There seems to be a fundamental shift in the way that startups view the public markets as a capital source for their companies. This has been reflected by the drop in the number of initial public offerings (IPOs) over the last 40 years. In fact, the number of U.S. companies that went through an IPO in 2018 represented one-fifth of the 40-year high watermark of 677, last reached in 1996. During the IPO heyday of the 1990s, the U.S. market averaged 409 public offerings per year. Last year, the number of public offerings was about one-third of that at 134. Clearly, an IPO’s place as a liquidity option for private companies has changed. This has become especially apparent in the venture capital ecosystem.
For context, consider some of the most successful venture-backed companies founded before 2000. Both eBay (founded in 1995) and Amazon (1994) remained private for three years before going public. At the time of their IPOs, their private market valuations were $23 million and $60 million, respectively. Salesforce (1999) and Google (1998) followed similar patterns – staying private for five and six years, respectively. Salesforce’s last private market valuation was $355 million, while Google’s was $100 million. During this period, the best private companies launched IPOs within six to seven years of inception, on average. This resulted in the public markets capturing most of the value of these companies, as they grew from private valuations measured in millions, to public valuations now measured in tens of billions of dollars.
Contrast that timeline with some of the biggest venture-backed companies founded after 2006. Recently public companies Dropbox (2007) and Uber (2009), for example, had their initial public offerings after being private for more than 11 years. Prior to their IPOs, their last private market valuations were $15 and $72 billion, respectively. Airbnb (2008), which is still private at the time of this blog post, has a private market valuation of $31 billion and is 10 years into its life. In stark contrast to public offerings of the past, companies are staying private longer and a tremendous amount of their value is being captured by private investors. It remains to be seen how much value these companies will accrue for public market investors.
There are a myriad of reasons that companies choose to stay private longer and either delay or avoid IPOs altogether, including: the unprecedented amount of capital chasing startups, the lower reporting and compensation costs associated with being a private company, reduced investor scrutiny versus public investors and a longer-term perspective on value creation (private) versus a short-term performance goal focus (public). Regardless of the reasons, the trend has persisted with few exceptions – the most significant being the growing role of mergers and acquisitions as a means of creating liquidity.
Key Takeaway
It is uncertain whether this is a long-term shift in the way that investors view the relationship between public and private markets. What has not changed is that great entrepreneurs will create exceptional companies and ultimately drive investment returns. Aligning yourself with the best early-stage investors – who are able to access the best entrepreneurs – gives limited partners the best chance to consistently outperform both the private and public markets.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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