Silicon Valley companies that stubbornly avoided the public markets could have hardly picked a better moment to change their tune.
For years, US start-ups stayed private for as long as possible, growing into multibillion-dollar giants in the private markets while testing the willingness of their backers to fund lossmaking businesses.
Now, as stock markets end the year on a euphoric note, they are going public in droves — older and larger than ever.
Public exchanges have this year welcomed 20 US venture capital-backed companies that had been privately valued at more than $1bn, according to a Financial Times analysis of Crunchbase data, beating the record set last year. Those companies reached a combined market value of $218bn upon listing, surpassing last year’s total even without a single company that rivalled Uber’s $82.4bn listing in size.
US companies in this year’s cohort had stayed private for 11 years on average, compared with about five years in 2011, illustrating how a “stay private longer” mentality has become commonplace in Silicon Valley. The short-term rental site Airbnb and data analytics company Palantir both waited at least a dozen years before going public this year.
Nick Giovanni, head of global technology, media and telecom investment banking at Goldman Sachs, said investors had asked as far back as 2014 why companies were staying private longer and whether the initial public offering markets were dead.
“We said, ‘No, it will be worth the wait’. And here we are, and it’s worth the wait,” Mr Giovanni said.
The shift to staying private for as long as possible has become an enduring feature of US capital markets, although it has few parallels in the rest of the world.
Out of the 270 private US venture-backed companies valued at more than $1bn, about one-sixth were founded at least one decade ago and have been a billion-dollar company for at least five years. But in China, only one out of every 10 have been worth $1bn for that long, and start-ups have been going public earlier and earlier on average.
In 2014, the average billion-dollar private Chinese company took about 14 years to reach public markets. In 2020, that timeframe has been cut in half to seven years.
Some investors have worried that US start-ups are spending their fastest-growing years in private markets, depriving ordinary investors of the opportunity to share in their gains.
“The degree to which they can command a positive valuation depends on how much growth is left in the story,” said Sarah Solum, head of US capital markets at the law firm Freshfields. “That’s the rub — they don’t want to go public too late in their growth trajectory.”
There are still signs that some Silicon Valley start-ups want to continue biding their time in private markets, helped by record sums raised by venture capitalists as well as new sources of capital, such as sovereign wealth funds.
One example is the payments company Stripe, which has recently held talks about a new round of funding that investors expect to value the company between $70bn and $100bn, according to people briefed on the discussions.
Stripe’s co-founders, the brothers John and Patrick Collison, have batted away questions about when they will take the 10-year-old company public, saying they have no “near-term” plans for an IPO.
Even at the low end of its expected valuation range, Stripe would become the largest venture-backed company in the US, according to CB Insights data, potentially surpassing the valuation Uber reached before it went public.
One person briefed on the company’s plans warned that the financing might not materialise and could stretch on into the new year. Stripe declined to comment on fundraising.
“There’s so much money available from private sources that there’s not a lot of downside to staying private other than employees who eventually want to have liquidity,” Ms Solum said.
For bankers and venture capitalists, the waiting period has arguably resulted in more lucrative payouts, even as it has tested their patience.
“The companies that would have gone public five years ago in smaller deals are now going public in bigger deals, and we’ve gotten through that period of waiting,” Mr Giovanni said. “The backlog is really, really healthy.”
Additional reporting by Patrick Mathurin and Chris Campbell