Navigating The IPO Maze: Why Startups Are Taking Longer To Go Public

Prior to the 2000 dot-com bubble, companies went public in about five years; today, companies take 8 to 12 years, depending on region and global or regional economic outlook. That is quite a shift. 

One must also note that along with the time shift, there has been an increase in the valuations of companies when they go public (IPO). The median valuation has increased, especially in the technological segments where we see the 1-billion-dollar mark being crossed often. 

The Big Shift?

Let’s look at it from a founder’s perspective – the founder can raise private capital even to the tune of a billion dollars, and while this is not easy money, it does not come with the rigour of an IPO process. So, the founders are in no hurry to ring the bell on the stock exchange. 

Added to this is the fact that when you are privately held, you are answerable to a set of people who are aligned with the broad goal that the company has to grow and give returns. While in the case where the company goes public; the scrutiny is much wider – financial numbers, the right team, and the analysts. The emphasis shifts abruptly from managing growth to ensuring your earnings per share are in line with Wall/Dalaal Street.

Also, any public listing will open the books for all (including competitors) to read into the secret sauce — where is your spending for that phenomenal growth? The other side of going public is the macroeconomic factors that can directly impact your share price, which is a new space for startup founders to deal with. Given the heightened merger and acquisition activity, many startups are being absorbed by larger companies without reaching their dream of going public. 

But the advantages of going public are manifold, one of which is access to a permanent pool of capital without having to keep pitching your growth story to investors in coffee shops. Most important is the ability to provide liquidity to investors, employees and the founders themselves. Furthermore, the image of a public company is different – stable, regulated, and trusted. Going public also improves the overall M&A game for companies. For any successful startup, the ultimate litmus test is going public. 

So, with the newfound appetite for private financing to write billion-dollar checks and other factors weighing in, the average time for a startup to go public has increased by 4-6 years in the last two decades. 

Valuations Under The Scanner

Another intriguing aspect contributing to this delay is that the investors (or the bankers) in the public markets have a different lens for arriving at the value of a company compared to the venture capitalists. 

Many startups that have gone public in the last five years have had to list at a valuation well below their previous private valuation. Now, if I were the VC who wrote a large check in the last valuation, I would not like the IPO to be listed below that number! 

This difference between public and private valuations, along with the global headwinds during various economic cycles have not only delayed IPOs for startups but also made such a move towards public listing even more demanding. Now, you have multiple stakeholders with differing agendas (remember, the early-stage investors are already impatient), making the decision-making complex. 

The Middle Path

All this has led to the following outcomes and thoughts on how we can be better off:

• Private money enjoying the growth: Because of these delays, the venture funds that invested in these startups (especially later) can ride the wave longer and reap great returns. But these hyper-growth cycles get snapped suddenly before and during the listing because of valuation reductions. So public investors are missing in action because of the delayed IPOs. There are mutual funds that invest public money just before an IPO today, and we may see more of this activity as IPO sizes have increased by multiples. 
• Private vs. public valuations: One would think that the difference in valuations of privately held vs. public companies that have been in business for 8-10 years would be minimal. But, guess what, the gap is growing by the day. This calls for the late-stage funds to ensure their valuation process imbibes the rigour of public listings. 
• Ease the regulatory burden: I appreciate that the regulations of the stock exchanges are in place for a reason, but they need to evolve to meet the needs of the market. Multiple developed countries have taken steps in this direction to ensure new-age startups can get listed without spending inordinate time on the process. This might also bridge some of the gaps discussed in the two points mentioned above. 
• Better companies in the making: Another amazing aspect of a startup going public is that the thoughts of growth at all costs will be replaced with let’s look at the overall financial health of the company. This can be a positive shift for the ecosystem – scale vs unit economics is an important balance, and the market can bring that into the picture. 

Startups are fueling innovation and are an important part of the new-age economy. It is crucial that this gap between startup and IPO does not keep increasing. Otherwise, we risk creating startups that grow quickly without regard for their bottom line, while public markets miss out on the growth that innovation can fuel.

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