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- US companies are opting to go public much later than they did in the past, which is having a major impact on investing trends.
- Late stage VCs are raising more money than ever before to take advantage of value creation opportunities from high growth businesses.
- Early stage or seed VC funding is seeing volumes shrink, meaning important initial investments are more difficult for new companies.
US companies are opting to go public much later than they did in the past and it is having a major impact on investing trends and the ways that VCs are operating.
In the past, going public was the best way to raise capital, access new funding, and develop businesses. But today, the US has "abnormally few listed firms," according to a working paper from the National Bureau of Economics.
In 1975 there were 22 public firms for every million Americans. Now that number is just 11, according to Quartz.
The dearth of investment options is stark for a number of reasons, among them that a lack of choice is shrinking the available market for average investors. It also removes from the investing public the opportunity to benefit from the value creation that typically occurs in the early years of a company’s life.
"The amount of money in early stages is diminishing which means that the pipeline for funding is broken," according to Jonathan Breeze, CEO of Aardvark Compare, who talked to Business Insider.
The impending mega IPO for Lyft is a case in point. The company is valued at $23 billion, a sum so vast that it implies that much of its growth has already been captured by private investors and VCs who got in early, rather than the public to whom the company will now be sold.
Lyft is six years old and has yet to turn a profit. It has received $5 billion in total VC funding. It managed losses of $911 million in 2018.
For context, Amazon was valued at $438 million at the time of its IPO in 1997.
Lyft is a good example of what happens in a VC market that is more accommodating than ever before. "Mega-rounds" are now a major feature of the industry. Rounds for more than $50 million of new investment account for more than 62% of the entire start-up funding market, according to Suster. Similarly, last year, 256 funds raised $55 billion for VC funding — the most since the dot-com bubble.
For tech startups in particular, public listings can be tricky — making private capital preferable. High standards of disclosure and stringent public accounting standards make things difficult for companies whose main assets are intellectual property. US securities law requires companies to disclose their activities in detail. But startups are wary of sharing information that might benefit their competitors discouraging them from going public.
The rise of late-stage capital is having an distorting impact on the set up of the entire credit market for startups: companies are going public on average five years later than before. The average age of a company going public is now 20 years old, up from 12 in 1997, per Quartz.
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Source: Business Insider – cburroughs@businessinsider.com (Callum Burroughs)