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Screenshot of a breaking news alert e-mail from Q2 2017
The holy grail of many startup companies, tech and otherwise, is the IPO.
An IPO, or initial public offering of company stock, has numerous advantages for startups and is done for a variety of reasons including:
- formally establishing a public valuation for a company,
- gives early stage shareholders and employees the chance to cash in some of their shares,
- gives the company credibility and a higher profile with potential customers,
- makes it easier for a company to raise money to fund growth,
- gives the company a ‘currency’ to pursue acquisitions.
Forex industry companies can also understand the benefit of being public – does anyone think that Playtech PLC (LON:PTEC) would have offered to pay $700 million for Plus500 Ltd (LON:PLUS) if not for Plus500’s multi-hundred-million market valuation? (Although that transaction has been called off).
When tech companies were all the rage in the late 1990s, startups couldn’t go public fast enough. Backed by impatient venture capitalists and encouraged by highly-incentivized investment bankers, many not-quite-ready-for prime-time companies having no earnings or even no revenue went public at nosebleed valuations, based on ‘eyeballs’, trends, or just plain ol’ hype.
Some IPO companies from the late ’90s used the opportunity to fund real growth and build real organizations, but most burned through the cash raised and faded away. As did the investment banking firms which brought them public – does anyone remember Robertson Stephens, H&Q, or Montgomery Securities?
Not surprisingly, the trend since then has been to build bigger companies before going public. More recently, some tech startups have taken to waiting even longer, building large ‘real’ companies by continuing to raise money in the billions of dollars in the private capital market. A very notable example is rideshare giant Uber which just raised more than $2 billion at a $62 billion company valuation. That is the highest valuation ever for a venture-backed company, topping the $50 billion Facebook was valued at in 2011 when it completed its last round of fundraising before (finally) going public.
Home rental online giant Airbnb is still private, having raised $1.5 billion last summer at a $25 billion valuation.
Popular video message app Snapchat has raised more than $1 billion in outside funding, with its last round back in May valuing the company at more than $15 billion.
But are all these companies waiting too long, and possibly ‘missing the bus’ to truly establish themselves as formidable growth companies which are here for the long term?
Google seems to think so.
In a recent interview to the Financial Times, Google’s VC arm chief Bill Maris states that many tech companies are waiting too long to go public, and might miss out on going public altogether should equity markets cool down for a while.
Also, the private capital market is more volatile that the public market – funding can dry up altogether for long spells, and even during good times there are simply less options. Relying on continued private market funding is not a good idea, especially when other options are available.
Maris’ comments to the FT include:
I don’t see many examples of fast-growing companies that have stayed private for 15 years.
Let’s not ignore shareholders and employees. It’s hard to see how you give them what they need and deserve without having a market price.
They’ll do better with the scrutiny of the public market.
Google’s view is not the only one out there. One of Silicon Valley’s most high-profile venture capitalists, Marc Andreessen, seems to think otherwise. Andreessen often tweets out the dangers of going public too early, prefering his companies to (generally) stay private as long as possible.
Andreessen’s reason for being IPO shy?
There are of course several reasons of course. But the primary idea seems to be simple. Growth companies do best when they can focus on growing, not worrying about satisfying Wall Street’s need for quarterly growth or keeping one eye on where the stock price happens to be.