How Large Must a Tech Company Be Before an IPO?

TL;DR

A technology company does not need $700 million or $1 billion in revenue to pursue an IPO. One capital-markets leader suggested that $200 million to $300 million in revenue, growth above peers, attractive unit economics, and a valuation above $2 billion can support a viable offering, while abundant private capital and founder reluctance are limiting supply more than investor demand.

Transcript

if you're public with 100 million of Revenue and a 10% growth rate your valuation is not going to be all that great but guess what if you're private at 100 million Revenue with a 10% growth rate it's not like you're better off like like you're just fooling yourself [Applause] hey man good to see you good to see you Brad how you I've been well how w... Read More

Key Insights

• The number of US public companies declined from approximately 6,500 to about 4,000 over 20 years. The reduction exceeds 40% and occurred during what the participants described as an exceptionally prolific period of American innovation and startup creation.
• Private equity-backed companies increased from roughly 1,900 to more than 11,000. This expansion helps explain why fewer businesses enter public markets, because private financing can fund companies for longer and may also provide secondary transactions that give shareholders liquidity.
• A technology company does not categorically need $700 million or $1 billion in revenue before going public. Data cited for software IPOs over the prior 10 years placed median revenue near $185 million and median growth above 50%.
• A credible modern IPO profile may include $200 million to $300 million in revenue, growth above comparable companies, and attractive unit economics. One capital-markets leader also suggested that the company should command a valuation of more than $2 billion after considering expected dilution.
• The IPO market may be constrained more by limited supply than weak demand. The investors said they would consider companies capable of compounding at 50% or more for five years, provided their entry valuations reflect the multiples available in current public markets.
• Private capital allows founders to postpone public listings even when an IPO market exists. Companies can raise substantial financing privately, and permitted secondary transactions can address employee or shareholder liquidity needs that historically encouraged businesses to pursue public offerings.
• Public ownership can raise a company’s performance standards by imposing greater accountability and operating discipline. Bill Gurley cited OpenTable’s public offering at a $10 million quarter, equivalent to a $40 million annualized revenue rate, as evidence that smaller businesses have listed successfully.
• Delaying IPOs can prevent ordinary investors from participating in earlier stages of company growth. The discussion notes that regulators and others worry that if businesses wait until reaching $1 billion in revenue, much of their potential value appreciation may remain within private markets.

Questions & Answers

Q: How much revenue does a technology company need for an IPO?

A technology company may be able to pursue an IPO with $200 million to $300 million in revenue, according to one capital-markets leader cited in the discussion. Revenue alone is insufficient. The company should also demonstrate growth above its peers, attractive unit economics, and a valuation exceeding $2 billion after accounting for dilution. Historical software IPO data cited in the conversation placed median revenue around $185 million.

Q: Does a software company need $1 billion in revenue to go public?

A software company does not necessarily need $1 billion in revenue before going public. Although one view presented in the debate claimed that markets have changed and companies now require that scale, cited historical data showed a median of about $185 million in revenue among software IPOs over the preceding 10 years. The discussion emphasizes growth, economics, valuation, and investor demand alongside revenue.

Q: Why has the number of US public companies declined?

The number of US public companies fell from roughly 6,500 to about 4,000 over 20 years while private equity-backed companies increased from approximately 1,900 to more than 11,000. The discussion attributes part of this shift to abundant private capital, which lets companies remain private longer, and to secondary transactions that can provide liquidity without requiring a public listing.

Q: Is weak investor demand preventing technology IPOs?

Weak demand is not necessarily the primary obstacle to technology IPOs. A capital-markets leader quoted in the discussion characterized the slow volume as a shortage of supply rather than demand. The investors expressed interest in buying companies that might compound at 50% or more for five years, as long as IPO pricing reflects prevailing public-market multiples and creates an attractive entry point.

Q: What characteristics make a company a strong IPO candidate?

A strong IPO candidate may have $200 million to $300 million in revenue, a growth rate above comparable companies, attractive unit economics, and an expected market value greater than $2 billion. One capital-markets leader said that such a valuation can support an offering of at least $200 million to $250 million, providing enough publicly traded shares for investors to establish reasonable positions.

Q: Why do founders choose to keep companies private longer?

Founders can keep companies private because substantial private financing remains available, even after interest rates rose and markets reset. Private investors may also permit secondary share sales, which can provide liquidity to employees and other shareholders. These alternatives reduce two traditional reasons for listing publicly: raising significant growth capital and enabling existing stakeholders to convert part of their ownership into cash.

Q: What are the potential benefits of becoming a public company?

Becoming public can raise expectations for company performance and encourage greater operating discipline. Bill Gurley argued that public status can help companies achieve more than they otherwise would and can strengthen the broader US financial ecosystem. Public listings also allow ordinary investors to gain exposure to growing businesses earlier, rather than leaving most appreciation exclusively to private-market participants.

Q: Why does IPO size and public float matter to investors?

IPO size matters because investors need enough publicly traded shares to build reasonable positions. One capital-markets leader suggested that a company valued above $2 billion could produce an offering of at least $200 million to $250 million. That amount of float can make participation more practical for institutional investors while supporting a functioning market for the newly listed company’s shares.

Summary & Key Takeaways

• The number of US public companies fell from roughly 6,500 to about 4,000 over 20 years, even as innovation and startup formation expanded. Meanwhile, private equity-backed companies increased from approximately 1,900 to more than 11,000, illustrating how business ownership and financing have shifted toward private markets.

• The central disagreement concerns whether companies now need enormous scale before listing. Some market participants suggested revenue thresholds of $700 million or $1 billion, but historical software IPO data cited in the discussion showed median revenue near $185 million and median growth above 50% during the previous decade.

• A capital-markets leader described a workable IPO candidate as having $200 million to $300 million in revenue, premium growth relative to peers, attractive unit economics, and a valuation above $2 billion. The resulting offering must also provide enough publicly tradable shares to support reasonable positions for institutional investors.