Private companies — especially those in tech — are raising billions of dollars to delay, and sometimes even shun, a path to public markets. These efforts are creating vast wealth for employees and early-stage stakeholders, while shutting out most people who can’t invest in them through things such as 401(k) retirement accounts provided by some US companies. The numbers show a dramatic shift from just a few decades ago, and the trend has become even more stark as initial public offerings (IPOs) have receded since a pandemic-era frenzy. As a result, a relatively small group of people have access to the upside while the vast majority of potential investors can only watch from the sidelines.
Has the number of public companies declined?
Yes. Over the past two decades, the number of publicly listed companies around the globe has been shrinking. In the US alone, the number of publicly traded companies has dropped by nearly half, from roughly 7,500 in 1997 to fewer than 4,000 today, according to the Center for Research in Security Prices.
Why are companies staying private?
Professional investors, especially institutions, have been increasingly turning to private companies; while they carry more risk, they’re drawing an ever-larger share of the capital available. This shift in attention — and investment — to the private markets has resulted in companies such as OpenAI and SpaceX having an almost insatiable amount of demand from would-be buyers. The checks being cut just keep getting bigger and bigger.
Elon Musk’s SpaceX just hit a valuation of $350 billion, a number that would place it among the 25 largest companies in the S&P 500. Sam Altman’s OpenAI raised $6.6 billion in new funding, bringing its valuation to $157 billion. Fintech giant Stripe Inc. bought back shares at a roughly $70 billion valuation. And software company Databricks Inc. just raised $10 billion in new funding, taking its valuation to $62 billion.
As long as early-stage investors and employees are happy, the companies benefit from a more lax regulatory environment and don’t have to deal with activist investors pushing for change, or disclosing trade secrets and other matters that the firms would rather keep private.
How much money is tied up in these companies?
It’s something to the tune of about $3 trillion for private equity-owned companies alone, as of October, according to a report from Bain & Co. Private equity firms, which raise funds to take or keep companies private, are dealing with a logjam of companies that they need to either take public or sell.
That number is likely similar for the traditional venture capital community, depending on the data. There are currently more than 1,400 venture-backed unicorns — companies valued at more than $1 billion — worth roughly $5 trillion in total, data from PitchBook show.
The data show there are more than 57,000 private US companies with roughly a third of those fitting the mold of late-stage and venture growth startups — a group that’s typically prime for public listings.
“It’s interesting to see companies like Databricks and Stripe continue to raise from unlimited capital to stay private, though they are using that money to reduce the pressure staying private causes,” said PitchBook analyst Kyle Stanford. “Most companies can’t pull that lever, and private capital is limited for the vast majority of companies.”
How are private companies valued?
The same as public companies — they’re valued based on what investors are willing to pay for a stake in them. The difference is that whereas the going price for a public company is updated and displayed in real time on stock exchanges during trading hours, the price paid to buy shares in a private company is in many cases a closely guarded secret, with the valuation occasionally disclosed in a press release after a rare funding round.
What types of oversight exist for private companies?
One important thing about being private: the company technically doesn’t have to share any details of their business with the public. Yet many of the largest companies still do share details about how the business is operating, even without it being obligatory.
Can you invest in a private company?
It’s difficult for retail investors to buy shares of a private company, unless they’re accredited investors — people who make a certain amount of money or have certain licenses. Those rules exist in order to protect retail investors. If a person becomes an accredited investor, they can use platforms such as those offered by Forge Global Holdings Inc. and Rainmaker Securities to buy into private companies. However, those markets are opaque, have their own requirements and can be expensive.
For those who are not accredited investors, and not willing to pay money managers to buy shares in private companies, the most viable way to get a stake would be through Destiny Tech100 Inc. (ticker DXYZ). It’s a closed-end fund that counts stakes in private-market unicorns such as SpaceX and OpenAI among its holdings. But buyer beware: Even though the fund most recently reported a net asset value of $5.32 per share, its shares trade above $60 apiece. That means people buying shares at current prices are paying a dramatic premium to what the fund itself says its assets are worth.
What do companies gain by going public?
The chance to raise cash from a huge pool of investors, including the 401(k)-style masses. Not every company can obtain the money they need in the private markets, so an IPO is often the goal. Companies typically sell shares to public investors to raise funds for operations or to handle some of their debt. It also creates a public currency for any future takeovers.
Going public also opens the door for employees and long-term investors to more easily and frequently gauge the valuation of their stake in the company.
And for many firms, being publicly listed lends credibility — to potential employees, customers and suppliers. It also serves as a branding event and often helps to validate the company because its operations, expectations and finances are disclosed on a regular basis to the public.
