Why Do Unicorn Companies Stay Private Longer?

TL;DR

Unicorns stay private longer because abundant private capital lets them raise money without accepting public-company costs, scrutiny, disclosure, lawsuits, and frequent market pricing. Remaining private can protect proprietary information and preserve control, but going public provides liquidity, acquisition currency, employee compensation opportunities, credibility, and broader access to corporate growth for retail investors.

Transcript

This is a story about privacy, specifically the privacy of keeping a company's ownership and operations out of the public domain. It seems like every day we hear about another so-called unicorn, a private company valued at over a billion dollars. It's not just the number, it's the size and how long they've maintained their privacy. I'm in a rush to... Read More

Key Insights

• The average journey to becoming a public company has lengthened from roughly seven years to 11 years, and many businesses now remain private for more than 10 years, which was previously considered around the maximum typical period.
• The number of unicorns has risen from virtually none in 2010 to more than 1,400, with a combined value exceeding $5 trillion, as successful private companies have gained access to substantial venture capital and growth equity funding.
• Public-company status is expensive and demanding, with even a micro-cap company paying at least $5 million for being public, while management also faces market scrutiny, stressful earnings periods, extensive overhead, disclosure requirements, and potential lawsuits.
• Private ownership can protect proprietary information until a company has established a widely recognized brand and attracted enough customers, reducing the risk that competitors benefit from disclosures about relationships between a business's knowledge and its capital.
• Private-market prices are set by the ultimate owner or transaction participant, while public-market prices are set continuously by marginal traders. Consequently, a private valuation mark may not equal the price produced by an actual trade.
• Publicly traded shares provide liquidity and acquisition currency, allowing companies to purchase other businesses with stock instead of relying entirely on cash or debt. Public shares can also support employee incentives and give workers more liquid opportunities to sell.
• The number of public companies has fallen from more than 7,000, and perhaps 8,000, about 25 years ago to roughly 4,000, reducing the range of publicly traded equities directly available to everyday investors.
• Investor strategy can shape a company's direction because different capital providers may encourage shorter-term or longer-term decisions. Business leaders should therefore define their target investors with the same clarity they apply when developing their customer strategy.

Questions & Answers

Q: Why are unicorn companies staying private longer?

Unicorn companies can remain private because large amounts of venture capital and growth equity funding are available outside public markets. Staying private also helps them avoid public-company expenses, earnings pressure, operational scrutiny, disclosure of potentially proprietary information, and lawsuits. Some businesses wait until they have established a recognized brand and signed up enough customers before considering a public listing.

Q: What costs discourage private companies from going public?

Public companies face substantial financial and managerial burdens. The transcript states that even a micro-cap company pays at least $5 million for being public, with larger companies paying more. Executives must also manage regulatory and market scrutiny, recurring earnings announcements, public-company overhead, extensive disclosures, and lawsuits. These obligations can make public ownership painful, expensive, and distracting for management.

Q: How does private capital allow companies to delay an IPO?

Venture capital and growth equity investors can provide substantial funding without requiring a company to sell shares through public markets. Because growth companies can obtain large amounts of money privately, they do not need to conduct an IPO as quickly to finance expansion. This availability of capital has helped extend the typical journey to going public from roughly seven years to 11 years.

Q: What information risks can arise when a company goes public?

Going public requires a company to release extensive information about its business and operations. Some of that information may be proprietary and difficult to protect through patents, particularly knowledge about how the company's capabilities interact with its capital. A business may therefore remain private until its brand is widely recognized and its customer base is sufficiently established to withstand greater disclosure.

Q: What benefits does a company receive from going public?

A public listing gives a company more liquid shares, stock that can serve as currency for acquisitions, and additional ways to reward employees through options and similar compensation. Public status can also create credibility with suppliers, employees, and other business partners. It opens opportunities to issue more shares, raise capital, and purchase companies without relying entirely on cash or debt.

Q: How are private-company valuations different from public-market prices?

In private markets, the ultimate owner or party completing a transaction effectively sets the price. In public markets, the marginal trader sets a price that can change every day or every minute. A highly valued private company may have an accurate valuation, but its stated mark can differ from the amount established through an actual trade, making valuation quality an important distinction.

Q: Why do delayed IPOs matter to retail investors?

Delayed IPOs leave retail investors with fewer public companies to buy and can keep them from participating directly in a company's earliest period of rapid growth. The number of public companies has declined from more than 7,000, and perhaps 8,000, about 25 years ago to around 4,000. By listing at a large valuation, a company may already have realized substantial gains privately.

Q: How should business leaders choose between public and private capital?

Business leaders should consider what kind of company they want to build, not merely which source of capital is available. Investors can influence or nudge a business toward shorter-term or longer-term decisions. Leaders should therefore create a clear investor strategy that identifies the investors they want and why, using the same level of clarity normally applied to customer targets and locations.

Summary & Key Takeaways

• More growth companies are delaying public listings, with the typical path to an IPO increasing from roughly seven years to 11 years. Abundant venture capital and growth equity funding make this possible, while public-company expenses, regulatory scrutiny, operational disclosure, earnings pressure, and the prospect of lawsuits make an early listing less attractive.

• Staying private protects proprietary information and lets owners establish valuations through negotiated transactions, although a valuation mark may differ from an actual trade. Public companies gain meaningful advantages, including more liquid shares, stock-based acquisitions, employee compensation options, business credibility, and access to further stock issuance for financing corporate growth.

• The decline from more than 7,000 public companies, and perhaps 8,000, to about 4,000 has reduced direct investment choices for retail investors. When valuable companies list only after substantial private growth, early gains are less broadly distributed, although pension plans and other investment vehicles can provide individuals with indirect private-market exposure.