For any startup, the decision of whether to go public is a big one, and a number of factors must be taken into consideration. Recently, speculation that more tech startups will make the choice to go public next year has increased, and with good reason. While tech startups may have at one time delayed going public, it is rapidly becoming clear that the advantages of doing so are numerous.
Why Many Tech Startups Chose to Delay Going Public by Accepting Private Funding
Over the course of the past year, tech startups have remained relatively off the global stock market radar, opting instead to raise funds on the private market. Companies like Airbnb and Uber have proven it is entirely possible to raise small fortunes by leveraging venture capital and corporate investment firms, in the process proving that going public is not always necessary in order to obtain funding to fuel growth. The ability to raise such funding has oftentimes made it possible for startups to delay an I.P.O. for a year or more.
One such firm is Box, a cloud document storage firm, which raised a round of private funds last year in order to delay an I.P.O. Eventually the firm did go public and now has a stock market valuation of approximately $1.7 billion. Technically, Box is considered a unicorn with a $1 billion+ valuation, although its valuation is still significantly below that of its larger competitor, Dropbox, which received a $10 billion valuation.
In the past, the issuance of an I.P.O. in Silicon Valley was viewed as a tremendous achievement for most startups. Over time, however, companies began to wait longer and longer to go public, preferring instead to rely on private funding to grow their operations. With what seemed like an almost unlimited supply of funding available, tech startups could easily hedge their bets using such a strategy.
A Cold Awakening to the Realities of the Strings Attached to Venture Capital
Should such private funding dry up next year, however, tech companies may find they have little choice but to turn back to the public markets. Along with reduced funding, startups have also discovered that accepting money from private lenders is not always without drawbacks. Increased public scrutiny is just one of the tradeoffs that most startups must cope with after accepting money from large investors, including mutual funds. When mutual funds invest in private companies, they must make regular reports assessing the value of those startups. In cases in which it appears that a startup may actually be worth less than the funds invested, the backlash on both the investor and the startup can be tremendous.
Case in point: Dropbox. The cloud storage firm made the decision last year to raise funds privately in an attempt to delay going public, while working on building a viable business platform. During the financing round, Dropbox was valued at $10 billion. At the time, CEO Drew Houston stated that the company's investors were happy and things were going well. When two investors, BlackRock and Fidelity Investments, marked the value of their investments down by an astounding 15 percent, however, Dropbox, as well as the rest of Silicon Valley, was left reeling. Since then, startups have been increasingly wary now that it has finally become public knowledge that investors may opt to adjust the value of holdings and that such information may be reported publicly as part of routine regulatory filings. The bid to delay answering to investors by delaying going public has clearly become an ineffective strategy for many startups.
Snapchat was yet another example of marked down valuations. The messaging app, originally valued at $16 billion during a funding round earlier this year was later devalued by 25 percent by Fidelity. Such situations have led to a general perception that privately held tech startups might well be overvalued. With concerns regarding overblown valuations on the horizon, venture capital could well begin to dry up over the course of the next several months, practically forcing tech startups to once again reconsider the IPO route.
Private Funding Doesn't Delay Public Scrutiny
Furthermore, while the old cliché "no press is bad press" may still abound, when it comes to a startup trying to gain a foothold in a competitive industry, that does not always hold true. Public companies are also often better positioned to hold up to scrutiny. The level of skepticism regarding privately held companies simply tends to linger. Public companies, such as Google and Apple, are not immune to doubt. Both companies have faced antitrust scrutiny, but they have also seemed to fare better overall.
The IPO Route Can Actually Drive Innovation and Growth
Going public can also sometimes provide the impetus needed to propel a startup to the next level. For years, Mark Zuckerberg delayed taking Facebook public. While the company certainly experienced a tremendous amount of growth during those private years, since going public in 2012, Facebook has achieved a phenomenal amount of success, including edging in on a mobile advertising market share once controlled by Google.
Since making the decision to release an I.P.O., more than 1 billion people now use the social media platform on a daily basis. Adding video propelled the company even higher, with users viewing videos at a rate of 8 billion each day. Since April, video viewing has actually doubled.
Pinterest is just one of the companies that could make the decision to go public next year. Launched in 2010, the social media company is hardly a startup any longer. Still, recently valued at $11 billion following the most recent round of funding, Pinterest could find that the time is finally ripe for an I.P.O.
To date, there have only been 18 tech specific I.P.O.s this year. Whether that number will grow next year remains to be seen, but at the moment, all the signs do indicate that we could see a much larger number of tech companies opting to go public in 2016.