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Why are Companies Staying Private Longer: Expert Analysis on This Growing Trend

By Darin Soat, Jun 17, 2024

Psychedelic image featuring multiple overlapping Wall Street signs with vibrant green, purple, and yellow colors. The image is abstract and visually dynamic, representing the concept of companies staying private longer.

In recent years, there has been a noticeable trend of companies choosing to stay private longer before pursuing an initial public offering (IPO). This shift is reshaping the investment landscape and offering new opportunities for accredited investors. In this article, we will dive into the reasons behind this trend and explore the benefits for companies to stay private longer, and why that has led to the need for a pre-IPO investment platforms like Linqto. This analysis will provide you with valuable insights to enhance your investment strategies, particularly in the pre-IPO space.

Understanding the Growing Trend of Companies Staying Private Longer

Historically, companies would usually raise capital from investors while they were private, scale to a point where it was clear that the business model could succeed, then go public to get access to additional funding. Now, a new playbook has been deployed for private companies. With so much capital now in the venture capital space, companies are not only proving out their business model while private, but also using additional venture capital money to capture as big of an audience while possible, all while running at a loss, called Blitzscaling. Once they believe the company has captured a wide enough audience, they’ll likely aim to IPO or seek another liquidity event such as a sale.

Bar chart "The Liquidity Problem" showing the private and public value creation of companies like Apple, Microsoft, Amazon, Google, Facebook, Twitter, Airbnb, and Coinbase. The chart highlights that most value is generated while companies are privately owned.

IPOs and Wealth Creation

To highlight the above point, IPOs have historically been a significant wealth creation event for individual investors. Early on, companies like Amazon, Microsoft, and Apple have allowed investors to partake in their extraordinary growth stories. For instance, Amazon’s IPO in 1997 was a pivotal moment that transformed it into a global retail giant, and most of its growth has happened since it’s been public. Similarly, Microsoft’s 1986 IPO and Apple’s 1980 IPO were both big for the companies, but bigger for those who invested since they’ve been pubic.

However, there’s been a noticeable shift recently. Companies such as Twitter, Coinbase, and Airbnb all chose to stay private longer, generating substantial value while public, and a lot less value while public. When it is time to go public, companies are now working on the perfect timing to do so. For example, our portfolio company Turo continues to update their S-1 indicating a desire to go public, but when they go public remains a mystery. Nevertheless, companies are staying private longer because going public isn’t something that happens at any time, it needs to wait for the right time. The chart below tells quite the story.

And this isn’t just amongst those companies, it’s a trend industry wide.

Graph titled "Size and Age of IPO Companies Have Increased" showing the average IPO size in millions and median age in years for companies across four time periods: 1980-89, 1990-98, 1999-2000, and 2000-2020. The graph indicates a trend of increasing IPO sizes and company ages over time.

But why is this? Well, we’re going to highlight five reasons that explain this, and how you can leverage this trend to access companies where value is being made today. Have you considered investing in pre-IPO opportunities? What benefits and challenges do you see? Your input enriches our community’s understanding and could help guide future investors. Comment now!”

Profit from Delayed IPOs

Top 5 Benefits of Why Companies Stay Private

1. Financial Privacy:

One of the most significant advantages of staying private is the ability to maintain financial privacy. Public companies are required to release quarterly and annual financial statements, which means they have to disclose detailed information about their revenues, profits, expenses, and other key financial metrics. This transparency can expose a company’s strategies and vulnerabilities to competitors and market speculators. Private companies, however, are not bound by these disclosure requirements, allowing them to operate under the radar and protect sensitive information from public scrutiny. For a deeper understanding of the complexities involved in going public, you can explore this detailed article on the IPO process.

