Editor’s note: David Famolari is a director at Verizon Ventures.
It’s taking longer for startups to get to IPO, but that’s not necessarily bad news for investors in private companies. Why? Because startups today aren’t just valuable for their future exit potential, but for the proprietary data they produce while still private.
Market statistics clearly show companies are staying private longer. The average time to IPO has doubled to nine years today from four in 1999, and the median amount raised prior to IPO has increased steadily from $48 million in 2008 to $101 million in 2013. Of the 100 largest VC rounds in history, 90 have occurred in the last five years.
There are several reasons startups are staying private longer, including volatile public markets, healthy secondary markets, and a preference by some for mega-M&As. Whatever the reason startups don’t seek IPOs early, there is a real and often overlooked benefit to investors when startups stay private longer – the value of their data.
Many of today’s large startups have upwards of 100 million active users, sitting on a treasure trove of insight data about technology trends, consumer behavior, and market direction. VC firms that back growing startups get a unique view on what matters to future generations, consumer trends and other critical information that helps inform future investments.
Corporate VCs get insights to help their companies hone and refine product offerings to meet customer needs. In other words, private companies are a source of great informational advantage to both traditional and corporate VCs, providing data and insights unavailable on the public market. (Once the startup goes public, at least part of the company’s data will become public knowledge.)
And the flow of information goes both ways. Both traditional VCs, with their company-building expertise, and corporate VCs with their institutional insights and large partner networks, have a lot of insights to feed back into their portfolio companies. When startups stay private longer, they benefit from this flow of expert insights for a longer period, growing stronger and generating more revenue. When IPOs are delayed, the informational advantage begins to shift from players in the public market to those in the private market.
The fact that startups hold valuable data has also attracted investors from hedge and mutual funds. Financial institutions aren’t just rushing into Uber, Dropbox, Airbnb and Pinterest because they want a financial return, but because they see that these companies understand the consumer and business ecosystems of the future. Hedge and mutual funds can use this data to make long-term investment decisions.
Of course, as the broader market realizes the value of the data some startups possess, their lofty valuations don’t seem so crazy after all. Startups that stay private longer continue to increase in value, setting the stage for IPOs with bigger valuations once they do decide to hit the market. Facebook waited eight years to go public and achieved an out-of-the-gate valuation of $100 billion, which has since doubled to $200 billion.
Though Facebook’s investors clearly made a bundle on the company’s exit, they also reaped untold competitive advantage from access to the company’s unique data and insights during the eight years it was private.
The speed of business today is moving at a faster pace than ever, so it may seem counter-intuitive that “slow-and-steady wins the race” is an effective profit strategy for venture investors. However, companies that stay private longer not only frequently deliver bigger financial returns, but they provide invaluable insights not available elsewhere to their investors. That information is worth its weight in gold.