Initial public offers changed in nature, causing possible loss of investors’ chances of getting good returns from fast-growing companies.
The companies are somewhat making IPOs reach the sixth floor where middle-aged companies are settled instead of going public. They prefer to stay private for a number of years to raise money. Investors will then have to settle with older companies while waiting for young and fast-growing businesses. One company that made the private operation strategy happen is Alibaba Group Holding. Its value can be an estimated $150 billion later this 2014, as brought by its 15 years of raising money from SoftBank and Yahoo.
While the companies remain private, they keep it probable to expand in monetary aspects. Kate Mitchell, the Scale Venture Partners’ managing director, found this rare before, but now, private investments seem to be causing tech companies reach a valuation of $1 billion.
Jay Ritter, a finance professor at University of Florida claimed that 1999-2000 IPO record of average company age is 5 at the peak, while for the past 20 years, it has been 7 to 9. In contrary, since the year 2001 came, companies had an average private operating years of 11.
Outranking public companies in the new listings is what occurs now (36% fall since 2000). Companies in the United States sap their shares off the public exchanges. As this happening pursues, Marc Andreessen, Venture capitalist, forecasted not just the extension of IPOs, but its effective death. Even small investors will have more downfalls as exhibited by more gains accrued by private companies. The expert stresses out that overregulation in the market is what causes the problem. Private companies stay private just to steer away from complying with Securities and Exchange Commission’s Regulation FD in 2000 and Sarbanes-Oxley Act of 2002.
The disruption caused by the sudden growth of private companies compared to public companies will change the way how traditional companies grow and get bigger market opportunity. Presently, despite many companies viewing growth ahead of them, there may be more private entrepreneurs who might not intend to go public. Instead, they will carry on getting absorbed by Google and Facebook, which are evidently big companies. Companies will likely put money into companies for them to stay private longer. The said method is just among the many ways of raising funds for booming businesses today.
The bigger size of IPO may presently not be an indicator of early IPO’s death due to biotech’s recent raise in initial public offerings, but the period of this progress report may only be temporary.