Uber raised $3.5 billion from Saudi Arabia’s Public Investment Fund, making it the largest investment in a private company. Uber, now being valued at approximately $62.5 billion, has raised $13.8 billion in the private market from venture capitalists and private equity firms in the past two years. However, the IPO (initial public offering) path, or going public, for Uber is nowhere in sight. At the end of the first quarter of 2016, Travis Kalanick, the Co-founder and CEO of Uber, told CNBC Europe that he did not see Uber going public this year.
In fact, Uber is not the only startup company that is staying private for a long time. More and more businesses in the US are now favoring private ownership. According to the US Census Bureau, the total number of US companies increased from about 4 million in 1990 to 5.1 million in 2013. However, the number of public traded companies decreased about 45% between 1990 and 2015, from approximately 6,500 to fewer than 4,400 (see chart below).
The IPO market in the US has shrunk since the dot-com bust in 2000. From the chart below, the annual number of IPOs has declined from an average of 436 a year in the 1990s to 120 in 2015. In 1999, the average age of companies that went public was four, compared to 11 in 2014.
This seems like a counterintuitive observation, since an IPO is often the goal of a founder of a startup company — — a public validation of their vision and hard work, not to mention a way for the founder to personally monetize their effort.
So then, why are companies waiting longer to go public?
Source: (top) U.S. Census Bureau; World Bank; World Federation of Exchanges; (bottom) Professor Jay R. Ritter, University of Florida
Cost of Going Public
The process of bringing a company from private to public is time-consuming and costly. When a company decides to go public, it needs to register the IPO with the Securities & Exchange Commission (SEC) by filing the registration statement, or S-1 form. This is a document with the description of the company’s business, potential risk factors, how the company is going to use the money raised from the IPO, and ownership of the company’s stock. Filing the S-1 and obtaining SEC approval can take 6 to 9 months.This is an extremely long process for a private company.
The company also has to spend money on a wide range of professional services, such as legal counsel, auditors, hiring investment bankers to market the offerings, printing prospectuses, registration fees, and exchange listing fees. According to a report by PricewaterhouseCoopers, these costs are, on average, $4.1 million for a company raising $0–50 million and can go up to $13.0 million for a company raising $101–200 million.
The costs of going public are high, and the ongoing costs for a company to remain a public company can also be expensive. A public company has to hire staff for SEC reporting, investor relations and accounting; it also has to “publish annual and quarterly financials, meet corporate governance standards established by the exchange.” These costs can range from $3 million to $4 million annually.
Scrutiny from the Public Market and Competitors
When a company goes public, it has to make all of the material offering information available to the public. The company is disclosing a lot of information that its competitors have not had access to before, especially its finances. Competitors can learn many things about a company’s strategy through its financial statements.
“Do you agree or disagree with the following: It would be easier to manage my company if it were a private company rather than a public company.” The result shows that 77% agreed with that statement.
In addition, a public company is often followed by professional equity research analysts on Wall Street and “buy-side” institutional investors (hedge funds and mutual funds). This creates pressure for the CEO to meet short-term goals rather than long-term goals, because when a company does not meet quarterly expectations, the company’s stock price can decline significantly. It is difficult for the CEO to manage expectations on Wall Street while simultaneously running their business. Fortune conducted an online survey asking CEOs, “Do you agree or disagree with the following: It would be easier to manage my company if it were a private company rather than a public company.” The result shows that 77% agreed with that statement.
Access to Capital and Liquidity
The private market has been flooded with capital from venture capitalists and financial institutions, including mutual funds. Yes, even mutual funds are tiptoeing in the private market. Fidelity Investments, T. Rowe Price, and Vanguard are investing in private companies.
Entrepreneurs now also have other options to raise money after Congress passed Title III of the Jumpstart Our Business Startups Act (JOBS Act) in 2012. Startup companies are now able to raise capital from the general public through the Internet.
Multiples and Performance
Another reason that companies are staying private longer is that public investors are not buying small companies. Public investors prefer larger companies, or in other words, companies with higher market capitalization.
According to an article on Barron’s by Jeremy Abelson and Ben Narasin, public market investors assign a higher trading multiple for large tech companies that IPO’d in the last three years. For private companies that are valued more than $1 billion, the average sales multiple is 4.6x, compared to only 1.7x for companies valued below $500 million.
Source: Why Are Companies Staying Private Longer?, Barron’s.
Public investors are also willing to pay a higher price on future sales for companies with higher market capitalization: 3.7x of sales one year after the IPO for companies valued over $1 billion, compared to 2.3x sales for companies valued below $500 million.
Considering the reasons above, it does make sense that many entrepreneurs decide to keep their companies private for a longer period of time. Since the supply of capital in the private market is still plentiful, this trend is likely to continue indefinitely into the future. It’s a favorable time for entrepreneurs to raise money and grow their businesses, without the pressure to go public.
Minh Le is an Associate at North Capital Private Securities, a registered broker-dealer focused on the marketing and distribution of private funds and securities.
Disclaimer: The views and opinions expressed in this post are the views and opinions of the author and do not necessarily reflect those of North Capital. All information provided herein is for informational purposes only and should not be relied upon to make an investment decision and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision.
This may contain forward-looking statements and projections that are based on our current beliefs and assumptions and on information currently available that we believe to be reasonable. However, such statements necessarily involve risks, uncertainties and assumptions. The charts, tables, and graphs contained in this post are not intended to be used to assist the reader in determining which securities to buy or sell or when to buy or sell securities.