On April 20, 2015, Jay R. Ritter, Cordell Professor of Finance at the University of Florida published a report on initial public offerings (IPOs) in which he observed a huge difference in the number of technology companies going public pre-and post-2014.The report claims that there were 2,961 tech stock IPOs between 1980 and 2014. That’s an average of 87 IPOs per year. In contrast, in 2014, only 207 companies made IPOs and 26 percent of them were technology companies, a total of 54 tech stock IPOs (rounded up).
If you look at the big companies that have gone public since the technology boom of the 1980s, they’ve all come of age. Apple and Microsoft are two of the largest companies in the world right now. Google, eBay, and Amazon are the new juggernauts, proving that Internet-based companies can run on the same track as real world technology companies.
Traditionally, wise-minded investors like companies with proven track records. With mature tech companies like Google and Amazon promising steady growth, there is greater competition among investors, and that means startups have to work harder.
In a world where there are more tech companies than ever, I can’t help but ask the question, “Why are there so few going public?”
Are Technology Stock IPOs a Thing of the Past?
You’d have a hard time finding many market analysts claiming IPOs are a thing of the past, but there must be a reason, or reasons, things have slowed down. Let’s take a look at a couple of these:
1. Choice to stay private longer
Some companies don’t have this choice, whereas others do. Either way, there are advantages to staying private for as long as you can. One of those is the high cost of going public to begin with.
2. More available funding options
Companies looking for funding have way more options now than they’ve ever had.
- Equity crowdfunding – The JOBS Act has given birth to a whole new industry and method of raising capital. Even mature private companies can take advantage of equity crowdfunding, and Regulation A+ makes it all easier.
- Marketplace lending – Companies can go straight to their peers. No broker necessary.
- Private investors – Friends and family are often the first line of advance for companies looking for capital. Uncle John has made his mark. Now he’s ready to help the young budding entrepreneurs of the family move ahead. No advertising needed.
- Bank loans/lines of credit – While bank loans are not always favorable (you have to pay them back, with interest). It’s still an option. And for certain companies, it can be a powerful option.
- Cash flow – This tried-and-true method goes back to as far as men have pursued trade and is a mainstay allowing companies to fund future growth from current profits. The key is to spend less than you bring in.
In summary, there may be fewer tech IPOs than there used to be, but it’s no cause for alarm.