While media often highlights the costs of being public, the valuation multiple is an overlooked benefit. A consistently growing small business can command a 20x P/E ratio, far exceeding the typical 3x cash flow multiple offered in a private equity buyout.
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Contrary to the prevailing wisdom of staying private as long as possible, VC Keith Rabois counsels his portfolio companies to pursue an IPO once they hit ~$50 million in predictable revenue. He believes the benefits of being public outweigh the costs much earlier than most founders think.
Public serial acquirers like Constellation Software exploit a valuation arbitrage. They buy private niche businesses at low multiples (e.g., 5x EBITDA) which are then automatically revalued at the parent company's much higher public market multiple (e.g., 28x EBITDA), creating significant shareholder value on day one.
The VC model thrives by creating liquidity events (M&A, IPO) for high-growth companies valued on forward revenue multiples, long before they can be assessed on free cash flow. This strategy is a rational bet on finding the next trillion-dollar winner, justifying the high failure rate of other portfolio companies.
Acquiring smaller companies at a 5-6x EBITDA multiple and integrating them to reach a larger scale allows you to sell the combined entity at a 10-12x multiple. This multiple expansion is a powerful, often overlooked financial driver of M&A strategies, creating value almost overnight.
EquipmentShare's IPO was "effortless" because it checked all the boxes for the current market: billions in revenue, high growth at that scale (47%), and profitability. This success contrasts sharply with the struggles of smaller tech companies, defining the new standard for a smooth IPO.
While many private founders fear going public, David George of a16z claims he's never met a public CEO who regrets it. Key benefits include easier and often cheaper access to capital compared to private markets, increased transparency, and the discipline it instills. The narrative of public market misery is overblown for most successful companies.
Private market valuations are benchmarked against public multiples. Currently, public SaaS firms with 30% growth trade at 15-20x revenue, twice the historical average. If this 'bedrock price' reverts to its 7-8x mean, it will trigger a cascade of valuation drops across the private markets.
To generate returns on a $10B acquisition, a PE firm needs a $25B exit, which often means an IPO. They must underwrite this IPO at a discount to public comps, despite having paid a 30% premium to acquire the company, creating a significant initial value gap to overcome from day one.
Venture capitalists often have portfolio companies that are profitable and growing but will never achieve the breakout public offering VCs need. These companies can become a distraction for the VC and can be acquired by PE investors who see them as attractive, stable assets.
High SaaS revenue multiples make buyouts too expensive for management teams. This contrasts with traditional businesses valued on lower EBITDA multiples, where buyouts are more common. The exception is for stable, low-growth SaaS companies where a deal might be structured with seller financing.
