The future of private markets in a world without IPOs

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In recent years the once well trodden path of taking a company public has become far less traveled. Companies are increasingly raising huge sums privately and deferring or ditching the traditional initial public offering (IPO).

This shift matters big time for everyday investors seeking wealth-building opportunities: the boom of early growth is now largely reserved for institutions and ultra-wealthy, well-networked investors, leaving everyday investors on the sidelines.

In this episode of The Unsophisticated Investor, we dive into how the decline in IPOs is reshaping private markets and what that means for both employees and investors.

The decline of IPOs and the rise of private markets

IPOs are becoming rarer and happening at far later-stages. The data says it all: in 1996, U.S. stock exchanges listed about 8,090 companies, but by early 2023 that number had fallen to roughly 4,572 – a 43% drop. The pipeline of new listings has slowed dramatically. From 1980 to 2000, over 6,500 companies went public, whereas 2001 through 2022 saw fewer than 3,000 IPOs.

These days, companies that do IPO tend to be much more mature and valuable by the time they hit the market. In 1980, the median age of a company at IPO was 6 years with an inflation-adjusted value around $105 million, but by 2021 the median age was 11 years and the median value a whopping $1.33 billion.

In other words, companies are staying private nearly twice as long and growing over ten times larger before even considering a public debut.

Why are companies staying private longer?

1. No shortage of private capital: High-growth companies can tap vast pools of venture capital and private equity funding, reducing the need to raise money via public markets. With private markets flush with cash, private companies can raise hundreds of millions, or even billions, in late-stage private rounds, delaying any urgency for an IPO.

2. Regulatory and reporting burdens: Becoming a public company brings costly compliance requirements and intense scrutiny. Quarterly earnings reporting, increased compliance controls and the obligation to disclose detailed financials can become an incredibly complex pressure cauldron for management.

3. Market volatility and valuation concerns: The markets can be unforgiving. A high-profile example is Uber: after nearly a decade of explosive private growth, Uber’s stock famously stumbled, its 2019 IPO yielded the largest first-day dollar loss in U.S. history. This left many first day retail investors holding a heavy bag.

4. Alternative paths to liquidity: Mergers and acquisitions (M&A) have become a more common exit path as incumbents and private equity firms snap up promising private companies before they ever think about going public.

The upshot of these trends is an impending private market boom: more companies are choosing to remain privately held, backed by private investors, for longer durations. Value creation is increasingly happening behind closed doors. As a result, the public equity market is thinning even in a growing economy, and the balance of power is tilting toward private capital.

So what does this new reality mean for investor liquidity, the public markets, and access for retail investors?

Evolving liquidity options in a world without IPOs

For investors and employees in private companies, the decline of IPOs raises an important question: How can we realise gains or cash out if there’s no IPO? Traditionally, an IPO was the liquidity event that let early stakeholders sell shares to the public. In a world with fewer IPOs, alternative liquidity avenues have expanded:

1. M&A exits: As mentioned, one straightforward path is to sell the company to a larger player. Tech giants with deep pockets (or large private equity firms) are often eager to acquire innovative startups.

2. Secondary market sales: A growing secondary market for private shares now allows existing investors or employees to sell some of their equity to other private investors. These transactions, sometimes orchestrated as tender offers, are on the rise. Tender offer programs have become common at successful startups. In these deals, a late-stage investor (like a venture fund or secondary fund) agrees to purchase a block of shares from employees or early angels, usually at a price set in reference to the latest funding round. Companies like Stripe and SpaceX, for instance, have periodically used secondary sales so that long-time employees can cash out a portion of their stock options without an IPO.

3. Continued private funding: Some companies address liquidity by simply raising additional private funding and allowing a portion of that new money to cash out existing shareholders. In mega “Series H” or “Series I” rounds, it’s now common to earmark some proceeds for buying out early investors or employees. For example, in 2023, fintech giant Stripe raised $6.5 billion in a Series I round largely to facilitate a tender offer, enabling employees to sell shares at a valuation around $50 billion, delaying the need for an IPO a bit longer.

4. SPACs and direct listings (IPO alternatives): During the IPO drought of 2022–2023, creative alternatives surged. SPAC mergers (where a private company merges with a special-purpose public shell) briefly offered a shortcut to public markets, though many SPAC deals later vastly underperformed. Direct listings (used by Spotify, Slack, and others) allow a company to list its shares on an exchange without a traditional IPO fundraising, insiders simply start selling existing shares to the public.

In summary, investors in private companies are not completely stuck, liquidity options have expanded to include not just acquisitions but secondary sales, larger private rounds, and alternative listings.

For employees holding stock options at a late-stage startup, the new normal might just be a series of small, but increasingly larger, liquidity events over a number of years.

For everyday investors looking for a way to gain access to the value creation that occurs in private markets long before an IPO, platforms like Shuttle are now making this a possibility.

What we’ve been working on at Shuttle

• Pay by Bank deposits are now live for new and existing customers 💰

• Finalising the next investment opportunity for our second drop 🔎

• Shipped a major upgrade to our portfolio calculation system 🧮

• Added a button to book a call with the founders during registration 📞

• Added a Google sign in option during registration & sign in 👤

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of Shuttle. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status-quo. Shuttle’s singular focus is to unlock private markets for busy professionals and help them build wealth through the highest performing private market opportunities.

Scott & Rob
Shuttle Co-Founders