Youthful IPOs Are Dope
And Why Extended Adolescence Is Not Good for Tech Companies
Lemonade went public last month, a short five years after its founding. Time was when it would have been obvious that a company at Lemonade’s age and stage would go public, and many of the most iconic tech companies — like Apple, Microsoft, and Amazon — were roughly our size when they IPO’d.
But it’s become trendy to go public ever later.
Twenty years ago, the median age of a company going public was four; ten years later it was fourteen.
This change is also reflected in the ever larger revenues of tech companies at the time of their IPO:
The shift towards geriatric IPOs has been fueled by a glut of late-stage VC money. With funds now able and willing to cut multi-billion-dollar-sized checks, tech companies increasingly opt to stay nestled in the protective waters of venture capital, long after their forebears were forced to seek their fortunes in the open seas of the public markets.
No doubt, being private is more cozy: less scrutiny, less transparency, less accountability, less adversity, less volatility, less compliance — and often higher valuations. What’s not to like?
Two things.
First, a cocooned existence can lead to the corporate equivalent of ‘extended adolescence.’
It’s questionable whether delayed adulthood is good for humans — and I’m not sure it makes for great companies either.
At worst, it seems to beget dodgy governance, frat cultures, and business plans that neglect profitability.
Without naming names or pointing fingers, it seems better to emulate the discipline, culture, and resilience of the iconic brands that came of age as public companies, over those that went public only after their growth spurt was over.
Second, it stunts growth post-IPO. 2019 was a bumper year for stocks of all kinds, yet tech IPOs underperformed to a degree not seen since 1995, and for good reason. Investors questioned whether the companies heaving themselves onto the public were aligned to make money with them, or just cashing out at their expense. Apple, Amazon, and Microsoft delivered spectacular returns to their public market investors, engendering mutual confidence, which enabled those companies to grow ever bigger with public market capital. That has been a rewarding cycle for investors and companies alike — but it is contingent on companies going public while much of the value creation lies ahead of them:
A growth company’s IPO valuation must be a fraction of its potential value.
None of which is to say that youthful IPOs are easy. Valuations — set by the collective judgement of the market rather than your friendly VC — can be a let down; volatility — never fun — hits the small and unproven disproportionately and the overheads can feel top heavy on a slender body. No, the claim is not that it is easy, but that value is often created by doing the hard thing.
Time was when it would have been obvious that a company at Lemonade’s age and stage would go public. I don’t generally hark back to bygone eras, but in this case I’ll make an exception!
