Public companies can no longer rely on hype
Historically, the stock market has been synonymous with success, but the tide is turning on this sentiment.
Some big-name brands have faced major embarrassment after their IPO hype fell flat. Aston Martin has wiped 42% off the value of its shares since last October, Uber and Lyft have also struggled, while WeWork shelved IPO plans before a public launch had even begun.
While some of the contributing factors can be rationalised, there’s no escaping the fact that a poor stock exchange experience can shake investor confidence. Many are starting to doubt the benefits of backing large enterprises, particularly if pre-sale hype has over-inflated their value.
Let’s take a closer look at why investors are turning their back on the stock market, and why we need to rethink the stock exchange model.
Too little, too late?
The challenge with going public is that the traditional stock market set-up is complex and expensive to participate in, which means companies have to grow to a certain size before they can contemplate a viable offering. And this troubles investors for two reasons.
Firstly, costs are passed onto the investor, raising the entry level barrier to the point where retail investors find it hard to get a decent sized stake – particularly if they have to wait until stock purchased at issue price by institutional investors begins trading.
Secondly, return on investment is often diminished, as business growth tends to slow as organisations mature.
What are the alternatives – if any?
In response, many investors are looking at private opportunities. While the risks might be higher, the potential returns are much greater, and investors get the excitement of backing a brand with a rapid growth trajectory.
Some early adopters have experimented with crypto exchanges, but these can be highly volatile. They are looking for a ‘best of both worlds’ approach that provides access to private businesses as they scale-up, but with a protective legal and structural framework.
Investment methods like crowdfunding and peer-to-peer lending provide an alternative, but most providers lock-in investors so they can’t access their cash when they need it, as the fundraising platform has no secondary exchange element.
What the market is missing is something that can provide true liquidity and freedom to investors, whilst providing the support and returns that they crave.
The stock exchange needs a digital upgrade
Another reason that investors are turning away from the stock exchange is the user experience.
We’ve already talked about intermediaries impacting cost of entry, but a partner-heavy approach can also make it difficult to engage investors. We live in a digital world, but our day-to-day experiences aren’t mirrored in the investment process – which is particularly disappointing for Millennial and Generation Z investors, who have grown up in the internet age.
Although there are user-friendly apps like Robinhood and Nutmeg available, these are effectively new interfaces on old technology – so investors are still having to deal with middlemen. These investors don’t have the time of patience for complex processes; they want instant access to equity in companies that fit their investment portfolio.
A vision for the future stock exchange
We’re not suggesting that the stock exchange as we know it is going to crumble; it’s a 400-year-old model. However, modernisation is definitely overdue.
Investors are looking harder than ever for a solid business case, and the existing stock exchange model simply cannot deliver the accessibility, affordability and user experience that they want. Wavering consumer trust is forcing companies to look harder at their proposition, to ensure they are putting together a compelling offer, which stands up under scrutiny.
We need to look at how the stock exchange can evolve to embrace the future investor – and WeOwn has a vision of what this new exchange should look like. We look forward to sharing this vision with you in more detail very soon…
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