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.