2. Control and Flexibility:

Staying private offers a significant advantage in terms of control and flexibility. Public companies often face pressure from shareholders and Wall Street to deliver short-term results, as executive compensation packages are frequently tied to stock price performance. This pressure can lead to a focus on immediate profitability at the expense of long-term strategic goals. For instance, public companies might cut essential R&D spending or lay off employees to meet quarterly earnings targets. In contrast, private companies are not subject to these pressures. The founders and management team can make decisions that align with their long-term vision without worrying about the short-term reactions of the stock market. Furthermore, the risk of hostile takeovers is significantly reduced for private companies since their shares are not freely traded on the open market. This is discussed in more detail in the pre-IPO investing article.

3. Access to Capital:

The landscape of capital access has dramatically shifted over the past few decades. In the past, companies often went public to access large amounts of capital needed for expansion. Today, there is a robust ecosystem of venture capital, private equity, and other private funding sources. These investors are willing to provide significant amounts of capital to promising private companies, allowing them to grow and scale without the need to go public. This influx of private capital has enabled companies to not only develop their products, but also scale broadly all while remaining private. The ability to raise large sums from private investors has reduced the urgency for an IPO, allowing companies to bide their time until they are truly ready for the public markets. For more information on the current landscape, check out the 2024 IPO landscape article.

Bar chart titled "Global Venture Capital Investment, 2004–2019" displaying annual venture capital investment in billions of dollars from 2004 to 2019. The chart shows a significant increase in investment, reaching $308 billion in 2018 and $257 billion in 2019.

4. Regulatory Environment:

The regulatory burden on public companies is substantial. The Sarbanes-Oxley Act of 2002, enacted in response to corporate scandals, introduced rigorous compliance requirements for public companies. These regulations aim to protect investors by improving the accuracy and reliability of corporate disclosures. However, complying with these regulations is costly and time-consuming. Public companies must invest heavily in compliance infrastructure, including hiring legal and accounting experts, which can be a significant drain on resources. In addition to Sarbanes-Oxley, public companies must adhere to a myriad of other regulatory requirements imposed by the SEC and other regulatory bodies. This regulatory burden can detract from a company’s focus on its core business operations and growth strategies. Private companies, by avoiding these requirements, can allocate more resources to innovation and strategic initiatives.

5. Liquidity Alternatives:

While staying private offers many benefits, companies and their investors still need liquidity. This need has given rise to secondary markets where private company shares can be bought and sold. Platforms like Linqto, Forge, and Zanbato have created marketplaces for private company shares, providing liquidity options for early investors, employees, and founders without the company having to go public. These secondary markets enable stakeholders to realize some value from their investments while the company remains private, maintaining operational control and strategic flexibility. This development has made it feasible for companies to stay private longer, balancing the need for liquidity with the benefits of remaining private. For more insights into how secondary markets function and their benefits, read this article on IPO exit strategies.

Benefit from Private Market Exclusivity

Conclusion: Why Companies Stay Private Longer

The trend of companies staying private longer is driven by a combination of financial privacy, control over company direction, ample access to venture capital, regulatory burdens, and the availability of secondary markets. This strategy allows companies to focus on long-term growth and stability, providing significant opportunities for accredited investors in the pre-IPO space. As the landscape continues to evolve, understanding these dynamics will be crucial for making informed investment decisions. For further insights into IPO exit strategies, the 2024 IPO landscape, and the process of going public, be sure to explore the linked articles.

Star-shaped diagram titled "Top 5 Reasons Companies are Staying Private Longer" listing the reasons as: 1) Market Size and Growth, 2) Control and Flexibility, 3) Access to Capital, 4) Regulatory Environment, and 5) Liquidity Alternatives.

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Darin Soat

Darin Soat

Darin Soat is Linqto's Head of Community and Education. Prior to joining Linqto, he spent half a decade in investment banking doing mergers and acquisitions in the healthcare and technology industries, most recently in San Francisco for Cain Brothers. While in investment banking, Darin held his FINRA Series 63 & 79 licenses. Darin also created one of the leading business and economics-focused YouTube channels, and has gained over million subscribers. He is based in Los Angeles.