Pando

Josh Kopelman drops some knowledge on all you "private IPO-loving" unicorns

By Dennis Keohane , written on April 6, 2015

From The News Desk

This morning, First Round Capital partner (and, disclosure, Pando investor) Josh Kopelman went on a Tweet storm about a topic that is being discussed more and more these days: How fewer and fewer companies are hitting the public market, instead remaining private and raising truckloads of funding.

While the Series A Crunch is a topic that has been covered by pretty much anyone with an AngelList account and a blog, the question of whether or not it’s good for companies, and the startup ecosystem more broadly, to remain private as long as possible has been broached by a few.

The impetus for Kopelman’s storm was a post by Tomasz Tunguz entitled “The Runaway Train Of Late Stage Fundraising” in which the Redpoint Ventures partner tracks what he calls the frenetic state of the private market. Among the data points used by Tunguz to make that point “that the current investment levels aren’t yet justified by the exit environment,” is one tidbit tweeted out by Kopelman: 231 companies raised more than $40 million in growth rounds in 2014, by comparison, 240 venture capital-backed IT companies have gone public in the last 10 years.

The point being: Even though companies are staying private longer, there’s still an expectation they’ll go public at some point-- and the pressure to do so with more zeros mounts with every “UNICORN!” funding round. This stat suggests there’d have to be a wildly systemic change in our economy to absorb the same number of IPOs seen in the last ten years in the next year or so. The fear is this will end in tears, downrounds, and acquisitions for many, while a rarified few will enjoy going public at such a dominant stage that they get to avoid some of the pitfalls of post-IPO life. (Read: The Google playbook.)

But Kopelman examines the matter from a different perspective, questioning, to some degree, whether the lack of IPOs is robbing us the opportunity to observe capitalism’s version of the survival of the fittest.

While some bemoan the slow IPO market for robbing us of the pleasure of hailing the next big thing (and fattening the purses of venture capital funds), Kopelman points out that the longer companies stay private, the less we really know how viable they really are. Basically, by taking tons of venture money and avoiding an IPO, startups (mostly who proudly tout their unicorn status and $1 billion plus valuations) are avoiding sucking out loud.

As Kopelman points out in his tweets, this “private IPO phenomenon” allows companies to grow without the regulatory restrictions imposed by being public. However, he believes it is leading to stale valuations and risking creating new unicorns that don’t deserve the high valuation. “If there is one thing we can learn from the public IPO market, it's that our industry isn't always very good at pricing large companies,” Kopelman tweeted. He supports that statement with the points that by the end of 2011, 65 percent of that year’s IPOs were underwater, and that ⅓ of the IPOs in 2013 were also underwater by the end of that year.

His conclusion:

https://twitter.com/joshk/status/585115556468170753

Kopelman has a point. It is awfully cushy to be on something like Fortune's Unicorn List, especially if there are venture capitalists, private equity firms, and banks lining up to get into a pre-IPO deal for the next Facebook or Twitter. Another factor, the recent tech companies hitting the public market did so with less than spectacular fanfare.

The environment, especially in terms of the uncertainty of the public market, is something that companies with an excess of funding are avoiding at all costs if the number of IPOs this year is any indication.

Like Dropbox isn't sitting back watching how the entire Box IPO is panning out, glad that it isn't being scrutinized to the same degree. And how about the New York tech scene, I'm sure there are a lot of folks getting anxious about Etsy's impending IPO, a bellwether for the New York startup community that has been waiting a long time for a signature IPO.

At some point, however, things have to change.

As Spark Capital's Bijan Sabet pointed out in his own blog post earlier today on the rise of growth rounds, the financing schedule for promising companies in today's venture climate make the financing history of a company like Tumblr "look like a messed up company in today’s environment."

With everything expedited, and companies raising monster round after monster round on their way to billion dollar valuations, and then sitting pat, at some point, investment backers are going to want a return on investment. The trouble is, as Kopelman pointed out, the hype may exceed the actual viability of many of the unicorns as public companies. They also may be too expensive, or perceived to be too costly, for a merger or acquisition.

Kopelman said in his tweet storm that he's interested in looking back 10 years from now at how the current state of private IPOs shakes out; if 2015 continues to see a slow IPO market and more companies with billion dollar valuations, he may not have to wait that long.