The Private IPO Phenomenon

By Josh Kopelman

The data shared by Tom Tunguz about The Runaway Train of Late Stage Fundraising deserves a lot of attention from investors — both early and late stage — as well as limited partners.

What stood out to me most was that 231 companies raised over $40 million in growth rounds during 2014 alone, while just about 240 VC-backed IT companies went public in the last 10 years. This is astounding.

I don’t think we’ll fully understand or appreciate the impact of the “private IPO” phenomenon for another decade, or at least until a full cycle plays out.

In my opinion, there isn’t nearly enough focus on “low frequency trading.” Public companies reprice daily. Private companies don’t have to reprice for years on end.

One key benefit of low-frequency trading in private companies is a long-term focus. It removes arbitrary time constraints on growth and profits.

By relying on private financing events as “comps,” we risk pricing new financings (and creating new unicorns) based on stale valuations.

If there’s one thing we can learn from the public IPO market, it’s that the VC industry isn’t always good at pricing large companies.

More than 65% of IPOs in 2011 were underwater before the year was over. And a third of IPOs in 2013 were underwater by the end of that year.

How many “private IPOs” are underwater now? The low frequency of trading in these companies means we won’t know for years.

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