Silicon Valley Is Hoarding Wealth by Skipping IPOs; the Most Dynamic Industry on the Planet Has Been Actively Deciding to Keep as Much for Itself as Possible by Avoiding Public Stock Offerings

By Maney, Kevin | Newsweek, July 8, 2016 | Go to article overview

Silicon Valley Is Hoarding Wealth by Skipping IPOs; the Most Dynamic Industry on the Planet Has Been Actively Deciding to Keep as Much for Itself as Possible by Avoiding Public Stock Offerings


Maney, Kevin, Newsweek


Byline: Kevin Maney

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Uber CEO Travis Kalanick is famous for saying things that make him sound like tech's Dr. Evil, but now he's spouting his most damaging rhetoric yet: He vows that Uber won't go public for another decade. He adds that he'll finally do an initial public offering (IPO) "one day before my employees and significant others come to my office with pitchforks and torches."

Well, maybe it's time for that witch hunt. Data show that if Kalanick keeps Uber private for the next 10 years, his company will likely flatline, and concern regarding his truculence is now about more than just Uber. It's about all of us, and it's about the world's growing and volatile income gap. Kalanick is looking straight at America's middle class--the kind of people who might want to buy his stock as a way to build some wealth--and telling us to fuck off.

Worse yet, too much of the technology startup ecosystem stands with him. The most dynamic industry on the planet has been actively deciding to keep as much for itself as possible and shut out the rest of the populace by avoiding public stock offerings.

RELATED: Why the world hates Silicon Valley

As I write this, a reasonably successful tech company--Twilio, which is obscure enough that you might think it's the name of a new licorice candy--is about to go public. The markets are celebrating this event the way parents exude over their baby's first word. Before Twilio, the number of so-called tech unicorns going public in 2016 totaled zero. In all of 2015, only five went public. Go back to 2006, and there were 84 tech IPOs for the year.

(By the way, billion-dollar private companies aren't unicorns these days. They're more like rabbits, propagating everywhere. If that keeps up, they'll turn into a plague.)

Staying private has deep implications. While researching our book, Play Bigger, my colleagues Al Ramadan, Dave Peterson and Christopher Lochhead analyzed data about thousands of venture-backed tech companies founded since 2000. They found something that at first seemed weird: The data show that the best time for a company to go public is when it is between six and 10 years old. Cisco, Google, VMware and Facebook are among the many enduring companies that went public in that sweet spot.

The age of a company at IPO mattered more to post-IPO value creation than the amount invested in a company while it was private. There is zero correlation between the amount of money raised by a company before it goes public and its post-IPO value creation. Keep that in mind the next time you read about a billion-dollar private financing round.

Stock in companies that went public before six years often cratered later. Groupon went public at three years old, and that didn't go well. Stock in companies that went public after 10 years almost always stayed pretty flat, puttering along on fumes.

We figured out why the sweet spot is a real thing when we looked at studies about how new markets evolve. From its inception, a new category of product or service needs years to work itself out and get to mainstream, usually with a bunch of newcomers fighting to be the category king. After five or six years, one company nails it, competitors fall away, and the category takes flight. The biggest spike in almost every new category's growth comes within that six- to 10-year window. …

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