4 Reasons Startups Are Delaying Their IPOs

The 2018 IPO market was one of the most active on record. In the first three quarters of 2018, 173 companies raised $45 billionmore than 30 were tech startups that raised $10 billion — a noticeable uptick from 2017 that had a total of 160 IPOs

Other companies may go public in 2019, such as Slack that confidentially filed to go public through a direct listing in February 2019; and other large, late-stage tech companies may follow suit. However, many startups may choose to stay private longer. 

According to a McKinsey Study titled “Grow Fast or Die Slowly,” the average age of technology companies that went public in 2014 was 11 years, and private funding rounds generated several decacorns and unicorns. 

Additionally, nine of the 10 top tech 2018 IPOs had a median age of 12. For example, Uber — incorporated in 2009 as UberCab — filed in 2018 with plans for a 2019 IPO.

The reasons vary, but some startups want to build the maturity of their company before an IPO. Or, the C-suite may want to avoid public-market pressure, so they would rather position the startup for acquisition. 

An IPO can be a hallmark of success but staying private longer can be beneficial to the long-term prosperity of a company. Here are four reasons why some companies have chosen to stay private for longer.

1. IPOs Can Be Costly

Debuting an IPO is not only time-consuming, but also expensive. A PwC report found that 83 percent of CFOs surveyed will spend more than $1 million on one-time costs associated with an IPO. 

For some small to mid-size startups, these high IPO expenditures may take a bite out of their bottom lines. 

Regulatory compliance can also be costly for companies that want to make a public offering. According to the PWC report, 20 percent of CFOs surveyed said they considered regulatory compliance costs if they go public.

Some of those costs include compliance with regulations from the Public Company Accounting Oversight Board, Sarbanes-Oxley, the Securities and Exchange Commission, EU regulators, Federal and State regulators, and Exchange regulators.

“Raising money from an IPO is an entirely tactical decision and should be weighed against all the other funding alternatives for private and public companies,” said Barry McCarthy, CFO of Spotify in a Financial Times report. “Many of the other choices are considerably less expensive than a traditional IPO.” 

McCarthy’s point is salient for Spotify since the music streaming service went forward with a direct listing — a less expensive alternative to an IPO.

If a startup is not big enough to support the cost of going public, then it’s best to stay private longer to grow the business.

2. Able To Scale Without Distractions

Going public stifles the autonomy associated with running a private company. A public company can’t pivot their business model or advance their products without considering its shareholders’ interests.

Also, public-market scrutiny requires increased disclosure and reporting that must be shared publicly. CFO prep for earnings calls, coupled with the SEC-mandated deadline for executing a quarterly or annual report, can be a significant distraction for the business as the staff tries to complete the report.

Private companies can expand their product suite, raise a private financing round (if needed), and ensure the company is closer to profitability without having to meet Wall Street expectations. 

Long-term investors will be pleased that the company has taken steps to grow their business, revenue, and valuation before an IPO.

3. Choose Investors And Control Your Cap Table

An IPO can complicate cap table management as some shares are sold and new stakeholders become investors in your company. 

Losing the ability to choose investors could expose a company to potential investors who have conflicts of interest or may be embroiled in geopolitical issues that could reflect poorly on the business.

Private companies can control their cap tables, choose their investors, and reduce their dilution as a result of issuing additional shares in a public offering.

4. The 2019 IPO Market May Heat Up But Subsequent Years Could Cool

The 2019 IPO market could heat up as unicorns such as Uber and Airbnb — as well as other late-stage companies — may go public. 

While some economists believe that these unicorns have been private for some time and their time to go public has come, others posit that these companies are attempting to make a public offering before an impending recession.

In fact, despite a robust IPO market in 2018, only 17 percent of companies that went public were profitable. 

The only other time so few newly public companies were profitable (19 percent) was in 2000 — right before the dot-com bust. 

The influx of unprofitable public companies signals to some IPO analysts that the IPO boom could cool off and an economic downturn may follow. 

Delaying an IPO can inoculate a company’s health from a turbulent stock market during a recession.

Bonus Tip: Staying private longer can be good for startups, but employees may need to liquidate a portion of their shares to fund life events today. Forge provides late-stage startups with programs that help companies create more liquidity events without sacrificing control.

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