Posted by: Dr Churchill | April 17, 2018

Today’s Private markets are tomorrow’s Public Markets

“Today’s Private markets are tomorrow’s Public Markets”

Those proud and prickly Unicorns have given the middle finger to the SEC and to the public markets in favor of softer money, no regulations, and also receiving money of ill repute…

So “Today’s Private markets are tomorrow’s Public Markets” is what I throw out there to say, when I want to offer a pithy quote, and a memorable hashtag, to the journalists and to the pundits out there.

It is of course an oversimplification, and it simply shows how smug we have become about the Unicorns ruining the sport of Venture Capital for all of us.

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But it works, and before you all come down here to tear me down — let me explain.

The Unicorn in a safe space model, but he disconnect stands because what it used to be is no longer true.

Because it used to be that early-stage StartUps and speculative companies used to be private, and middle-stage growing companies used to be public, and late-stage cash-flowing incumbent companies also used to be public with dividend paying and blue chip reputations.

All that has been turned upside down with value investors losing their shit when they see now as to how that middle stage has shifted.

Because as a Startup, you can now get all the capital you need to grow while you’re private, so you stay private a hell of a lot longer.

Yet the longer you stay private — the more difficult it becomes to go public and reform yourself, because once you’re not growing as fast anymore, and when you don’t need as much capital to grow, then you seek to go through the IPO window to become a public company, in order to cash out your stock incentives, and help your employees get rich, or just to keep them around, and manage to align your goals and improve your profit discipline.

Yet, today, it is the private markets that have taken over the public markets’ role in capital raising, but the public markets have fully retained their leading role in liquidity provisioning and in the capital returns to investors.

Yet if that’s the model that persists for a few years — then you’d expect an IPO slowdown during the transition, and then a return to all the IPOs once the transition is complete.

All the big unicorns that grew while being sheltered in the safe spaces of the “Enchanted Forest” are now finally ready or even required to come out.

I say this only because this seems to be the strongest and most brilliant of the golden ages ever to exist for unicorns.

For one thing, with SoftBank Group Corp. pouring money into private technology companies, unicorns can raise all the money they want; the main inconvenience is that when private tech companies try to raise money they keep raising more money than they want:

The Silicon Valley money machine is once again in high gear, thanks largely to SoftBank. The conglomerate is injecting billions of dollars into tech, in turn causing deep-pocketed global investors—and some U.S. venture firms—to arm up in response. A record level of late-stage money is flooding in, threatening to keep some startups out of the public markets even longer while heightening concerns that the sector is overvalued.

In recent months, hotly contested companies like ride-hailing service Lyft Inc. and dog-walking app Wag Labs Inc. have received hundreds of millions of dollars more than they sought.

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Ah, but good news for unicorns is also worrying news: If unicorn fund-raising is hot and valuations are high, that just means that venture capitalists will be unable to take their unicorns public, right? But, no, actually, the exits from the Enchanted Forest seem pretty enchanted themselves:

Investors, bankers and analysts said they expected a wave of initial public offerings to bring some of the most highly valued and recognizable start-ups to the public market over the next 18 to 24 months — and billions of dollars in returns to their executives and investors. The potential bonanza would follow years of waiting as a few dozen companies amassed valuations without precedent in the private market.

Already, 2018 has gotten off to a fast start. Two of the biggest start-ups still sitting on the sidelines — Dropbox, an online file storage company, and Spotify, the streaming music service based in Sweden — successfully went public over the past month. Tech I.P.O.s have already raised more than $7 billion this year — more than all of 2015 and 2016, and more than half the $13 billion they raised last year, according to the market-data firm Dealogic.

We talk a lot around here about how private markets are the new public markets, how private companies can now get most of the benefits (limitless fund-raising, secondary liquidity, name recognition) of being public, without the inconveniences (financial disclosure, shareholder pressure) of actually going public.

So why are the big unicorns heading finally towards the exits of the private markets?

It is the SEC stupid.

And of course the Tax Code that finally favors companies.

And it might also be this dude Donald Trump who promises a level Darwinian field for public and private companies to play and win.

No more protection or safe spaces for mythical creatures like Unicorns.

I don’t know.

All the answers I’ve got are not super satisfying, nor are they forthcoming anymore…

Yours,

Dr Churchill

PS:

And while private capital has been so accessible that start-ups have been able to get ample funding without the headaches of an I.P.O., several factors are encouraging companies to go public now, as major investors and bankers say they want to see happening.

Public investors are hungry to buy shares of fast-growing companies. Early employees are getting antsy to cash in their stakes.

And some start-up executives are eager to prove themselves as public company chief executives after founders like Facebook’s Mark Zuckerberg and Twitter’s Jack Dorsey have said going public improved their discipline and focus on profits.


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