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[@alux] Why Companies Aren't Going Public Anymore

· 6 min read
[@alux] Summarizer
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@alux - "Why Companies Aren't Going Public Anymore"

Link: https://youtu.be/p7iOHnOe2JY

Short Summary​

The number of companies going public in the U.S. has significantly declined in recent decades due to increased private funding, stricter regulations, short-term market pressures, and acquisitions, leading companies to stay private longer. This trend raises concerns among economists that regular investors are missing out on early growth opportunities, wealth is concentrating in fewer hands, and decreased competition may stifle innovation.

Key Quotes​

Here are four quotes from the YouTube video transcript that represent valuable insights:

  1. "Going public is the moment when a company stops passing the hat among a few wealthy friends and opens up the door for everyone else to invest. You're trading a bit of control and a bit of privacy for the resources and credibility to play on a much bigger stage." (This succinctly captures the fundamental trade-off involved in IPOs).

  2. "Back in 1980, the median age of a company at IPO was just 6 years. But by 2021, the median age was more like 11 years. In other words, companies are now about twice as old and generally far larger by the time they go public." (This provides a concrete data point illustrating the trend of companies staying private longer).

  3. "Going public puts you on a treadmill of quarterly scrutiny. And once you step on, it is hard to step off. But staying private means you can be more patient without Wall Street's constant judgment." (This explains the pressure and short-term thinking incentivized by being a public company).

  4. "Economists and regulators worry that when companies stay private for longer, regular people miss out on the chance to invest in the early growth stages of a business, where the biggest gains often happen. Instead, those gains go almost entirely to private investors who were already wealthy to begin with." (This highlights the potential wealth inequality implications of fewer IPOs).

Detailed Summary​

Here is a detailed summary of the YouTube video transcript, presented in bullet points:

Key Topics:

  • Decline in IPOs (Initial Public Offerings) in the US.
  • Reasons why companies are choosing to stay private longer or indefinitely.
  • Consequences of this trend for investors, the economy, and competition.

Introduction:

  • IPOs have significantly decreased from 739 in 1996 to approximately 225 recently.
  • The number of publicly traded companies in the US has halved from over 8,000 to around 4,000 in the last 30 years.
  • The video explores the reasons behind this trend, its implications, and potential future scenarios.

What is an IPO and Why Go Public?

  • IPO Definition: A company's first sale of stock to public investors.
  • Example Scenario: A mechanic with a successful car seat business wants to build car engines, then entire cars, but needs significant capital.
  • IPO Process: Creating new shares and selling them to the public.
  • Underwriter Role: A bank helps determine readiness, capital needs, number of shares, and a realistic price range.
  • Benefits of Going Public:
    • Access to massive capital pools for expansion (factories, R&D, acquisitions).
    • Provides liquidity for founders, early employees, and investors.
    • Builds trust through audited financials, disclosures, and visible market price.
    • Stock can be used as currency for acquisitions and talent rewards.
    • More stable shareholder base.
  • Trade-offs: Giving up some control and privacy for resources and credibility.

The Downtrend in IPOs:

  • Chart analysis showing a clear downtrend in total yearly IPOs from the 1980s to 2024.
  • Companies are waiting longer to IPO, even successful ones.
  • A $1 billion valuation used to guarantee an IPO, but not anymore.
  • Examples:
    • Uber IPOed nearly a decade after being founded.
    • Airbnb IPOed 12 years after launch.
    • Stripe, valued at $100 billion, has no immediate IPO plans.
    • SpaceX, valued at over $400 billion, is also staying private.
  • Increasing number of public companies being taken private.

Reasons Companies are Staying Private Longer:

  1. Rise of Private Money:

    • Explosion of private funding sources (venture capital, private equity, sovereign wealth funds, hedge funds).
    • Companies can raise significant capital without an IPO.
    • Median age of companies at IPO has increased (6 years in 1980 to 11 years in 2021).

  2. Regulation and Compliance:

    • Increased regulations after corporate scandals like Enron and Worldcom.
    • CEOs and CFOs required to sign off on financials; internal audits required.
    • Being a public company is expensive (paperwork, audits, disclosures, investor relations).
    • Founders may find staying private simpler with private investor funding.

  3. Short-Termism:

    • Public companies are judged by Wall Street on a 90-day quarterly cycle.
    • Missing earnings targets can lead to significant stock price drops.
    • Pressure to focus on short-term results rather than long-term innovation.
    • Activist investors can push for changes like cost-cutting or selling the company.
    • Staying private allows for patience and long-term strategic planning.

  4. Mergers and Acquisitions (M&A):

    • Companies are often bought out before they reach IPO stage.
    • Big tech companies (Google, Apple, Meta) acquire startups for talent, technology, and to prevent competition.
    • Private equity firms buy companies, keep them private, and resell them later.
    • Some startups aim for a buyout from the start instead of an IPO.

Consequences and Concerns:

  • Regular people miss out on the opportunity to invest in early growth stages, where the biggest gains happen.
  • Wealth becomes more concentrated in the hands of private investors.
  • Stock market offers fewer high-growth opportunities for everyday investors.
  • Lack of oversight for large private companies can lead to hidden problems and potential collapses.
  • Regulations are important for investor protection and preventing fraud.
  • Mergers and acquisitions can lead to less competition, less innovation, and more power concentrated in fewer hands.
  • Example of Adobe trying to buy Figma highlights concerns about reduced competition.

Conclusion:

  • IPOs have changed; companies now tend to go public when they are already big.
  • There are benefits (founder freedom) and drawbacks (less early growth access) to the shift.
  • The future of IPOs is uncertain.