Do you know what the market capitalization was of Microsoft when they went public on March 13, 1986? A mere $500 million (~$1 billion in today’s dollars). If you had bought just 100 shares of Microsoft at the $21 offering and rode it all the way up to its peak in 1999, you would have cashed out for $1.4 million. Of course the stock came tumbling down and then back up. But you’d still have around $1 million bucks today. Not bad.
I remember working on the syndicate with my US colleagues during Google’s IPO back in 2004. We took the company public at a $23 billion market cap. Meanwhile, Facebook went public in 2012 at a $100 billion market cap. See a trend here? Companies are going public later and later in the game, meaning the public is getting less and less of the upside benefit!
The people who are getting rich are 1) Private institutional investors such as the hedge funds, venture capital funds, venture debt funds, and private equity funds, 2) Accredited investors who are able to invest in such private funds, and 3) The employees qualified enough to get jobs at these hot startups. Everybody else is shut out!
A LIST OF $1 BILLION+ UNICORN COMPANIES
A market cap of $1 billion is almost commonplace nowadays. There are dozens of private companies with $1 billion+ market caps that you probably have never heard of. Just take a look at the image above and a comment below where I list out 80+ names. The chart is from early 2014, so valuations are even higher e.g. $15 billion for SnapChat now vs. $10 billion.
Uber probably could have gone IPO in 2013 with a $5B+ market cap, but they chose not to. Why bother subjecting yourself to massive regulatory scrutiny when you can raise billions in the private market through institutional investors and accredited investors?
Private companies no longer need mom and pop public investors because the rich have gotten extraordinarily rich over the past 30 years. There is just too much liquidity held in massive private funds chasing too few deals. Add on hot foreign money, especially from Russia and China, and it’s easy to see why the IPO market is slowing down.
Initial public offerings in the U.S. have dropped to around 100 a year from more than 300 a year between 1980 and 2000. The 34 IPOs in Q12015 raised $5.4 billion, marking the fewest IPOs since since Q1 2013 and the smallest in proceeds raised since Q3 2011, according to Renaissance Capital. The health care sector accounted for 47% of the IPOs, mostly biotechs and small medical device companies.
THE PUBLIC IS GETTING SCREWED
After the scandals at Enron and WorldCom, Congress in 2002 gave us Sarbanes-Oxley, a federal law that set new, higher, standards for publicly traded companies. In other words, being a public company got much more expensive and onerous than in the past. If you’re a smaller company, you’re not going to be able to afford a team of lawyers to make sure your company complies with all these new rules. Think about the already arduous tax code individuals have to go through.
Sure, the government may have wanted to protect the retail investor from more Enrons and WorldComs, but instead, the government has essentially shut out retail investors from a massive amount of wealth creation as private companies stay private for longer! Talk about the law of unintended consequences.
I run my own small online media company. If I can raise $1 million dollars from private investors with little effort and cost, why on Earth would I spend hundreds of thousands of dollars on lawyers to subject myself to Big Brother? Freedom is glorious!
One of the main reasons why any private company would want to go public is because they’ve reached the 500 individual investor maximum and need more capital for expansion. The other big reason is to allow for earlier investors, including the founders and early employees to cash out in an orderly fashion.
Finally, if the founders and early employees are cashing out at IPO or soon thereafter, what business do retail investors have buying? The easy money has already been made because the company grew so massive in the private markets!
PRIVATE MARKET IS KING
If you’re looking to supercharge your wealth during your one and only life, hurry up and make $200,000 as an individual, $300,000 as a married couple, or have $1 million in investable assets so you can at least try to gain access to the private investment market. Of course, then it’s up to you to decide which private investment companies or funds offer the best returns.
The government has once again found a smart way to keep the middle class down, without the middle class even realizing what the government is doing! Pro-Big Government voters just get excited about more regulation, when more regulation is what shuts the public out.
I worked in the public equities market for 13 years and I’ve been a private equity investor for 10 years now. Trust me when I say the shift towards staying in the private market is real. There will be no more Microsofts that go public for a mere $1 billion dollars. The next Microsoft will probably go public for $100 billion as private investors cash out. Nobody wants to face the wrath of the government if they don’t have to, especially not entrepreneurs with incredible access to capital.
“Being the CEO of a public company is horrible right now. Trying to get my employees motivated to work while they see their private company peers get valued at higher and higher valuations is frustrating. Do you have $4 billion for a management buyout so I can go private again?” – My friend, a CEO of a publicly traded company.
THE PATH TO BECOMING AN ACCREDITED INVESTOR
I realize some of you might be thinking, Umm, easier said than done becoming an accredited investor, and I hear you. Just know there are plenty of industries that provide plenty of jobs that pay six figures a year. And if you just can’t last long enough to get to the six figure mark, then there are plenty of wealthy people out there looking for love. And if you can’t find anybody to shack up with you, then not to worry either. There’s around $30 trillion of wealth getting transferred down to you!
Let’s say you can’t find a six figure job, can’t find a wealthy spouse, don’t have parents who will leave you anything, aren’t willing to take any entrepreneurial risk in this land of opportunity, and suffer from some terrible physical and mental affliction. You can always invest in the public equity markets. At least the pubic equity market is liquid, with much more transparency, and plenty of research to go behind your investments.
But part of getting rich is making educated bets about the future. It’s my belief that wealth is going to accrue at an increasing pace towards those who invest in the private markets. A
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About the Author: Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $150,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Updated for 2019 and beyond. One of the investment categories I’m most interested in is real estate crowdsourcing. If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.