Many long-standing tech companies are going public not because they are strong businesses, but because their venture capital investors need a liquidity event after 15-20 years. Public market investors should be wary of these IPOs, as the underlying companies are often 'dead in the water' with historically poor post-IPO stock performance.
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The traditional IPO exit is being replaced by a perpetual secondary market for elite private companies. This new paradigm provides liquidity for investors and employees without the high costs and regulatory burdens of going public. This shift fundamentally alters the venture capital lifecycle, enabling longer private holding periods.
An IPO at a valuation that's flat compared to the last private round suggests the company is distressed. It implies the private markets are tapped out and the company is being forced to go public out of a desperate need for capital, rather than from a position of strength.
Top-tier private companies like Stripe and Databricks are actively choosing to delay IPOs, viewing the public market as an inferior "product." With access to cheaper private capital and freedom from quarterly scrutiny and activist investors, staying private offers a better environment to build long-term value.
Venture capitalist Bruce Booth explains that bankers, lawyers, audit firms, and VCs all have strong financial incentives for a company to go public. This creates systemic pressure that may not align with the company's best long-term interests.
Despite initial excitement, the market's enthusiasm for IPOs has cooled significantly. Many newly public tech companies, including high-quality ones like Figma, are trading well below their peaks or even their IPO price, indicating the floodgates for public exits have not truly reopened.
The current IPO market is bifurcated. Investors are unenthusiastic about solid, VC-backed companies in the $5-$15B valuation range, leading to poor post-IPO performance. However, there is immense pent-up demand for a handful of mega-private companies like SpaceX and OpenAI.
The dot-com era saw ~2,000 companies go public, but only a dozen survived meaningfully. The current AI wave will likely follow a similar pattern, with most companies failing or being acquired despite the hype. Founders should prepare for this reality by considering their exit strategy early.
Navan's IPO stumbled despite decent growth and improving margins, not because of its own fundamentals, but due to its relative unattractiveness. In the current market, public investors prefer putting capital into proven, profitable tech giants with strong AI stories over an unprofitable company at a high sales multiple.
Companies like SpaceX and OpenAI command massive private valuations partly because access to their shares is scarce. An IPO removes this barrier, making the stock universally available. This loss of scarcity value can lead to a valuation decline, a pattern seen in other assets like crypto when they became easily accessible via ETFs.
The successful $6.3B IPO of medical supply company Medline, not a tech darling, is the real sign that the IPO market is reopening. Its success proves deep, stable investor demand exists beyond venture-backed hype, signaling that the window is now truly open for giants like SpaceX and Anthropic to go public.
