If you haven’t heard, this year is looking to be a robust vintage for IPOs. Among those expected to go public in 2019 or 2020: Uber (biggest of the crop), Lyft, Slack, WeWork, Postmates, Airbnb, Robinhood, Pinterest, SpaceX, Palantir, Stripe, Instacart and more.
People are mad it took so long
It’s no secret that, post-financial crisis, the fastest growing companies have stayed private for much longer than similar companies in the past. This has given birth to a scary narrative you may have heard, it goes like this:
Onerous regulation and the burden of going public have made companies like Uber & Airbnb stay private much longer. Thus, you haven’t been able to participate in their growth like you could in the past. Venture Capitalists and their rich clients have kept all of the profits for themselves while you missed out on gains from the fastest growing sector of our economy.
I must say, it’s a compelling and sinister-sounding argument. It is partly true: if Uber went public earlier, even index fund investors could have benefitted from those early years of faster growth. Instead they'll have to buy Uber as a big, slower growing company in 2019.
Luckily, we have a few prior models for benchmarking exactly how much we’re missing out on. There’s been 2 times in the recent past when everyday (“retail”) investors could participate in early growth of start-ups, because they went public much earlier. Let’s start with the first; roughly 1995-2000.
1995-2000
This was a world before the $100B SoftBank Vision fund and the $360B Saudi Sovereign wealth fund. When everybody had to raise capital from public markets to fund continued growth. During this time, the average age of a company at IPO was just 4 years old vs. 11 years old today. Since retail investors could participate in earlier growth, everybody got rich and retired early.
Oops, sorry. Actually ’95 to 2000 was the tech bubble. A terrible time for retail investors in start-ups. People were scammed left and right by pump-and-dump IPOs promising to change to world. By 2001, it was revealed the emperor had no clothes, and the average investor, net losses.
Ok bad example; let’s look at the next.
2017-2018
In 2017, a disruptive innovation arrived, allowing average people to buy in to early start-ups once again—and bypass the rich Venture Capitalists in the process. The ICO, or initial coin offering, democratized early stage investing for the world. Millennials ended up making so much money, everybody bought Lamborghini’s and moved out of their parents basements.
Oops. I guess that one ended up being a scam-fueled bubble as well (even more scam-fueled than the last!). I think you get where I’m going with this.
Here’s the truth
The “rich private investors screwing you over” narrative is appealing because it preys on your fear of missing out. It’s actually just textbook survivorship bias. The problem isn’t that Uber going public earlier would be bad. The problem is that 99.99% of companies aren’t Uber….and the majority of people who’s literal job it is to pick Ubers can’t even pick Ubers. Uber-like success is exceedingly rare.
Tech media doesn’t advertise that the total return of Venture Capital as an asset class is in fact negative. This means most venture funds—which are diversified across potentially hundreds of the most hyper-vetted, top decile start-ups—lose money. Even winning companies for VCs (those which go on to IPO) are considered the black hole of investing. Historically, they underperform the broader market.
The reason tech companies stay private for longer today isn’t anything sinister. It’s that the public markets have now expressed they prefer companies who wait longer to IPO…as explained in this Barron’s article:
Looking at the cohort of tech companies that have IPO’d in the last three years and their trading multiples relative to their market cap….you can see a very demonstrable story.
• $0 - $500m: 1.7x sales
• $500m - $1B: 4.5x sales
• $1B+ (Unicorn level): 4.6x sales
This is a very clear preference for larger companies — public markets assign more than double the sales multiple for companies with more than a $1 billion market cap
It’s simple. If you want to maximize the return for your investors and employees, you stay private until your company has proven success. Unlike the inevitable speculative bubbles of the past, this is a better incentive structure for everybody involved. ■
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