The intersection of public and private markets is an increasingly interesting topic. In an earlier post I looked at why private companies are reluctant to go public. This is in part due to the poor reception many recent tech IPOs have received in the marketplace.
The disconnect between public and private technology companies is nothing new. In an excellent post @modestproposal notes how the technology life cycle helps explain the current friction. At present the public markets are weighted toward big, mature cash-rich technology companies. The public markets are demanding these companies return more of their cash to shareholders.
Whereas in the private markets all investors at the moment are interested in is growth. The degree to which public companies are investing they are often doing so by investing in private, startups. Here is where venture capitalists are stepping into the breach.
The bottom line from @modestproposal is this:
I see very little reason to believe that tech and public equity investors will get over their differences and start seeing eye to eye. As a result, expect more activists, more proxy fights and more tech companies looking to have dual class share structures.
Conor Sen is has also touched on this issue in a couple of recent posts. In one post he talks about how in Silicon Valley “there’s just not enough “stuff” to go around.” Talent wars, spiraling rents etc. are all signs of a overheated market that can’t put to work, efficiently, all the capital being put to work.
For Sen the question is whether the so-called unicorns will be able to squeeze through the IPO window in a way that allows for a happy ending to this story. Private capital can for only so long fund the technology boom. At some point these companies will have to go public to provide liquidity through the system. Sen notes that might be tough:
Most of the tech IPO’s of this cycle have ranged between disasters and underwhelming. And yet there are 80+ unicorns in the pipeline, all of whom are dreaming of IPO riches to afford a middle class life in the Bay Area. Companies that…are trying to avoid going public as long as possible. While I’m always impressed by the talents of my friends in I-banking, it strains credulity to think that public investors will continue to line up at the trough for IPO’s when so few of them are winners.
So Silicon Valley is in a very real way at a crossroads. Companies are reluctant to come public because they see the rigors of the public markets as a challenge. In the most recent wave of IPOs many companies have “broken.” However at some point the system needs to refresh itself with public capital. Therein lies the conundrum.