Startups are increasingly choosing to remain private for extended periods, largely due to the rise of alternative capital sources. Recent data indicates that the median age of companies that have become private in 2023 has reached 13 years, up from 10 years in 2018. This trend underscores the shift in how startups approach funding and growth.
Growing Preference for Private Status
An analysis by Renaissance Capital shows that the trend of startups prolonging their private status is becoming more pronounced. More startups are accessing private funding, allowing them to avoid the challenges associated with going public.
Statistics on Companies Going Public
- The average age of companies going public has more than doubled between 1980 and 2024.
- In 1980, median revenue for IPO companies was $16 million (equivalent to $64 million in 2024 dollars).
- By 2024, median revenue for these companies increased to $218 million.
This growth suggests that startups are not only maturing in private but also achieving significantly higher revenues before considering an IPO.
The Rise of Unicorns
According to CB Insights, the number of “unicorns” — private companies valued over $1 billion — has exceeded 1,200 as of July 2023. Notably, OpenAI recently achieved a valuation of $500 billion, surpassing SpaceX’s $400 billion valuation, making it the highest-valued private firm globally.
Driving Factors Behind Staying Private
Experts attribute the increasing trend of staying private to several factors:
- Regulatory burdens associated with being publicly traded.
- Short-term market pressures that public companies often face.
- The influx of alternative investments providing ample funding to tech startups.
Investors, including sovereign wealth funds and family offices, have contributed heavily to this shift, driving growth in the private equity sector.
Alternative Capital Trends
Private equity assets under management have seen significant increases, rising over 15% annually in the past decade and surpassing $12 trillion. Projections indicate that this figure could double to approximately $25 trillion in the next decade. In North America, venture capital assets under management are expected to grow from $1.36 trillion in 2025 to reach $1.8 trillion by 2029.
Access to Liquidity for Employees
New digital platforms like Forge Global and EquityZen are facilitating access to liquidity for employees of private companies. Rather than waiting for an IPO, employees can now sell their shares on these marketplaces, enhancing overall cash flow and stability.
A Case Study: Klarna
Klarna, a Swedish fintech company founded 20 years ago, exemplifies this trend. After experiencing significant valuation fluctuations, it went public last month. The company was valued at $45.6 billion in 2021, largely due to investments from SoftBank, though its valuation dipped to $6.7 billion in 2022. Klarna’s current market capitalization stands at $15 billion, reflecting the volatile yet promising nature of private company valuations.
The Future of Startup Financing
Academics like Jay Ritter from the University of Florida emphasize that the motivations for going public have shifted. With numerous alternative funding options available, companies no longer need to rush into public markets primarily for capital. Ritter suggests that the surge of capital flowing into private investments could alter the landscape, potentially diminishing the likelihood of abnormal returns in the future.
The dynamic nature of startup financing is changing. As startups opt for alternative capital, the trend of extending private status is likely to continue, reshaping the landscape of public offerings.
