It’s Taking More Funding for Tech Companies to IPO. However, Valuations at IPO are Not Following Suit.

Venture capital-backed tech companies are taking longer to go public. Median pre-IPO funding for VC-backed tech companies has risen every year since 2010. Through the first 6 months of 2014, the number is climbing still.

Here’s the data.

This is a topic that has gotten a lot of attention among investors.  Scott Kupor (see post below) and Marc Andreessen (presumably via tweetstorm) of Andreessen Horowitz have both talked about this, as has Mark Suster of Upfront Ventures at the recent 500 Startups PreMoney conference.  There are a few general narratives and views on this trend:

• Much of the gains of public markets are now being made by private market investors. Amazon, Apple and Microsoft IPO’d when their valuations were much lower and so the run ups in those stocks after going public accrued to public equity holders.  Now that value is going to private market investors – not just to VCs but to hedge fund and mutual funds investing in private companies.  We’re seeing hedge funds like Tiger Global and Coatue, as well as T. Rowe and Fidelity on the mutual fund side, get active in private markets because presumably it’s now where the alpha is.

• IPO market is broken (or perhaps smarter) – Depending on your perspective, the longer time and greater funding in the private markets is a terrible thing or a great one. There are those who believe that public market investors are losing out on the next big thing (see bullet 1) and this is due to an IPO simply being too expensive and burdensome for a high growth private company. On the flipside, there are also those who believe that this is good for public market investors, as it prevents them from investing in duds, which is what happened in the dot com boom (Webvan anyone?). The logic here is that most VCs are not good at picking technology winners so why would a public market investor be any better?

• It takes more money to own the market – Scott Kupor articulates this well arguing that this is a structural change in VC and that while it’s cheaper to start a company, it takes more capital to own the market.  As a result, companies are raising more money to win their respective markets.

Of course, the truth is complicated and probably some combination of the above.

Interestingly, although it takes more money to IPO, the median valuations at the time of IPO actually are not climbing.

When looking at median valuations for VC-backed tech companies at the time of their public offering, the figure has actually fallen since 2011. That said, if 2014’s current pace holds, we could see our first year of growth in valuations since 2011. Of course, the median ignores the power law nature of venture capital.  It is also worth noting that these are valuations at the time of IPO and hence a point-in-time snapshot and prior to any run up (or down) of these companies.

Nevertheless, the fact that greater funding for IPO bound tech companies is not translating to larger valuations at the time of exit is counterintuitive.

All the investment funding and exit data in this brief is from CB Insights venture capital database. Login or sign up for a free account below.