I just read this piece from March written by Scott Kupor, a partner at VC firm Andreessen Horowitz. I broadly agree with most of his argument (though I think he overstates the importance of the IPO market to strengthening the American middle class). Taking a company public today is a bigger regulatory and financial burden than it needs to be. The more onerous parts of Sarbanes-Oxley should be amended and reverting back to a higher minimum tick size should be changed as well.
Also, Kupor doesn’t point this out, but the pressure created by the quarterly earnings cycle is as intense as ever (see declining CEO tenure) Simply put, with late-stage private financing opportunities abundantly available for the best companies, why should founders/management opt for the IPO route?
Companies are staying private longer in favor of a “private IPO.” That’s to say that they’re both issuing new shares and offering secondary share sales to large institutional investors to achieve investor, founder, and early employee liquidity. Only in these “IPOs” there is no public participation.
I think one of the more subtle factors at work here isn’t simply that companies are choosing to stay private longer through late stage financings, but also that these rounds are being done at extremely high valuations.
From a public markets perspective, the current financials of many of these companies wouldn’t support the valuation they’re getting in the private market. I’m not going to get into whether public market investor are applying a more rigorous standard or are simply naive (i.e., they don’t get the story behind tech), though I tend to think they’re pretty rationale and that investors understand consumer web, SaaS, and other types of businesses than they have in the past.
Late-stage, private investors are clamoring to get into the “hottest” companies – Evernote, Uber, Fab, etc. and once private companies like Facebook, Zynga, and Groupon. The excess supply of capital and fear of missing out on the next homerun are driving some valuations above where they would trade if public today. Some of these companies have to delay an IPO because they don’t have the financials to support the valuation they require to earn an appropriate return for the last round investors.
Twitter is a good example. It’s only in the last year that its advertising efforts and revenue trajectory have really taken off. The late stage bets being taken in 2009-10 were being taken on the site’s awesome user growth and assumption that monetization would eventually catch up. Financials at the time wouldn’t have supported the valuations these rounds were being done at. As the valuations being to support the valuation, the main beneficiaries will be the private investors, not the public guys.