The headwinds for Atlassian's IPO

Traders work on the floor of the New York Stock Exchange. Photo: Spencer Platt/ Getty.

Australian tech powerhouse Atlassian will seek an initial public offering in the United States, citing greater understanding and evaluation that will take place on Wall Street.

But the Atlassian IPO may be heading into a headwind.

Since the Twitter IPO turned into a flop, and with companies able to raise larger amounts in more funding rounds, many US tech companies have decided to stay private instead. And the amounts that can be raised through these private investments are gigantic, as SpaceX’s $US 1 billion injection from Google and Fidelity earlier this year and Uber’s $US 1.2 billion Chinese capital raising from earlier this month demonstrate.

The move to the private markets has been an ongoing conversation in Silicon Valley for a while. Here’s venture capitalist Josh Kopelman during a tweet storm on this topic earlier this year:

Kopelman was referring to a post Tomasz Tunguz, another venture capitalist, about late-round funding, which included a couple of awesome charts.

This one compares the number of private fund raising and IPOs that have raised more than $US 40 million. It shows private funding rounds have exploded since the GFC, taking a greater role in capital allocation in the US tech sector.

And according to Tunguz’s numbers, private funding isn’t just leading in large cash injections, it’s also leading in absolute dollars.

So why is this happening?

There are a number of reasons why a company would choose to remain private instead of going onto the market. For instance, it allows founders and early investors to remain in control without messy dual class share structures. For executives, being private means less filings, audits, press and publicity events.

And it also allows them to avoid the kind of Wall Street pressure that ex-Twitter CEO Dick Costolo had to endure for much of his tenure.

And there are also non-monetary reasons to be private, such as Kickstarter’s recent decision to reincorporate as a public benefit corporation:

“Kickstarter’s mission is to help bring creative projects to life. We measure our success as a company by how well we achieve that mission, not by the size of our profits,” the company website says. “That’s why we reincorporated Kickstarter as a Benefit Corporation in 2015.”

While on the other side of the deals, as Jonathan Marino pointed out earlier this year, private funding rounds are also preferred by the banks that underwrite IPOs. They get equivalent fees without having to share. And for a company that is already profitable, it’s not like Atlassian investors need a quick exit to make their multiples.

Of course, there are also reasons to go public. An IPO allows employees and investors to cash out, and for investors with a time horizon this alone may make early round investing possible. And as Facebook has shown numerous times in recent years, on top of the cash provided by an IPO, publicly traded shares themselves can be an integral part of a company’s war chest. But perhaps most importantly, the process of going through an IPO, and all the analysis that requires, can be beneficial in itself. Here’s legendary Silicon Valley investor Bill Gurley:

late-stage private companies have not endured the immense scrutiny that is a part of every IPO process. IPOs are remarkably intense, and represent the most thorough inspection that a company will endure in its lifetime. This is why companies and their board of directors agonize over whether or not they are “ready” to go public. Auditors, bankers, three different sets of lawyers, and let us not forget the S.E.C., spend months and months making sure that every single number is correct, important risks are identified, the accounting is all buttoned up, and the proper controls are in place. Conversely, these late stage private rounds have no such pageantry or process. There is typically just a single PowerPoint deck presentation.

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