IPO and SPAC Frenzy
A Big Opportunity… For Who Though?
In an earlier blog post, we showed how the universe of publicly traded companies had shrunk dramatically over the prior decades—from over 8,000 publicly traded companies in 1996 to less than 5,400 in 2018. This was attributed in part to the growing availability of capital in the private markets, both venture and private equity. It allowed founders and CEOs to remain private for longer, and they did so for good reasons:
· Avoid large IPO expenses and recurring expenses required to stay listed on an exchange
· Avoid reporting on a quarterly basis, which can stifle long-term thinking
· Avoid having short-term focused retail investors determine the company’s valuation
· VCs could provide a premium valuation with knowledgeable, value-added investors
As long as there is enough liquidity in the private markets, and putting aside the widespread marketing that accompanies a traditional IPO, there aren’t many other compelling reasons why a growing company with a promising future would choose to go public. So why has this trend suddenly reversed in 2020? Why are companies suddenly choosing to go public rather than stay private?
2020 IPO Frenzy
2020 is the first year in a long time where companies have raised more money through IPOs than through VCs. We believe this to be a result of tightening liquidity in the private markets. While the headlines will claim that domestic VCs raised a near record $155B year to date, the truth is the number of funds being successfully started has been cut in half since 2018.
This resulted in a 1:1 flow through effect in investments – 40% less deal activity this year than last. What does this mean? The bar for what a VC is willing to invest in has gone up dramatically. It also implies that for every ten investments a VC made in 2018 or 2019, four of them either no longer meet the bar anymore, or no longer have the business metrics required to support prior valuations. VCs have tightened their belts, and portfolio companies are feeling the squeeze.
Going public as a necessity
So where are these portfolio companies that still need growth funding forced to go? The public markets. It is clear, from the exploding volume of SPAC deals this year, these companies are using whatever means necessary to raise capital. Remember, by going through a SPAC, these companies are undertaking all the headaches involved with being publicly traded, while consciously choosing to forgo one of the biggest reasons to even go public in the first place, the IPO marketing hype – it makes you wonder how important that liquidity is to them.
In conclusion, public market investors are faced with one of two scenarios. This is either a once in a decade, golden opportunity for retail investors to gain access to these fast-growing startups that were previously guarded by VCs; or, these startups are forced to go public out of survival necessity, and their investors are taking advantage of the exuberance and greed that is currently running rampant through the public markets. Maybe a bit of both?
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