Navigating The IPO Maze: Why Startups Take Longer to Go Public

July 03, 2023: Startups nowadays take more time to go public than before. In the last two decades, the average time for a startup to go public has increased by 4-6 years. There are a few reasons for this shift.

Firstly, regulatory hurdles have become more significant, causing delays in the IPO process. Startups must comply with various regulations and requirements before going public. These regulations aim to ensure transparency and protect investors, but they can also add complexity and time to the process.

Secondly, there is a growing trend of startups seeking private financing instead of going public. Private financing allows startups to raise large sums of money from private investors without going through the rigorous IPO process. This newfound appetite for private financing, where investors write billion-dollar checks, has made startups less eager to go public.

While going public has advantages, such as access to capital and liquidity for investors, it exposes companies to greater scrutiny and potential valuation reductions. Publicly traded companies face intense scrutiny from analysts and investors, and their share prices can be affected by macroeconomic factors. This increased scrutiny and potential risks have made some founders hesitant to go public.

The longer delay in IPOs has also created a gap between private and public valuations. Private valuations, especially in the technology sector, have reached billion-dollar marks. However, when these companies eventually go public, their valuations may not match the expectations set during the private financing rounds.

Founders also prefer to stay private because it gives them more control over their company’s destiny. When a company is privately held, the founders are answerable to a select group of aligned investors who focus on long-term growth. Going public means facing a more comprehensive range of stakeholders, including analysts and public investors, who prioritize short-term financial performance.

Furthermore, going public exposes a company’s financials and business strategies to competitors and the public. It removes the secrecy surrounding the company’s growth and spending. Additionally, macroeconomic factors can directly impact a startup’s share price, which adds a new layer of complexity for founders to navigate. Some startups may choose to be acquired by larger companies instead of going public due to the uncertainties associated with IPOs.

Despite the trend of delayed IPOs, going public still has benefits. Going public provides access to a permanent pool of capital and allows for liquidity for investors, employees, and founders. It also enhances a company’s image, presenting it as stable, regulated, and trusted. Going public can also improve a company’s ability to engage in mergers and acquisitions.

Several measures can be taken to address the challenges and bridge the gap between startups and IPOs. Late-stage funds should incorporate the rigor of public listings into their valuation processes to minimize the gap between private and public valuations. Regulatory burdens can be eased by evolving stock exchange regulations to meet the needs of new-age startups. This can reduce the time and effort required for startups to go public. Additionally, a shift towards focusing on the company’s overall financial health rather than just growth at all costs can benefit the startup ecosystem and ensure a sustainable balance between scale and unit economics.

In conclusion, the average time for startups to go public has increased due to regulatory hurdles, the preference for private financing, and the challenges and risks associated with going public. The gap between private and public valuations has widened, and founders face increased scrutiny and exposure to macroeconomic factors when they go public. Despite these challenges, going public offers access to capital, liquidity, and an improved M&A landscape. Efforts should be made to address these challenges and ensure that startups can grow while maintaining financial stability, as they play a crucial role in fueling innovation and driving economic growth.