Stay Private for as Long as You Can: The IPOs are on the Rise

Today, while the number of initial public offerings (IPOs) continues to rise steadily, the data shows that more companies are staying private longer. And it doesn’t appear that that trend is likely to change any time soon. 

Whether it’s a company like Facebook or one that’s been around since the 1950s like McDonald’s, going public has historically been the end goal for most businesses.

The average age of companies that went public in 2014 was 11 years, compared to four in 1999, according to Barron’s. Some pundits credit the delay to fears that the growing number of unicorns—startups valued over $1 billion—means another tech bubble is looming. That’s some sobering news.

However, it’s more likely that the IPO space simply has matured. Today’s savvier investors are more selective about which companies to back and how much to invest.

At the same time, privately held companies have figured out that the key to nabbing the most lucrative deal comes down to making sure a deal’s timing is right. Waiting to go public often leads to higher pre-IPO capital and better company valuations.

As you target companies planning to go public, being in the right place at the right time—as well as understanding the nuances of this flourishing landscape—may be the key to brokering successful deals. And, surely, replacing either “right” with a “wrong” means you’re probably going to fail. 

The Pros and Cons of Remaining Private

Delaying going public not only gives privately held organizations valuable time to grow in size and to solidify their expansion strategy, but it comes with a host of other benefits.

Pros of Staying Private Longer

  • Potentially less expensive to operate
  • Fewer reporting and compliance concerns
  • Limited market caps and comparisons
  • Easier publicity
  • Fewer disclosure requirements than public companies
  • Private investors drive valuation instead of the public

Of course, once a company has decided to compete on a national level and has competitors breathing down its neck, remaining private becomes more difficult, especially from a financial perspective. 

Consequently, it’s good to consider the disadvantages of staying private now:

Cons of Staying Private

  • Most company roadmaps lead to an IPO
  • Harder to release products or services to broader markets
  • Missing out on the potential for greater revenue

Enter the Private IPO

With software companies increasingly reaching a $10 billion valuation without going public, it’s no wonder that private IPOs are replacing traditional public IPOs. (And, of course, “private initial public offering” is a bit of an oxymoron!) 

Data from Pitchbook and highly regarded University of Florida business professor Jay Ritter supports this trend: Private IPOs have raised three times more capital than public tech IPOs over the past four years.

Mega financing rounds of $100 million or more in private capital markets, in fact, have become so commonplace that they have led to the creation of a new asset class called Private Tech Growth. In short, the majority of venture capital funding now comes from private IPOs.

As a result, value creation is shifting from public markets to the private, according to Forbes, who also reported these telling statistics:

  • The number of private initial public offerings has increased from about 70 in 2014 to more than 130 (annualized) in 2018
  • Private initial public offerings account for about 45% of $350 billion or roughly $150 billion in funding since 2009
  • Private initial public offerings accounted for more than $30 billion, or 55% of all VC funding in 2017

What Does This Mean For Private Equity Firms?

To remain competitive, general partners (GPs) and venture capital executives must consider new funding approaches for private companies and use different investment models for early- and late-stage investors.

Knowing that private IPOs are here to stay—and that private companies are taking much longer to go public—is the first step to fine-tuning your strategy to secure capital and win deals from other firms.
The second? Keeping track of all of the investment opportunities your team has evaluated in a structured fashion, so when the timing is right, you’ll be prepared to act quickly.

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like Salesforce.com have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that Salesforce.com has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that Salesforce.com — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.

investor relations