From OpenAI to SpaceX: Why Billion-Dollar Startups Are Staying Private Longer

Key Concepts

• Unicorns: Private companies valued at over $1 billion.
• Going Public (IPO): The process of a private company offering its shares to the public for the first time.
• Staying Private: Companies choosing not to go public, maintaining ownership and operations outside public scrutiny.
• Private Capital: Funding from sources like venture capital and growth equity.
• Public Company Overhead: Costs and administrative burdens associated with being a publicly traded company.
• Liquidity: The ease with which an asset can be converted into cash.
• Acquisition Currency: The ability to use company stock to acquire other companies.
• Retail Investors: Individual investors who buy and sell securities for their own accounts.
• Capital Markets: The marketplaces where financial instruments are traded.

The Trend Towards Staying Private

The video discusses a significant shift in corporate strategy, with more companies opting to remain private for longer periods, leading to an explosion in the number of "unicorns" (private companies valued at over $1 billion). Historically, companies went public within approximately seven years, but this timeframe has extended to around eleven years, with many now staying private for over a decade. This trend is evidenced by Pitchbook data, showing a rise from virtually no unicorns in 2010 to over 1,400 today, collectively worth over five trillion dollars.

Reasons for Staying Private

Several key factors contribute to this reluctance to go public:

• Cost and Hassle: Being a public company incurs substantial expenses, estimated by Jonathan Foster, President and CEO of Anggeles Wealth Management, to be at least $5 million annually for micro-cap companies, with larger companies paying significantly more. This includes the stress and difficulty surrounding earnings reports.
• Information Disclosure: Professor Gordon Phillips of Dartmouth's Tuck School of Business highlights that going public requires releasing a significant amount of information, including potentially proprietary data that companies wish to keep confidential. This is particularly relevant when the value lies in the intangible relationship between knowledge and capital, which is difficult to patent.
• Brand Recognition and Market Dominance: Companies like Uber and Lyft strategically waited to go public until they had established strong brand recognition and a substantial consumer base. This allows them to go public when their valuation is already high and their market position is secure.
• Availability of Private Capital: The abundance of private capital, including venture capital and growth equity, provides companies with sufficient funding to grow without needing to access public markets as quickly. This "tons of money" allows for significant capital infusion privately.

Distinguishing Modern Private Companies

It's crucial to differentiate these large, privately held companies from traditional small businesses or family-owned enterprises. Sarah Cohan Williamson, CEO of FCT Global, emphasizes that these are global-scale operating entities, not the typical private companies historically envisioned. A key distinction in private markets, as noted by Williamson, is that the ultimate owner sets the price, whereas in public markets, the marginal trader determines the price, leading to constant fluctuations.

Drawbacks of Staying Private and Benefits of Going Public

While staying private offers advantages, there are also significant drawbacks, and going public provides distinct benefits:

• Liquidity: Public markets offer unparalleled liquidity, allowing investors and early employees to easily sell their shares.
• Acquisition Currency: Publicly traded stock can be used as currency to acquire other companies, as exemplified by Apple's acquisition of Beats by Dr. Dre for $2 billion, facilitated by its cash and shares.
• Employee Incentives: Public companies can offer stock options and similar compensation, allowing employees to benefit from the company's growth and have a clear path to liquidity. While private internal markets exist, they are generally less liquid and may offer less favorable pricing.
• Credibility and Opportunities: Being a public company enhances credibility with suppliers, business partners, and employees. It also opens up new avenues for growth, such as issuing more stock to fund acquisitions.

Professor Phillips' research comparing companies that went public with those that filed for an IPO but withdrew found that those that proceeded to go public still reaped substantial benefits.

Impact on Investors and Capital Markets

The trend of companies staying private longer has several implications for investors:

• Reduced Investment Opportunities: The number of publicly traded companies has significantly decreased over the past 25 years, from over 7,000-8,000 to around 4,000, limiting investment options for retail investors.
• Delayed Participation in Growth: By the time these high-growth companies go public, much of their explosive growth has already occurred. Retail investors may miss out on the early, high-upside phases of growth, as seen with Apple's IPO. Companies like OpenAI and SpaceX, currently private, represent future investment opportunities that are inaccessible to retail investors until they eventually go public.
• Potential for Market Cycles: While the current trend favors privacy, the video suggests this may be a cyclical phenomenon, as public markets have historically provided favorable long-term returns. A comparison of unleveraged residential real estate in a prime Los Angeles zip code versus the S&P 500 from 1960 to today shows the S&P 500 yielding $1.1 billion compared to $7.7 million for real estate.
• Depth of Capital Markets: Vibrant public markets are crucial for robust economies. While direct retail investment in private markets was historically difficult, individuals now have indirect exposure through pension plans and other investment vehicles.

Strategic Investor Relations

Ultimately, the decision to go public or stay private involves more than just financial considerations. Business leaders must consider the type of company they aspire to be and develop a robust investor strategy, akin to their customer strategy. A clear investor strategy, defining target investors and their influence, is essential for guiding the company's direction, whether short-term or long-term.