Here in the UK, there is an intense debate about the dearth of IPOs, but even in the US, more and more venture capital-backed companies choose to stay private for longer rather than IPO. And according to Florian Ederer and Bruno Pellegrino, there is a case to be made that the dominance of big tech companies contributed to this trend.
Aug 10, 2023·edited Aug 10, 2023Liked by Joachim Klement
What i learned over the years. I've worked with a number of marketing- sales- and recruitment startups & smb’s. (The difference between startup and smb is less pronounced than startup founders probably like to admit).
They evolved from earlier companies, were the brainchild of a sales guy who took some large customers with him from his previous multinational employer or they could developed their funky startup stuff because they had a few very large customers for their more banal tech. (You can also go bust because of your funky-stuff investments btw).
Many if not most startups don't set out to compete with MS etc let alone replace them (Zoom was suddenly pulled into the light during covid but that was an accident - and they fell back again as well).
Often, like happens to be the case in business/capitalism, (young) entrepreneurs who have a little company or work for someone else, suddenly realize they have something that can be developed/exploited much further than their current circumstances/employer allow(s). That 'something' was often created on the request of a customer who not seldomly has an interest for it to be developed further. That's your first customer.
Other startups are two startups who worked together on one project and realized integrating their tech and story will amplify their chances.
So typically you can start your company with at least one or a few paying customers. (Based on my experiences the idea that entrepreneurs just decide to jump into deep water is nonsense. Entrepreneurs don't max out risk, they work hard to minimize risk. Otherwise they wouldn't survive. A few years ago the WSJ published an article on the 'just try and fail' startup mantra. It showed that most entrepreneurs/startup founders who failed the first time also failed the second time. I've met some of those...).
But the more rare 'strugglers without customers who made it while all the time being funded by loyal VC's who believed in them' examples are usually presented as the norm for the industry. Yet most startups are making a widget hoping to be bought. Many not so good startups are simply bought for their techies (acqui-hiring).
Startups, typically saas companies, there are now more than a 100.000 of them, have exploded since it is/was so easy to start one:
- Cheap money;
- You can hire all your needed technology on a monthly bases from other startups and from the behemoths;
- The 'startup-lifestyle' of techies who'd ipo-ed a little earlier, got wealthy and now became VC's (the average VC portfolio is basically a mini stock market, few of them indicate true insight in a companies potential).
- While for employees working at a startup brought status - even MBA's, McKinsey types and other consultants want(ed) to work there - although obviously not in entry roles;
- In the US you can pay your employees (partially) with 'future earnings' i.e. the IPO (but employees better read between the lines carefully).
Some entrepreneurs/VC's even become 'visionaries': Marc Andreessen 'Why AI will save the world'
Core message: don't regulate and don't tax AI - and that's good for Marc too.
Bottom line: startups mostly compete with each other (and absolutely adore publishing a behemoth logo on their customers-page, forgetting that thousands of companies work for Amazon...). There are dozens of similar companies in any tiny segment, whether a new segment or not. Just look at Scott Brinker's annually update martech landscape:
Over 11.000 marketing tech companies...Marketers, VP's of sales etc have the 'privilege' of trying to determine what to choose. Or they can roll the dice. Or do eeny, meeny, miny, moe.
For a pretty hilarious account of what it's like to work for a funky startup read Dan Lyons 'Disrupted'
As a veteran from Newsweek he too lost his job as the digitization of media progressed and he ended up at Hubspot. 50 +yo, at his first day in Boston no-one knew who he was or what to do with him (job negotiations had gone on for months...).
But since he was a journalist he was put in the (content) marketing room where a dozen or so straight out of college girls were ramming out blogs. (Hubspot used to have really serious blog diarrhea). In this room no-one was sitting on a chair, they were all seated on huge rubber balls in the orange company colors. Lyons refused and finally got himself a chair.
