IPOs are dead and retail investors like you are left hurting 🤕

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Back in the day, good companies used an IPO (Initial Public Offering) to raise capital and provide a return on investment to their early employees and investors. I emphasise “good” in my previous sentence because if you look at the data, 9/10 tech companies that IPO’d in 1980 were profitable compared to 1/5 in 2021. If I were to zoom out and take a look at all venture capital backed companies in 1980, a whopping 78% were profitable. Care to have a guess what that same figure looks like in 2021…? 10% 🤯 If that wasn’t bad enough, how many of the 13 venture capital backed companies that went public in 2022 do you think were profitable? Yep, ZERO.

Why did this happen to such a landmark event for both private and public investors you ask? The answer’s actually pretty simple; private investors grew tired of sharing upside (profits) with public investors 🤷 Over the last decade, more and more private capital has been flooding into companies mature enough to viably IPO. Here’s an example: Google raised just $26 million before its IPO in 2004 and made a net profit of $73 billion in 2022. Comparatively, Uber raised $10 billion (yes billion!) before its IPO in 2019 and posted a net loss of $9.1 billion in 2022. Just 10 years ago there were a total of 39 unicorns (a company with a $1B+ valuation) in the world. What do you think that number is today? If you guessed 1,233, you’d be correct. Astronomical!

While Uber and others like Airbnb have still been success stories for both private and public investors, there are many more companies that have performed incredibly poorly, or even outright died, since their own IPO. Take Blue Apron for example, a meal-kit delivery company. They IPO’d at a valuation of $2 billion in 2017. In 2023 the company was sold for $103 million, a stark 95% loss from IPO price 📉 There are others too, companies like Allbirds and Rent the Runway are down nearly 100% since IPO!

An IPO used to be an event that could generate liquidity for early investors and employees. That’s no longer the case. Secondary markets (a place where investors can sell their shares privately) are rapidly gaining in popularity. Last year, Etoro sold $120 million in a secondary share sale and while IPOs were all but dead, private equity firms sold a record $57 billion of their portfolio privately. Why would a company IPO when it can just raise more capital privately, access liquidity for early employees and investors through secondary sales and not have to deal with the ever-lasting burden that comes with being a public company?

The moral of the story is this; by the time companies do go public, the vast majority of the upside has already been completely sucked out of them, leaving public investors with shitty returns on over-hyped companies. The best time to invest in startups is pre-IPO, like way before an IPO. Although, this has historically been a game exclusive to the ultra-wealthy (we’re working on that). We believe everybody should have the opportunity to dedicate a percentage of their portfolio to investments in high quality early stage companies. And, we want to make that as easy as possible for investors who understand that time is their friend, not their enemy. As Warren Buffet famously says: “The markets are a vehicle for transferring wealth from the impatient to the patient”. 

This post was inspired by Scott Galloway's great write up on the same topic. In this post I’ve tried to summarise his thoughts and make it a little more accessible to the everyday investor. Thanks Scott!

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of PitchedIt. We were both sick of private markets being a playground exclusive to the ultra-wealthy. So… we started a company to challenge the status quo. PitchedIt’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
PitchedIt Co-Founders