Activant's Greene Street Observer No.16

Founders, Partners, and Friends,

A tale of two cities.

I want to discuss a controversial topic which we will call a tale of two cities.

Stripe was founded in 2010 and Snowflake in 2012. The businesses couldn’t be more different and they are not competitive, but the trajectory while they were both private companies was relatively similar. The big difference came when one went public and one didn’t.

There are always reasons to stay private, particularly for a closely held company. However, the goal of most technology companies that raise outside capital is to go public. Decades ago, companies went public as soon as they were able. Amazon within three years of founding when it had about $31MM of trailing revenue. Apple went public four years after it was founded with about $118MM of revenue and Microsoft took 11 years to go public, it had about $160MM of revenue, and at the time was profitable.

That might seem early as compared to today, but we should inflation adjust those numbers. Inflation adjusted, the revenue range at IPO is $61MM at the low end which is Amazon, and at the high end Microsoft at $460MM of revenue (using the BLS inflation calculator, which is probably light). Even inflation adjusted, this seems early versus what companies are doing today. 

What is going on? Some of the delay is due to regulatory changes as it is more expensive and more difficult to be a public company, but on balance I don’t think that is the answer. The real test of a business and its valuation is to hold up to the scrutiny of the public markets, and I think 1) a lot of today’s management teams are not ready for that type of microscope and 2) investors are fearful that their private valuation won’t hold up in the public market. So let’s not only put blame just on management, boards and GPs are driving this as well. This is a subtle yet important reason IPOs are being delayed.

Private equity owners are not immune to this trend either. As we have seen funds get larger and larger, one PE shops passes a company to another and so on until the music stops. The need to go public has been reduced in that market as well.

In venture and growth, if the company is destined for IPO, there are not many opportunities for liquidity and what we are seeing today are LPs protesting at the longer hold times. This has resulted literally in the last few days of two large funds seemingly robbing Peter to pay Paul to create liquidity at arbitrary valuations for prior LPs.

The lack of IPOs slows the entire sector down and changes the dynamics for both public and private investors. In the old days there might be six competitors for a market and they all go public. For a while they may trade well initially, and over time one wins and the others wash away. This construct allowed for liquidity at some point for all the investors and employees across multiple directly competitive companies. 

Today, the battle takes place in the private market. The losers turn to zeros and the winner may or may not go public because as they are battling as a private company, other public companies move into their markets. They miss their opportunity. The dynamics of competing as a public company vs. a private company are completely different, and private companies will always be at a competitive disadvantage especially when it comes to customers. 

The chart below shows Snowflake and Stripe valuations side by side. Although valuations are similar, the story couldn’t be more different. One created liquidity and options for its employees and investors and can be scrutinized by its customers. The other is still private, although it has incredible moats.

My advice to founders has always been to go public at your earliest opportunity. In the long run it will make your business more durable.

Let’s go! 🚀

Steve Sarracino

Founder & Partner

Our latest research is all about data! Check out our view on growth potential in this space with the following publications:

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Activant is a research-focused global investment firm that partners with high-growth companies, transforming the way the world makes, moves, and sells.

Founded in 2015, Activant has invested in category-defining companies like Deliverr (acq. by Shopify),Hybris(acq. by SAP), Celonis, Sardine, and many more.

The firm has $1.5B assets under management and is headquartered in Greenwich, Connecticut, with offices in New York City, Berlin, and Cape Town.

The Greene Street Observer is published monthly from Activant’s office on Greene Street in New York City.