The Counterintuitive Case for Companies to Stay Private
IPOs used to be a company’s hot coming of age. Now they are more like a company settling into middle age.
The IPO used to be a coming-of-age ritual for new companies: They’d grow up a bit sheltered, raising money from venture capitalists and making their big mistakes in private. Then, at the right time, they’d make their public debut, throw a huge party, and become a real Grown-Up Company for the first time. It’s also a moment when employees and early investors go from theoretically rich to having money they can actually spend.
Pre-IPO, an engineer might know what percentage they own of a company’s stock (due to dilution, this percentage is an upper bound on how much they actually own), and they might know what the company was worth the last time it raised money (due to the dynamics of deal structure, PR, and journalism, this is also an upper bound on how much the company is worth). But after the IPO, you can do some simple long division and convert the cost of a vacation, new car, or new house into a certain number of shares, and quickly convert those shares into cash.
That’s changed. Today, going public is more like becoming middle-aged: It happens gradually, and it entails a transition to a more mature, established phase of the corporate life cycle. Decades ago, companies went public early in their life. Microsoft, a relative late-bloomer, IPOed in 1986, a decade after it was founded, at a market value of $520 million. Today, Microsoft is worth about $1.3 trillion: 99.96% of its market value was created post-IPO. In 2012, Facebook went public, a bit under a decade after it was founded. Its value at IPO was $104 billion, compared to $580 billion today. Investors aren’t complaining, of course, but this means only 82% of its growth in value happened as a public company. The picture is worse for more recent IPOs, like Uber (trading below its peak private valuation), or WeWork (which hasn’t managed to go public at all).
You could have made a life-changing amount of money buying Microsoft stock the first day it traded, but it’s very hard to get rich investing in something that’s already…