They were early with AI and created an AI 'blog generator' for customers: 'just write some keywords and the blog is produced automatically'.
But the blog generator was not that successful. A healthcare client received blogs titled 'The ten things we love about cervical cancer that you should love too'...
The interesting thing is that companies seem to have higher compliance costs if they have about 500 employees with lower costs for larger and smaller companies.
'The interesting thing is that companies seem to have higher compliance costs if they have about 500 employees with lower costs for larger and smaller companies'
If the French new they'd say 'yeah, we knew that all along'...
I thought I'd share some data, that we use in presenting the case for investing in late-stage private growth companies.
Back in 1999, the average of a company before IPO, was 4 years and a market cap of $493m. In 2022 the average age of the company is 12 years and $2.393bn.
Historically, the average amount of companies that exit via M&A is around 55-70%, the rest is via IPO.
What we're also noticing is that more recently the so called liquidity premium is actually a discount, depending on the company and sector.
Post the JOBS Act, there's no real reason for a company to go public until they've reached true maturity, if ever. There is an abundance of capital in private markets, that wasn't there 10 years ago.
Of the US companies generating $100m+ in revenue, 74% of them are private.
Also, VC investors want to extract as much of the growth out of the company before dumping it on the retail investors.
I'd also disagree about going public and competing with the behemoths, the true battle is with Wall Street that like consistent quarterly earnings, no irregularities etc. If there's anything unusual the stock is dumped quicker than crypto scam.
A good read. I think the governance burden is another contributing factor: maybe the same reason that over the last 18 months we've seen more public companies go private than we've seen IPOs. Public companies are subjected to a host of administrative and reporting burdens (e.g. SEC filings, Sarbanes-Oxley and FINRA compliance, quarterly "proctological" exams by Wall Street, etc.) that a private company can largely avoid.
Also, from the selling shareholder's perspective, sometimes selling to a strategic or financial buyer can offer a better valuation leaving the public market (and all it's administrative hassles) as a market of last resort.
What i learned over the years. I've worked with a number of marketing- sales- and recruitment startups & smb’s. (The difference between startup and smb is less pronounced than startup founders probably like to admit).
They evolved from earlier companies, were the brainchild of a sales guy who took some large customers with him from his previous multinational employer or they could developed their funky startup stuff because they had a few very large customers for their more banal tech. (You can also go bust because of your funky-stuff investments btw).
Many if not most startups don't set out to compete with MS etc let alone replace them (Zoom was suddenly pulled into the light during covid but that was an accident - and they fell back again as well).
Often, like happens to be the case in business/capitalism, (young) entrepreneurs who have a little company or work for someone else, suddenly realize they have something that can be developed/exploited much further than their current circumstances/employer allow(s). That 'something' was often created on the request of a customer who not seldomly has an interest for it to be developed further. That's your first customer.
Other startups are two startups who worked together on one project and realized integrating their tech and story will amplify their chances.
So typically you can start your company with at least one or a few paying customers. (Based on my experiences the idea that entrepreneurs just decide to jump into deep water is nonsense. Entrepreneurs don't max out risk, they work hard to minimize risk. Otherwise they wouldn't survive. A few years ago the WSJ published an article on the 'just try and fail' startup mantra. It showed that most entrepreneurs/startup founders who failed the first time also failed the second time. I've met some of those...).
But the more rare 'strugglers without customers who made it while all the time being funded by loyal VC's who believed in them' examples are usually presented as the norm for the industry. Yet most startups are making a widget hoping to be bought. Many not so good startups are simply bought for their techies (acqui-hiring).
Startups, typically saas companies, there are now more than a 100.000 of them, have exploded since it is/was so easy to start one:
- Cheap money;
- You can hire all your needed technology on a monthly bases from other startups and from the behemoths;
- The 'startup-lifestyle' of techies who'd ipo-ed a little earlier, got wealthy and now became VC's (the average VC portfolio is basically a mini stock market, few of them indicate true insight in a companies potential).
