I’m hearing (and reading) about how a lot of VC-backed tech companies will go public in 2016, due to a slowdown in the later-stage financing market. I’m not convinced, and it has nothing to do with how the global stock markets greeted 2016 with a resounding thud.
For starters, the latter-stage issue right now is tighter pricing, not a lack of capital availability. The Fed would have to raise rates much more substantially before mutual funds and other crossover investors stop chasing yield in alternative markets. So unicorns and other startups can still throw new money into their burn ovens, albeit often at less ambitious valuations.
Second, I don’t accept the implicit belief that there will be capital availability from the public markets (i.e., wide-open IPO window). Last year was the weakest for VC-backed IPOs since 2010 in terms of dollars raised. What’s more, the performance of these new issues was decidedly mixed (including among tech issues). Why exactly is 2016 going to be better? If you’re looking for answers from stock market prognosticators, you’ll have to look pretty hard.
Third, there’s an argument that companies have been staying private not so much because of capital supply, but because it has come with higher and higher valuations (read: less dilutive). If you’re going to get a valuation haircut in your next financing round—no matter the venue—then you might as well receive all of a public listing’s benefits. The trouble here is that many founders believe those benefits are easily outweighed by negatives like Sarbanes-Oxley compliance and pressures from short-term investors (let along the future prospect of activist investors).
To be clear, I generally believe that companies should go public when they can. It’s a sign of maturity to customers, a boon for employees, and a civic good for everyone else. For the companies themselves, going public instills what is often a much-needed dose of discipline. It’s why I repeatedly expressed surprise that more VC-backed companies weren’t going public when the public going was good. This may be the year that regret finally begins to set in, but that won’t be enough to result in the IPO wave that many are predicting.