Technology startups since the past decade are staying private for much longer. During the dot-com boom (and bust) of the 2000s, many software and internet companies were going public as early as four years since their inception. It’s safe to say that this trend has changed. Tech startups with each passing year are becoming more wary of going public, trying to play the waiting game, delaying it as much as possible. Although 2019 was a pivotal year for technology companies as some of the biggest names debuted at the markets. Uber, arguably the biggest tech startup, went public last year, ten years after it was founded. Lyft, Slack, Peloton and Pinterest too ‘IPO’ed.
Here’s how their stocks performed after their IPO.
Why Should A Startup Look To Go Public Anyway?
Why can’t a startup just stay privately financed indefinitely? Well, it can, but one reason companies go public is access to permanent capital. That provides liquidity for the employees, the investors, and the founders. It provides a currency for mergers and acquisitions.
Apart from that, when a company goes public it signifies a symbolic ‘next step’ in its life-cycle. It shows that the company is headed in the right direction and instils confidence in the private early-investors too.
Also, many companies end up using their IPO as a marketing tool to accelerate growth and rope in potential customers.
The Change In Trend
There has been a massive change in how internet companies look at the public markets since the dot-com bubble burst. One of the major reasons is the rather easily available private funding from serial investors and VC funds. It has become a trend among investors in the past decade to encourage growth over profitability, which as a consequence has instilled scepticism in the markets towards such privately funded startups.
Also, as a result of this ‘easy money’, the companies debuting now are far bigger and far older. According to research from Jay Ritter, an IPO expert at the University of Florida, the median age for tech companies going public in 1999 and 2000 was four and five years, respectively, compared with 12 years in 2018. Median sales, meanwhile, were about $12 million then, compared with $173.6 million last year.
Software companies are increasingly reaching $10 billion in valuation before going public.
Private investors assigning such exuberant valuations to private companies has never happened before. This has made going public for tech startups quite tricky, as they would have to take a hit on their valuation(due to market scepticism) in order for them to IPO.
India has the third most number of unicorn startups in the world, yet none of those unicorns has had an IPO(barring MakeMyTrip which is listed on NASDAQ). So what’s stopping Indian startups from taking the IPO route? One of the reasons might be that Indian tech startups aren’t able to match the international profile of Chinese and US startups. Another barrier holding back Indian startups from going public on a global scale is that Indian businesses are required to go public on domestic exchanges first.
Also, another factor holding them back is the overall market sentiment in India which has not been very good towards tech startups.
A public company needs to show maturity and long-sightedness that may be a private upstart does not. IPOs can and should be used as a strategic lever to accelerate growth.
With Ola, OYO and Paytm all in line for their IPOs, it would be interesting to see how things pan out for our very own unicorns!