- While for employees working at a startup brought status - even MBA's, McKinsey types and other consultants want(ed) to work there - although obviously not in entry roles;
- In the US you can pay your employees (partially) with 'future earnings' i.e. the IPO (but employees better read between the lines carefully).
Some entrepreneurs/VC's even become 'visionaries': Marc Andreessen 'Why AI will save the world'
https://a16z.com/2023/06/06/ai-will-save-the-world/
Core message: don't regulate and don't tax AI - and that's good for Marc too.
Bottom line: startups mostly compete with each other (and absolutely adore publishing a behemoth logo on their customers-page, forgetting that thousands of companies work for Amazon...). There are dozens of similar companies in any tiny segment, whether a new segment or not. Just look at Scott Brinker's annually update martech landscape:
https://chiefmartec.com/2023/05/2023-marketing-technology-landscape-supergraphic-11038-solutions-searchable-on-martechmap-com/
Over 11.000 marketing tech companies...Marketers, VP's of sales etc have the 'privilege' of trying to determine what to choose. Or they can roll the dice. Or do eeny, meeny, miny, moe.
For a pretty hilarious account of what it's like to work for a funky startup read Dan Lyons 'Disrupted'
https://www.youtube.com/watch?v=RVSLLvHceSA
As a veteran from Newsweek he too lost his job as the digitization of media progressed and he ended up at Hubspot. 50 +yo, at his first day in Boston no-one knew who he was or what to do with him (job negotiations had gone on for months...).
But since he was a journalist he was put in the (content) marketing room where a dozen or so straight out of college girls were ramming out blogs. (Hubspot used to have really serious blog diarrhea). In this room no-one was sitting on a chair, they were all seated on huge rubber balls in the orange company colors. Lyons refused and finally got himself a chair.
They were early with AI and created an AI 'blog generator' for customers: 'just write some keywords and the blog is produced automatically'.
But the blog generator was not that successful. A healthcare client received blogs titled 'The ten things we love about cervical cancer that you should love too'...
Good point. there is a brand new paper out that tries to measure the cost of regulation in companies: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4534628
The interesting thing is that companies seem to have higher compliance costs if they have about 500 employees with lower costs for larger and smaller companies.
'The interesting thing is that companies seem to have higher compliance costs if they have about 500 employees with lower costs for larger and smaller companies'
If the French new they'd say 'yeah, we knew that all along'...
I thought I'd share some data, that we use in presenting the case for investing in late-stage private growth companies.
Back in 1999, the average of a company before IPO, was 4 years and a market cap of $493m. In 2022 the average age of the company is 12 years and $2.393bn.
Historically, the average amount of companies that exit via M&A is around 55-70%, the rest is via IPO.
What we're also noticing is that more recently the so called liquidity premium is actually a discount, depending on the company and sector.
Post the JOBS Act, there's no real reason for a company to go public until they've reached true maturity, if ever. There is an abundance of capital in private markets, that wasn't there 10 years ago.
Of the US companies generating $100m+ in revenue, 74% of them are private.
Also, VC investors want to extract as much of the growth out of the company before dumping it on the retail investors.
I'd also disagree about going public and competing with the behemoths, the true battle is with Wall Street that like consistent quarterly earnings, no irregularities etc. If there's anything unusual the stock is dumped quicker than crypto scam.
A good read. I think the governance burden is another contributing factor: maybe the same reason that over the last 18 months we've seen more public companies go private than we've seen IPOs. Public companies are subjected to a host of administrative and reporting burdens (e.g. SEC filings, Sarbanes-Oxley and FINRA compliance, quarterly "proctological" exams by Wall Street, etc.) that a private company can largely avoid.
Also, from the selling shareholder's perspective, sometimes selling to a strategic or financial buyer can offer a better valuation leaving the public market (and all it's administrative hassles) as a market of last resort.