The number of US-listed companies has fallen from 8,000 in 1996 to approximately 4,300 in 2016. In the technology sector, private buyouts and acquisitions are shrinking the pool; Dell’s buyout and Microsoft’s takeover of LinkedIn are two notable examples. Furthermore, there has been a distinct lack of new entrants; only 14 tech initial public offerings (IPOs) have occurred this year, compared with an annual average of 49 since 1980. The chief reason for this is simple, companies valued at more than $1 billion, such as Uber, have elected to stay private.
However, this IPO drought shows signs of diminishing. Investors and employees are generating considerable pressure for companies to initiate a public offering. This is due to a variety of reasons: the need for more liquid stock to fund acquisitions is becoming more acute, it is generally more difficult to raise sufficient funds privately, and there is demand from public investors such as Walter Price. Indeed, Mr Price, who manages $4 billion of equities for Allianz Global Investors, told the Financial Times that he hopes to see more public tech companies.
Jim Goodnight, founder of Sas Institute, adopts a more cautious view, detailing, “There was a lot of pressure internally from some of the senior management that we ought to go public,”. Nonetheless, the bursting of the dotcom bubble intervened and Sas prospered as a private company. In reference to the greater regulation and the pressure from external investors that public companies are subject to, Mr Goodnight concludes, “Why would you want to go public and ruin your life?” His view is reciprocated by Jack Dangermond, founder of Esri, who stated, “You don’t have to go public to succeed and that story is not told to young entrepreneurs.”
Despite these opposing views, it cannot be denied that IPOs are a useful way for companies to raise capital when they are producing relatively little cash flow. However, the injection of money into private companies – $261 billion since 2010, according to PwC MoneyTree – has certainly alleviated that pressure. This is exemplified when comparing Google with Uber. Before Google’s IPO in 2004, the tech company had raised $36 million privately. Uber has raised almost 100 times that amount in a single funding round from one investor, the sovereign wealth fund of Saudi Arabia. The ride-hailing company has created a strong brand without going public; it is questionable whether IPO marketing will generate much new business for the company, or even alter opinions of investors who are deterred by their numerous legal battles.
Overall, Uber has raised $15 billion in debt and equity, further highlighting the disparity in money available to the current generation of entrepreneurs compared with the previous generation. Still, private fundraising in the tech sector has slowed this year, with one banker telling the Financial Times, “There’s only so many investors to go to see…The number of people who have no exposure to Uber and are large and [invest in] privates is a dwindling universe.” Although it is possible to keep extending the private lives of tech companies, many of them are reaching a tipping point. Snap Inc has hired bankers in preparation for a $25 billion IPO next year, and Uber is expected to list during the next few years.