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April 13, 2021updated 31 Mar 2023 10:55am

Darktrace aims to succeed where Deliveroo failed as it launches its IPO in London

The cybersecurity firm's choice of London for its IPO is a vote of confidence for the City after Deliveroo's disappointing debut.

By Claudia Glover

Darktrace has confirmed its plan to go public, filing for an IPO on the London Stock Exchange (LSE) which could value the company at up to $3.8bn (£3bn). Though the news caps a generally buoyant start to 2021 for the London markets, Deliveroo’s high-profile struggles last month have cast a cloud of uncertainty over the appetite for tech among investors, meaning the cybersecurity company’s flotation is likely to come under heavy scrutiny.

Founded in 2013 and jointly headquartered in Cambridge and San Francisco, Darktrace uses artificial intelligence to identify and thwart cyberattacks. It has more than 4,600 customers including British Telecom, Toyota and Rolls-Royce, and employs 1,500 people around the world. The company is still loss-making according to its IPO filing submitted on Monday, but cut losses from $27m in 2018 to $9m in 2020, with revenue growing 58.3%, to $199.1m, in the same time period. Data from PitchBook suggests the IPO could value the company at up to $3.8bn.

Darktrace and Deliveroo: will the market respond differently?

Darktrace’s choice of London for its IPO could indicate planned market reforms designed to entice VC-backed tech companies are already making an impact, says Nalin Patel, EMEA private capital analyst at PitchBook. Last month an independent panel outlined planned reforms to the UK listing rules in a bid to make London a more attractive destination for high-growth businesses. These included a more liberal approach to SPACs, or blank cheque companies, which have become a popular way for tech companies to access the public markets.

“North America is Darktrace’s largest market and may have been expected to list in the US, which has been a popular exit pathway for Europe-based start-ups in recent years,” says Patel. “Despite Deliveroo’s disappointing debut, Darktrace is clearly confident investor appetite will rebound for its IPO on the LSE.”

The spectre of Deliveroo’s IPO flop looms large over Darktrace. The food delivery business was valued at £7.6bn ahead of its market launch in March but immediately saw £2bn wiped off its value as shares traded at a much lower rate than expected.

Patel says Deliveroo’s problems partly reflected a lack of confidence in the gig economy, with the company’s riders becoming increasingly vocal about the difficulties of algorithmic management and lack of minimum wage. These are unlikely to be a factor in Darktrace’s float. “The companies focus on different sectors with contrasting business models,” he says.

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Deliveroo’s dual-class share structure, which gave founder Will Shu 20 times the voting rights of other shareholders, was also reportedly a bone of contention for some investors. “Darktrace will not be using dual-class share structures, unlike Deliveroo,” says Patel.

Nevertheless, Darktrace has its own problems to handle, with UBS having resigned as one of the sponsors of its IPO in February. Reports suggest UBS’s withdrawal was in part related to the influence of tech entrepreneur Mike Lynch, who has backed Darktrace since its inception through his Invoke Capital Partners investment fund and retains a significant stake in the company.

Lynch is currently at the centre of a long-running court battle with Hewlett-Packard, which alleges he fraudulently inflated the value of his former company Autonomy before selling it to HP for £11bn in 2012, charges Lynch denies. He still serves on Darktrace’s science and technology committee, reports Bloomberg, and his continued involvement in the company could be a turn-off for investors. “It could face challenges in generating interest similar to Deliveroo if investors decide to pull out on the run-up to its IPO,” Patel says.

What does the Darktrace IPO say about the London markets?

For the London Stock Exchange, news of Darktrace’s IPO caps a successful first quarter. According to research from EY released on Monday, more funds were raised in the opening quarter of 2021 than in any other Q1 since 2007. The number of IPOs registered was also above average for this time of year.

Building on heightened activity in the second half of last year, companies listing on the LSE raised £5.6bn in Q1, over half the £9.4bn raised in the whole of 2020. “We’ve got an incredibly successful and vibrant early-stage tech ecosystem,” says Julian Rowe, general partner at Latitude VC. “So sure enough, capital has followed, both local capital and international capital investing into UK and European start-ups.”

Ensuring companies such as Darktrace list in London is vital to avoid a brain drain of talent to the US and elsewhere, says Ed Lascelles, partner at AlbionVC. “[A London listing] enables the headquarters of these companies to remain in the UK, whereas if you’re going to float on the Nasdaq, you have to start building up a senior management structure in the US, which means a lot of the strategic knowledge is over there,” he says, adding that retaining such talent is vital if the UK wants to incubate the tech giants of the future. “If you want to build the next Google over here, you need to have senior decision making and strategic understanding here in the UK,” he says.

This appears to be something that is understood in part by the UK government, which committed to upskilling the UK workforce and strengthening the UK’s uneven digital infrastructure as part of its ten tech priorities released last month. “Part of that policy is investing in growth,” says James Chappell, co-founder and CIO at UK based cybersecurity company Digital Shadows. “Investing in innovation and in particular in cybersecurity companies. Of course, this flotation [by Darktrace] on the LSE is a positive thing for that.”

Home page photo of the London Stock Exchange by Stirling Images/Shutterstock.

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