Companies are now taking longer than ever to go public. The average lifespan of a tech company that went IPO in 1999 was 4.5 years old. That number rose steadily over the years, and in 2020, that number rose to 12 years. Wow. That meant before, you could use a company’s product for a few years and validate if you liked it, word of mouth opinions from other consumers, then invest in said company. Now, this method of real time eye test analysis of a company would not even work, because the opportunity to invest in that company would not even be possible. The only way would be to get in on that company is in the private markets. Or, you could wait for it to go public and see the ensuing trouble that will occur.
Case example:
Stripe, one of the beloved unicorns, well nearly hectocorn closing in on $100 billion. According to ChatGPT, Stripe stands as a technology firm that furnishes a platform for the processing of online payments. Its inception took place in 2010, initiated by John and Patrick Collison. Stripe’s primary focus is to make it easier for online businesses and stores to accept and manage online payments etc. Stripe offers a suite of tools and services that enable businesses to accept payments securely and efficiently. Stripe’s platform supports a wide range of payment methods like as, including credit and debit cards, digital wallets, and local payment options specific to certain regions.
Stripe raised a Series I for $6.5 billion dollars at a 50 billion valuation in March 2023. In April 2021, valuation was at $95 billion. First of all, Series I? Where did this come from? More and more private series rounds seem to be invented. Previously, maybe a company would have 3–5 rounds before an IPO. Even if they become the next big thing, the valuation gain may be greater, but the actual return % for investors would be so much lower. For example, if you bought Stripe earlier on when the valuation was 50 million, and then saw it go to 50 billion today, that return is 1000x. But if Stripe went IPO at 50 billion, then over the long haul even if its valuation became the next trillion-dollar company, that is only a 20x return. Yes, a 20x return from 50 billion to 1 trillion is amazing, and is at a risk level that is lower than from 50 million to 50 billion. But the average joe retail investor is losing out on so much value by not being able to buy these promising companies at an earlier stage. Even more interesting was the press release issued by the company, indicating that the capital for the series I was not needed to run its business. I thought businesses raised money in order to fund its business operations? The money raised was for the tax bill for the money and as well as buying out other shareholders. Well that’s a departure from before.
No wonder wealth is now being concentrated in the hands of the few more and more than ever before, and projected to continue at this pace. Eventually 5% of the population will own 95% of all assets and inevitably reach revolution, as Cuba did in this bifurcated society and then eventually went towards an economic system of communism. And that is not a pretty system. When I went to Cuba years ago in 2016, the majority of the country was undeveloped, no real economy outside bringing travelers in, likely 100–150 years behind the Western world in terms of development by my estimation.
One columnist, Matt Levine in 2018 was quoted saying “private markets are the new public markets”. And in an information age, the data supports this saying. In 1996, 8000 companies on the US stock market were based in the US. By 2016, that number has dropped to just 3,618 companies. Whether that is due to globalization, the rise of other developed economies elsewhere in the world, the fact is less US companies are being listed than ever. And that could be in part to less new founders, as well as new companies staying private longer and longer. Previously, one of the common reasons for a company to go IPO was to raise additional capital from the retail markets, i.e. “dumb money”. With countries not having currencies tied to the gold standard, there is no incentive for countries to reduce money printing, and every incentive to continue to print money. This leads to more money in the system, and consequently, way too much money in the hands of smart money to invest privately in companies before they go public. This translates to all the early exponential gain in wealth to go towards the hands of the people who privately invested ahead of time, not the public investors. It makes more and more sense for the average joe to now get in on these early rounds in the private markets where possible. This trend will thus likely continue into the future with no signs of slowing down.
Another common reason for companies to go public was to allow its existing shareholders room for much greater liquidity to be able to sell out. Whether that be investors, employees, management, it gave the opportunity to be rewarded financially. Imagine buying into a company being promoted when the people who own its shares, the so-called insiders who are working in the company and have a general sense of where the company is going, are all running for the exits and selling, to the unsuspecting NPC gullible dumb money inevitable bag holder retail investor. And this time, the valuation at an elevated level, like falling off a cliff from a higher elevation. Ideally, if I’m buying into a company at any stage in the company lifecycle, I want to be buying when the insiders of the company are buying, not when they are selling rapidly.
Conclusion
The theory of survival of the strongest theory is not necessarily true. Moreover, it appears the survival of the most adaptable are the ones who are going to be the most well off. The financial markets, and by extension, financial future and livelihoods of people are now dramatically affected by companies staying private longer than ever before. It only makes sense to get in on companies that are promising in the early stages, which must happen now in the private rounds. By the time these companies have gone public, most of the gains are already gone.
Disclaimer
This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.