Thought Machine boss backs London listing for $2.7bn fintech

The chief executive of Thought Machine, one of Britain’s most valuable fintechs, has thrown his weight behind a London IPO, but admitted he is under pressure to list in New York.

Paul Taylor, who founded the London-based banking software provider in 2014, told City A.M. that Thought Machine was “definitely going to IPO” and gave his clearest public indication yet that the capital is management’s preferred destination.

“London is our home, and all other things being equal, we’d be very keen to list in London,” Taylor, a former Google executive, said.

“But it’s not just a decision that only I can take – our existing investors would have a strong voice in that,” he continued, adding that many other UK companies have ultimately opted to float in the US. “There’s a lot of momentum behind New York.”

Last valued at $2.7bn in a May 2022 funding round, Thought Machine’s IPO would be a much needed win for the London Stock Exchange.

Recent years have seen the bourse left in the dust by US markets, where deeper pools of capital and a less cumbersome regulatory environment have drawn in major British names like chip designer Arm.

A slump in IPOs and string of big players ditching their London listings have spurred the UK government and regulators to propose sweeping reforms aimed at boosting Britain’s capital markets.

Taylor said the LSE had been “fantastic in terms of encouraging people to list here” and praised the Financial Conduct Authority’s overhaul of listing rules in July, designed to make it easier for companies to float in London.

He hailed Raspberry Pi’s June IPO, which valued the computer firm at £542m, as an example of recent “local successes” in the UK market. “I think most of the tech companies in London would like to list here if we could,” he added.

However, Taylor warned the UK needed “a change in the investor sentiment, and for the pension funds and people like that to be happier to invest in higher-risk, high-growth stock”.

“It’s slight tragedy that some of the most active money in the London stock market isn’t UK money, it’s international investors,” he said. “That’s good in the sense that we’ve got inbound investment, but it means British people, funds and companies aren’t owning British stocks.”

Think tank New Financial has found that on “virtually every metric” UK pensions are towards the bottom of the pack in their allocation to domestic equities compared with 12 other developed pension systems.

A City taskforce said earlier this month that Britain must unlock a wave of cash from domestic pension funds to help attract the £1 trillion of investment needed to achieve its economic growth targets.

Its report flagged a “risk-off” culture that has eaten away at investment from top institutions and the British public over the last two decades.

While firm on London as his “first choice” location, Taylor was less clear on the possible timing of a Thought Machine float.

“There are a bunch of companies that went too early in 2021, so I think we’re taking a very sensible route,” he explained. “We’re going to IPO when the time is right, so it won’t be next year or the year after at least.

“Possibly it could be 2027, possibly it could be 2028, but you would lock in a date about 12 months before. You just need to grow the business as much as possible before then.”

Thought Machine is not alone. It is one of a crop of British fintech “unicorns” founded in the 2010s that are now weighing IPOs in what will be a test for London’s allure. They include digital banks Revolut, Monzo and Starling, and buy-now pay-later provider Zilch.

Software boom

Thought Machine sells cloud-based banking infrastructure and has deals with major lenders including JPMorgan, Lloyds and Standard Chartered, as well as neobanks like Atom Bank.

Lloyds and JPMorgan are also investors, alongside the likes of Morgan Stanley, Singapore-based Temasek and Italian bank Intesa Sanpaolo.

Taylor said the firm’s products cater to both challenger banks that “start with nothing” and established lenders “running on legacy technology” which Thought Machine replaces. He added that the UK makes up roughly a fifth of its business.

With some 550 staff and offices in London, New York, Singapore, Sydney and Melbourne, the company’s growth underscores the wider emergence of Britain’s banking software-as-a-service market.

Other fintechs are battling for a slice. Thought Machine’s rivals include Mambu and 10x Banking, which was founded by former Barclays CEO Antony Jenkins in 2015.

A newer player in the space, Starling made its first two software deals last year for smaller banks to launch on its platform. Starling’s second-largest investor has said this business, called Engine, could drive the group to a £10bn valuation in the next few years.

“Most good entrepreneurs would say competition is healthy for the market because it spurs people on to do better, but most good companies don’t focus on the competition – they focus on customer needs,” Taylor said.

Still, he claimed Thought Machine “outsells 10x Banking something like 10 to one, no pun intended”. Taylor added that while Engine offers “more of a pre-packaged solution”, Thought Machine was mostly focused on “the most tech-savvy banks and fintechs”.

An executive at one of his rivals told City A.M. that Thought Machine was “fixated on growth” and its continued losses could be cause for concern.

Thought Machine’s accounts for last year, published in August, showed its operating loss widened to £77.9m from £73.5m in 2022. Meanwhile, its pretax loss narrowed to £62.7m from £84.3m as revenue increased to £47.8m from £42.2m.

“Selling banking infrastructure is not a quick sale cycle,” Taylor said. “It’s certainly nothing to be worried about. We’re on track for all our financial plans.

“We achieved a lot of success in raising money in 2021 and 2022, and that leads to expansion… so for a short period of time that increases costs and losses, but the revenue growth is very healthy, and we’re on a rapid path to break even.”

Profitability has moved up the agenda for fintech investors after interest rate hikes triggered a drop-off in venture capital dealmaking and reset in valuations after 2021.

“Investors want to see it,” Taylor said. “There’s a time for growth, there’s a time for expansion, and we’re on the other side of that. Our costs are flat, our revenues are going up very rapidly, and we will hit profitability quite soon.”

He added: “Thought Machine’s a very attractive company to IPO because we’ve got very stable, baked-in, long-term revenue – we get paid by our banks every year in a subscription model. It’s a very easy business for investors to understand.”

Capital gains and workers’ rights

Taylor sits on a “Unicorn Council” of fintech bosses launched by trade body Innovate Finance earlier this year, which has made a slew of public policy recommendations to encourage more UK start-ups to launch, grow and list in their home market.

He himself has emerged as a vocal proponent of entrepreneur-friendly policies, recently warning Chancellor Rachel Reeves against a blanket rise in capital gains tax in October’s Budget.

“A lot of people in business are a bit shy in speaking out, which I find very odd,” Taylor said. “They don’t want to upset government, and I say there’s plenty of people who let the government know exactly what they think.”

“A lot of people in business are a bit shy in speaking out, which I find very odd”

Taylor cited government-backed schemes that offer tax relief on capital gains from investments in early-stage firms as one of the key factors behind the UK’s “enormous” success as a place to start a business.

The Treasury has neither committed to nor ruled out raising capital gains tax. A spokesperson said Reeves “has been clear that difficult decisions lie ahead”.

Taylor also argued that Labour was putting the “very good balance” in employment law that currently exists at risk with its plans to overhaul workers’ rights.

The new government has proposed giving workers protection from unfair dismissal from the first day of their employment, rather than kicking in after two years of continuous employment under current legislation.

“That’s hugely important to start-ups. When you’re hiring you don’t know whether you’re going to be successful, so being able to hire people easily is hugely important,” Taylor said.

“I am very, very worried about what the new government’s going to do, because they’re not only thinking about increasing capital gains tax, which will wipe out entrepreneur incentives, but they’re also going to make it harder to employ people. I was talking to my fintech founder colleagues, and they’re all frightened.”

He added that Thought Machine had ruled out employing workers in France and Italy “out of hand” because of “laws which make it incredibly hard to let people go”.

Ministers are due to put an employment rights bill before Parliament in October, but it is not yet clear which specific measures will be included.

On day-one employment rights, a business department spokesperson cited a “recent survey of bosses showing they think it would be positive for productivity, staff retention and profits” and said the government would “consult fully with businesses”.