Before, we talked about unicorn startups and how they’ve recently gained popularity. Although we can’t quite tell yet if unicorns will become commonplace, there has certainly been an uptick in their occurrence over the years which begs the question: will companies in the future choose to stay private?
There are many hassles to IPOs. At the forefront of the decision is their initially massive costs due to stock market regulations. In order to be offered on the stock market, a company must hire experts like investment bankers, lawyers, underwriters, and auditors to prepare and file a registration statement with the SEC (the stock market regulator). Because of this upfront cost and absolutely no guarantee that the IPO will go well, the risk isn’t sensible to some companies, or simply just not worth the worry.
Many more investor types are starting to see the return-on-investment potential of startups, so there is a lot more private funding available for those efforts today more than ever before. This has seriously challenged the decision of if startups want to submit to the public market and deal with its constant scrutiny while also inherently giving up full control over company decisions and overall trajectory. Furthermore, there is continual, yearly regulatory costs of staying on the stock market, primarily due to reporting requirements.
All things considered, going public has never really been a decision that was questioned, but as private markets become more appealing, companies are debating whether going public makes sense for them. If less companies are deciding to go public, that becomes more of a public concern than the public can probably even fathom.
Let me give you a scenario:
Let’s say you’re like me and you have a special interest in noticing trends, or maybe it just comes naturally. Nonetheless, with this interest/skill of yours, you just knew that one niche brand you purchased once upon a time was going to be a hit with the general public at some point in the future, but it just wasn’t there yet. Maybe you thought you’d better stock up before everyone hears about it because once demand rises, so does price. You’re especially like me if you took your faith one step further and searched for their stock market ticker symbol, only to find disappointment that it isn’t available for purchase by the public.
A lot of times, this is the case due to the strenuous process it takes to even be eligible for an IPO that we outline in our previous article, “How Startups are Funded.” In those cases, the company of interest just hasn’t grown to the point to accept public investors, so your purchase in their products or services is as far as your investment endeavors can stretch. Unfortunately, that doesn’t offer any opportunity of return for investing in a company you just know is underrated and is going to succeed exponentially.
Let’s say that time goes on, and your prediction is right! That company you believed in so much is the mogul you envisioned it was going to be, but instead of an IPO they’ve been acquired by some company juggernaut, bypassing your ability to benefit from your correct prediction of their success, and depending on the market context of the acquisition, perhaps now you’re even stuck with a higher price tag for that product or service…double whammy.
Had that company had an IPO, you could have benefitted at least in some capacity by purchasing their stock for IPO asking price and held as long as you had faith in the company to perhaps see an exponential return in years’ time, or you could even choose to sell on that same day for a short profit as most IPOs jump in price on offering day by 18.4% on average. Nonetheless, my point is that an IPO offers you, the common investor—and in the same hand, a loyal customer in this scenario—some opportunity for a return on investment.
It’s hard to compete with companies such as Google who have massive cash reserves specifically for the purpose of acquiring the next big thing, with the company solidifying a whopping 240 companies from a variety of different industries under their belt over the past twenty years. Even still, people who choose to purchase Google on the stock market in today’s market are likely not reaping the benefits of any of those acquisitions even if said acquisitions are bringing in direct profits. I’m not saying that the stock price won’t eventually go back up, this is just to bring light to an unfairly disproportionate loss of public benefit that would not have occurred had that acquisition rather been that company choosing to do an IPO.
A very recent example of just how much public equity is at stake regarding the decision of an IPO concerns the recent IPO of Bumble. Match Group Inc. supposedly offered to acquire Bumble in 2017 for 450 million dollars, but Bumble turned down the offer because they felt they were at least valued at one billion dollars at that time. Fast forward five years later and Bumble (BMBL) had an IPO of 46 dollars per share. That same day, Bumble closed at 63.5 percent above IPO price, meaning that gain was entirely public gain–around 6.4 billion dollars. Not only was wealth for the public created in this scenario, more importantly, it was deterred from private greed. Had Bumble agreed to the acquisition years ago, Match Group Inc. would have immeasurable wealth from the acquisition that would not have translated publicly in like size, while it would have also shorted Bumble what they were worth (assuming that they would have managed the company to the success they have today).
Last year brought in IPOs slightly below the 20 year average (not including the outlier year 2021), so concern isn’t necessarily too mounting for the future of IPOs, but for our own sake, and generations after us, we can only hope that it doesn’t become antiquated.