“For a long time the NYSE basically ignored Silicon Valley,” says Doug Chu, the fresh-faced head of the NYSE’s Silicon Valley office (and the rest of the Western half of the country). “Most tech companies weren’t even financially able to qualify. Today, that doesn’t fit in the business model.”
That Chu, 42, has the job he does is a telling indicator about how important tech has suddenly become to the NYSE. Before joining the company in 2008, Chu spent 12 years as a tech investment banker, including under Frank Quattrone at both Deutsche Bank and Credit Suisse. Among the companies he helped take public were Amazon, Tumbleweed Communications and Beyond.com. A few years ago, he says, “[the NYSE] had zero tech bankers on its IPO team. They were all capital market folks.”
Yesterday, I caught up with Chu to ask why startups should care about the changes at the NYSE.
It’s hard to change the culture of a company, yet you suggest that’s happened. How?
The NYSE used to be a member-owned home of big companies, but over the past two to three years, we acquired another global exchange [Euronext], we bought Archipelago [Exchange], and we became a public company. A new CEO was also brought in who has changed the culture [Duncan Niederauer, who was a managing director and co-head of the Equities Division at Goldman Sachs before joining the exchange in April 2007]. A lot of that change was inevitable. The NYSE had been a monopoly and the culture was from its old monopoly days, and it just wasn’t going to cut it anymore.
You’ve made it much easier for smaller tech companies to qualify for the NYSE. Would you outline how?
We changed the listing standards at the end of 2008 to make them much more accommodating of “growth” companies. Before then, if you wanted to list, you had to have some combination of either a very large market cap –at least $750 million — or $75 million in revenues, or some history of operating profit. In my experience as a tech banker before and after the bubble, the vast majority of the companies I took public didn’t qualify; I’d say 90 percent couldn’t make those standards.
Today by contrast, the market cap requirement is $150 million or $50 million in stockholder’s equity and $75 million in total assets, and there’s no income statement test. If you take a before and after [the standards change], we estimate that the addressable market in IPOs in tech has been increased by more than 70 percent.
What’s your pitch to a startup in choosing the NYSE over Nasdaq?
One of the main differentiators is that we’re a much more global exchange. Our biggest competitor isn’t Nasdaq. That’s not even in our top four in the world. In Europe, it’s the London Stock Exchange. We’re also in competition with many exchanges in China for companies around the world. Most exchanges are limited to one region or one type of company; with NYSE’s combination with Euronext, we’re the only global exchange.
Wouldn’t Nasdaq argue that buying OMX in 2007 gave them the same footprint in the U.S and Europe?
They would but OMX is Scandinavian and it was better known for the technology it was able to sell to other companies. The number of companies that list on OMX is microscopic.
Another big differentiator is our brand and our network. We have the leading companies, and most companies, around the world. We don’t have 80 percent of tech companies, but in every other sector, we have 80 percent market share, and we try to open up that network to our customers and put those resources to work around the world.
Not last, we differentiate on market structure. Every exchange is an electronic set of matching engines. We’re matching engines plus designated market makers — they used to be called specialists — who act as stabilization agents for our companies. We’re the only equities exchange in the world with this unique model.
Why keep the specialists, even in this new age of the NYSE?
Two or three years ago, there was a lot of discussion that if the world is going to be fully electronic, shouldn’t we do that, too? The determining factor was the market. We’re about 40 percent of the overall equities market, and 25 percent is on this model with designated market makers. So the market is saying, [we want] certain types of trades go through these market makers.
It is more expensive for us to do it, but one of the ways we fund it is that we have lower margins. We’re able to get a different kind of liquidity and volume. And that’s market share we wouldn’t get otherwise. Also, they don’t focus on smaller companies, but for what they do [oversee and facilitate all the trades for a particular stock], smaller companies are the biggest beneficiaries, because you see lower volatility and more orderly trading.
Bigger picture, does today’s M&A to IPO ratio concern you?
No, M&A has always been an exit for VC-backed companies and it’s an important part of the value chain. In fact, if you look at what’s happening in technology, the number of buyers is shrinking. If you name a tech company and tell me what vague sector of industry it’s in, I can tell you its likely buyers on less than two hands. The Microsofts, Googles and Ciscos are becoming the only buyers for small growth companies. Times to monetization are just getting longer and that’s part of what’s happening.
Also, IPOs are a vital and important part of renewing and adding to our platform but monetarily, it’s a very small part of it. So even though IPOs have probably seen the worst 12 quarters in the last 20 years, it’s not a huge concern for us.
What’s the fastest growing piece of your business then?
Our technology business. Over the last few years, the NYSE has built the world’s most advanced trading exchange: think data centers, middleware, software, services, everything that takes to run a massive global exchange. In fact, we’re the only exchange that runs our own data centers, which we built over the last couple of years for $500 million.
We did that because every day, trillions of transactions and messages have to happen in real time, with great security. It’s a complex problem. But with that investment came the realization that there are a lot of tech companies out there that want to have their version of an exchange but don’t have the wherewithal or experience to build one. Now, they can purchase a hosted subscription-based offering from us, they can purchase software from us. We sell our market data. It’s a very tech-oriented business focused on financial markets, and it was zero revenue for us five years ago and now it accounts for 10 percent of our revenue.
Who are some of that business’s customers?
The Tokyo Stock Exchange buys technology from us, the National Exchange of India, Qater Exchange in the Middle East. Not only are we building middleware services but we’re hosting their exchange and helping them build it, including providing management talent. There are a number of exchanges around the world that buy pieces of our data, too.
We’ll never get away from the listings and cash trading business, but we’re now in competition with other companies like SunGard or other data center companies. We’re behaving much more like a public tech company.