Super tech financier Frank Quattrone says a lot of tech companies are waiting longer than they used to before they go public, which means a lower rate of return for investors.
Startups go public for lots of reasons: to reward early employees and investors, to gain liquidity to expand and do acquisitions, and to gain credibility to help with hiring and business development.
But tech companies are waiting a lot longer than they used to back in the 1980s and 1990s, which means investors can’t get the kind of returns they used to.
At an event last night sponsored by Wealthfront, Quattrone pointed out that when Intel went public in 1971, it raised only $8 million at a $53 million valuation.
If you had bought the stock then and held it, your return would be more than 1,400 times what you put in. That’s a compound annual growth rate of about 20%.
Contrast that with Zynga, which went public last year at a valuation of about $7 billion. If it rises by the same amount, it will be worth more than $9.8 trillion in 2050. Extremely unlikely.
This is true across the board. Quattrone compared a basket of big successful tech stocks that went public before 2000: Intel, Apple, Microsoft, Oracle, Cisco, and a few others. Their average IPO raised $63 million. If investors had put $1 into each of them, their average return would now be $374.
Compare that with successful post-2000 IPOs like Google, Salesforce, VMWare, LinkedIn, and so on. On average, they raised more than $700 million. It’s true that they haven’t been on the market nearly as long, but if you invested $1 in each of these stocks, you’d have an average fo $5 apiece today.
So why are companies waiting so long to go public? Quattrone listed several reasons:
- Investors demanded higher liquidity for public companies after the dot-com crash
- Investment managers changed their focus to mutual funds so were no longer interested in small allocations of recently public companies.
- There are fewer banks trusted to take companies public — every tech company wants Morgan Stanley or Goldman Sachs to lead their IPO. That means these banks only have time to focus on the big-value deals.
- Regulation got tighter with rules like Sarbanes-Oxley, which increases the paperwork and management overhead for public companies. He called it “a $10 million tax per year.”
- Secondary markets gave companies a way to reward founders and early employees.
Quattrone doesn’t want to see a flood of thousands of small companies trying to go public too early, which would “kill the golden goose.”
But he thinks that companies who do want to go public earlier have a good opportunity now: low volatility and 0% interest rates are driving investors back to the stock market.
LinkedIn showed that new tech IPOs can do very well (he called it “a nice John the Baptist” to have out there), and the JOBS Act is reducing some regulatory burdens — for instance, public companies will have looser Sarbanes-Oxley requirements for their first five years.
“It’s the best climate we’ve seen since before 2000,” he said.