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Snapchat Means IPO Ice Age Is About To End

NEW YORK, NY – MARCH 14: Airbnb CEO Brian Chesky (L) and Doug E. Fresh speak at Experience Harlem hosted by Airbnb and Ghetto Gastro on March 14, 2017 in New York City. (Photo by Bryan Bedder/Getty Images for Airbnb)

Last week, AirBNB raised $1 billion in the private markets at a $31 billion valuation.

According to CNBC, they raised another $1 billion last June at the same (flat) valuation – making it the 2nd most valuable private company in America after Uber.

The company mentioned as part of the news that they became profitable in 2016. They also said that this round would allow some of their employees to cash out part of their shares.

Why didn’t they just IPO?

Snapchat (SNAP) IPO’ed earlier this month. Their stock has been up and down since but it still has a $26 billion valuation. It last raised two private rounds last year at the same $20 billion valuations.

In about 6 months from now after the IPO lock-up period is over, Snapchat employees will be free to sell all their stock if they want and they’ll surely have an easier time borrowing against public stock for a credit line or a new house if they want to compared to when it was a private company.

If public markets are more rewarding than private markets – giving higher valuations – and if they’re fully liquid, why do companies like Uber, AirBNB, or a large media company like Vice Media stay private?

It’s getting tougher and tougher to make an economic case to stay private – especially when your valuations are already measured in the multi-billions of dollars.

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Thankfully, we hear less and less about the onerous requirements of Sarbanes-Oxley as a reason for avoiding an IPO. Going public requires more legal and admin costs, yes. It also requires a CEO and CFO getting up once a quarter and explaining themselves to investors, even when (as is the case at Snapchat) those investors have absolutely no voting rights to do anything.

Is it necessary to stay private until you’re profitable? Snapchat lost half a billion dollars last year and yet public investors are being 30% more generous than private ones.

Amazon (AMZN) has grown up as a money-losing company for the last 20 years in the full sunlight of the public markets and yet that hasn’t prevented it from raising debt and equity whenever they wanted. You want to take the long-term perspective as a public company? No problem, but you need to articulate what that is.

It’s my view that the last 15 years of tech and media companies shying away from going public is an aberration in the long arc of time. It’s more likely that we will see more IPOs in the years ahead rather than less. Nine companies have filed to IPO this year compared to 3 at this time last year.

In addition to making you richer, going public also has a maturing effect on a company and its management team. Before it filed to IPO in February 2012, Facebook (FB) had done little work to prepare for their needed migration from desktop to mobile. Almost as soon as their S-1 dropped, Wall Street started howling about the threat of mobile, which was an eminently reasonable concern. By August that year, Facebook has amazingly solved the problem.

It wasn’t the Facebook board or its private investors who lit a fire under Mark Zuckerberg. It was the public markets.

IPO’ing isn’t a panacea. Some businesses who IPO will fail. But staying private longer would have unlikely helped those businesses turn things around.

At some point after college – and for some of us it’s later than others – we all have to move out of Mom’s basement and stop using her credit cards to order pizza. I don’t care how many books you read while living in the basement or how many interesting TV shows you watch down there, you’re not going to grow up until you move out of that basement.

IPO’ing is a rite of passage for all serious businesses during their course of their lives.

Most companies like Microsoft (MSFT) and Oracle (ORCL) used to IPO at much earlier stages in their life cycles in the 80s compared to today. In the dot com bubble, companies IPO’ed with little more than a business plan. Since 2000, we’ve been an an IPO Ice Age. But it’s starting to thaw.

The more examples we see of companies being rewarded at higher valuations as public companies vs. staying private, the sooner this Ice Age will end.

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This post appeared earlier this week in my Tech & Media Email newsletter. To sign up for future emails, go here.