By Monika Balavakaite, Writing Analyst at Unicast Entertainment
2020 saw a surge in the number of companies going through an Initial Public Offering (IPO), which was heavily driven by the boom of SPAC mergers; the number of IPOs in the United States grew to 407 in 2020, roughly a 108% increase from the preceding year, whilst SPAC IPOs raised nearly twice as much in 2020 than they did in the previous 10 years combined. The IPO market hasn’t seen similar movements since the dot com bubble of the late 1990’s, which notably affected high-tech IPOs and altered trends that still prevail today. Prior to the collapse of the technology bubble, the median age of a newly public tech company was 4 years, but this has since steadily risen, and in 2020 the median age stood at 12 due to increasingly more companies delaying IPOs, sparking the discussion around why companies are waiting longer to transition from private to public.
Firstly, going public can limit the autonomy leaders have in dictating how the company is run. Keeping the public and shareholders satisfied becomes a vital objective, which can result in vast criticism and the appointment of new leadership if this aim isn’t met. Alternatively, pressures to increase shareholder value can lead to long term growth being sacrificed for short term profits. Thus, by postponing the move to a public company, leaders can retain decision making power which allows them to execute desired changes without scrutiny from shareholders or the public. Jaeson Ma, the founder of East West Ventures, and the co-founder of 88Rising and Stampede Ventures, discussed the rising pre-IPO age in an interview with Unicast Entertainment, acknowledging that “the responsibility to be fully transparent with the public and be scrutinised” can be a vast challenge for founders and executives.
Moreover, the direct and indirect transaction costs of an IPO, as well as the additional annual costs associated with operating as a public company, are huge. The largest direct cost of an IPO comes from underwriting fees, which tend to be around 6.5% to 7% for a $100 million IPO. Firms also face other vast expenses such as legal, auditor, listing fees and more, which pose an immense risk if the foreseen advantages of going public do not materialise. In addition to this, public firms must abide by costly regulatory requirements. Companies have to file financial reports with government agencies such as the US Securities and Exchange Commission (SEC), which requires statements to be prepared according to US Generally Accepted Accounting Principles (GAAP) and audited by a certified public accounting firm, which is another greatly time consuming and expensive responsibility.
Furthermore, it has become easier to access private funding which has resulted in companies undertaking larger and more frequent private financing rounds prior to their IPOs, which is a matter of mixed opinions. Staying private for longer arguably allows firms to better prepare for an IPO by building maturity and implementing long term strategies that will fuel sustainable growth. However, others have highlighted that giants such as Amazon and Apple went public within 5 years of being founded, which has allowed public investors to take advantage of their increasing valuations. Hence, staying private for longer debatably limits the benefits investors can reap from companies who build up much larger private valuations before going public.
Overall, a successful IPO can immensely benefit a company, but operating as a public firm comes with substantial costs and risks given the volatility of the stock market. This, along with the changing nature of fundraising, has allowed private companies to grow larger and older before going public, if they decide to go public at all.
To hear more of Jaeson’s insights on the benefits and drawbacks of IPO’s and more, watch his full interview with Unicast here: https://youtu.be/ZD6upx_Ts1M
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