This sponsored post is produced by MicroVentures.
It’s been 15 years since the bubble heyday, and things still aren’t quite the same. For one thing, U.S. tech companies on the whole are raising less money. They raised a whopping $71 billion in funding in 1999, compared to only $48 billion in 2014. Even more dramatic has been the drop in the number of IPOs. 1999 saw 371 — one for every day of the year with a few left over — while 2014 saw only 53, an 85 percent drop.
Another interesting shift over that 15-year timespan is the median time to IPO. In 1999, the median time to IPO was four years. In 2014 it was almost triple that — 11 years. Facebook is the textbook example, having stayed private for eight years. As you might expect, average revenues have also gone up, but by much more than 3x. Average revenues for those four-year-old companies was $17 million, whereas the 11-year-old companies averaged $91 million in revenues.
But perhaps the biggest difference between then and now is the fact that today’s IPOs typically don’t create the same pop they once did. In 1999, nearly one-third of companies doubled their value on day one of the IPO. In 2014, only two out of the 53 IPOs experienced such an impressive pop. That’s a mere four percent.
Bottom line: The path to IPO is not as straightforward as it once was — not just from a market standpoint but also in terms of regulatory and compliance standards. As a result, companies are shelving the IPO option, staying private longer, and using that time to establish their brands, refine their value propositions, and prove out their business models by generating substantive revenue. In the process, they get to avoid the hassle and cost of dealing with quarterly appraisals, activist shareholders, intense public scrutiny, and other potential buzzkills of going public.
Companies that have postponed the IPO often turn to late-stage private funding instead to finance their growth. Even companies that don’t need to defer their IPO often still choose to because of the relative ease with which private capital can be raised. As a result, the number of late-stage funding rounds is increasing, as is the value of some of those rounds. According to PitchBook data, late-stage deals totaling more than $25 million accounted for 28 percent of total deals in 2014, up from 18 percent in 2013. Considering the deal sizes, the company valuations, and the publicity associated with these rounds, late-stage financing has the potential to carry the same punch as an IPO.
Given this trend, it’s no surprise we’re seeing traditional public market investors leading private funding rounds — that’s where the value is now. When companies do go out with an IPO, the value is no longer likely to pop dramatically or create vast fortunes overnight. According to Andreessen Horowitz, 40 percent of LinkedIn’s value was created before its IPO; for Twitter, most of the value creation took place before the IPO. And the return multiples for technology companies are clearly now being generated in the private market — just look at Facebook and Yelp.
That’s where equity crowdfunding platforms like MicroVentures come into play — by offering individual accredited investors the opportunity to participate in late-stage private fundraising opportunities that have traditionally been restricted to venture capitalists, private equity groups, and other large investors with only the deepest of pockets. Other investment platforms do allow individual investors to participate in a given late-stage fundraise, but they often require significant capital, which can limit the number of investors who can participate and limit their opportunities for diversification. These platforms can also pose an increased risk due to the types of investment contracts they use.
While late-stage rounds can be substantial, a platform like MicroVentures is able to pool investments from multiple investors in order to make the larger investments required. We’ve been able to give individual investors access to exclusive opportunities such as Twitter, Box, Facebook, and Yelp with investments as small as $5,000. Because the investors on our platform are able to invest with low minimums, they’re able to make more investments and more effectively diversify their private investment portfolios.
These late-stage opportunities are positioned for a liquidity event in 18 to 30 months, including companies in big data/analytics, business intelligence, cloud and data infrastructure, social media, and e-commerce. These are companies that have had some time to mature; they’ve used previous fundraises to fine-tune their business model, build out robust teams, identify and leverage their competitive advantages, prove out their user acquisition strategies, and gain traction in global markets.
By fusing venture capitalist opportunities with the power and accessibility of crowdfunding, individual investors can seize the opportunity these maturing startups represent — and make the most of the post-bubble shift to pre-IPO investments.
Bill Clark is the CEO and founder of MicroVentures, an equity crowdfunding platform.
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