If you have spent any time with me over the last decade you have heard me discuss my thoughts on why a drought in IPO’s is not necessarily healthy for the average investor. I recently ran across an article by Karen Firestone of CNBC that looks deeper into this potentially troubling trend (“Ordinary investors are the real losers in the tech IPO drought” - link below).

For most of my investing career, the stock market has been the most efficient way for ordinary investors to gain access to the growth segment of the economy. From the article: “For decades, individuals have participated in the fastest growth segments of the economy by making stock investments through their pension plans, 401(k) accounts and mutual funds. The underlying owners of the majority of these assets are households and individuals.”

However, in the last five to ten years, the lack of tech (and other) IPO’s has potentially changed this dynamic. From the article “Consider that between 1995 and 1999, there were a total of 768 tech IPO’s, an average of 153 per year, including household names like Amazon, eBay and Yahoo. By contrast, during the most recent five-year time period, there have been a total of 106 technology IPOs, an average of only 21 a year.”

Okay Marc, so the number of IPO’s has dropped. As an investor, is that really an issue?

I think it potentially could be, and here is why. The number of growth-oriented companies in our economy has not decreased, however, the number that the average investor can access through the public stock markets has. From the article: “Once upon a time, high-growth tech companies sought capital by offering ownership to the public rather than to a select group of elite private investors, and this lifted the fortunes of regular people.” This is not necessarily the case anymore. If you are an ‘elite private investor’ that can access these opportunities then you have nothing to worry about. If you are not, well…

Many of today’s Founders and CEO’s have no desire whatsoever to go public. The entire corporate strategy is to grow the company rapidly and eventually sell the company to a larger industry strategic. From the article: “Until a decade ago, the goal of a successful tech start-up was to go public, which would raise additional funds for expansion and allow the founders and early investors to recoup some of their, money hopefully at a nice profit. Today’s new companies don’t need or even want the public’s money.”

Don’t get me wrong. There is absolutely nothing wrong with this strategy. I completely understand it. However, if you are a long-term investor (like most of us) and primarily rely on the publicly-traded stock markets (like most of us) – this strategy might cause you to miss out on some interesting opportunities.

I am not going to lie, not all investors agree with me that this is an issue. They point out that many of these growth companies are being acquired by larger, publicly-traded stocks that average investors can access. So what is the problem? From the article: “Some argue that if young, innovative firms are acquired by the large platform giants, such as Facebook, Google, or Apple, the public would continue to benefit by owning the parent stock. However, the impact of a small add-on acquisition to a stock valued at hundreds of billions of dollars is, by definition, less powerful than if that company remained independent, at least for several more years.” Private equity and Venture capital firms understand this dynamic. That is one of the reasons they are helping to keep these companies privately-held for longer periods of time.

Sadly, I do not have a crystal ball. No one knows for sure if the trend to stay private longer will persist. Successfully navigating the private markets can be difficult, time consuming and expensive (with respect to fees). I still believe that liquid markets such as stocks and bonds should remain the cornerstone of a diversified investment portfolio. However, if you want greater access to innovative, disruptive and transformative companies, you have to access the private markets – warts and all.

Investors I talk to have strong (and sometimes contradictory) opinions to what I am saying here. I am of the belief that listening to and engaging dissenting opinions makes us stronger. I would love to hear what you think…

(C) Marc Patterson 2020

Ordinary Investors are the Losers

To put it mildly, the last few years have been challenging ones for both the venture capital and private equity funding markets. Companies that raised capital in 2020 and 2021 often did so at a favorable valuation, and with the expectation that they could tap additional rounds of funding a year or so down the line. As we have all discovered, that has not necessarily been the case.

Average Investors Lose Without IPO's

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