VCs say London AIM a funding rival

By Joseph A. Giannone

SAN FRANCISCO (Reuters) - London's AIM stock market has aggressively wooed new listings from start-ups worldwide, taking business from U.S. exchanges, but venture capitalists see it as a lesser choice.

AIM has become an alternative source of expansion funds, but lacks substantial trading volume, or liquidity, that new firms and their sponsors want, they said.

Norwest Venture Partners Managing Partner Promod Haque told the Reuters Venture Capital Summit that for many start-ups based in India and China, listing in the United States now may be too difficult and not worth the risk.

"It would be brain damage to try to list here (in the United States), said Haque, who invests in several Indian start-ups.

"The barriers are very high," he added, referring to regulatory and other issues. "We're much better off listing those companies in Mumbai."

AIM presents an option for companies eager to keep expanding, but it doesn't yet measure up to the Nasdaq Stock Market (NDAQ.O: Quote, Profile, Research, Stock Buzz), he said.

"It's a nice place to raise money in the late-stage round, but it has no liquidity," Haque said.

AIM, a unit of the London Stock Exchange (LSE.L: Quote, Profile, Research, Stock Buzz), has made headlines over the past year by encouraging small companies from around the world to float their shares in London rather than on Nasdaq, long the marketplace of choice for start-ups worldwide.

Still most VCs at the Reuters Venture Capital Summit said overseas growth companies still aspire to a Nasdaq listing.

So for many companies not big enough for a U.S. listing, AIM has become an alternative source of expansion funding -- and a stepping stone to a U.S. listing down the road.

3i Group director Ben Gales recalled that last year, a potential late-stage investment chose instead to raise funds directly from public investors through AIM, and got about twice the price that the venture capitalists offered.

"AIM is becoming competitive to the VCs as a source of funding," he said.

AIM has succeeded in large part because the U.S. Sarbanes-Oxley Act imposes stricter financial-reporting rules that require significant compliance spending. Meanwhile, broker-dealers have dropped research coverage and stopped making markets in many small-cap stocks in response to thinner profit margins.

VCs complained that companies with less than $250 million in market value today are effectively shut out of U.S. markets because of regulatory burdens and lesser demand for small-cap shares.

"There's a bit of a liquidity vacuum. It's creating a big opportunity for the AIM exchange in London" and other bourses, said Bob Grady, head of venture capital investing at Carlyle Group.  Continued...