After hitting a peak in 2014, IPO activity has been on a steady decline…
But it seems like the drought might finally be over.
From MarketWatch to The Wall Street Journal, the current headlines are all about 2018 being the year of the IPO comeback:
IPO watch: 11 tech companies most likely to go public — CNBC.com
10 Hot IPOs That You Could Buy in 2018 — InvestorPlace
Hoping for an Avalanche of Huge IPOs in 2018 — The Wall Street Journal
And with the high-profile names set to go public this year — start-ups like Airbnb, Lyft and Spotify — we imagine investors will be frantically trying to get their hands on as many hot IPO shares as they can.
But we’re planning to sit this one out...
And today, we’ll explain why you should sit this one out, too.
This Chart Says It All
Take a look at the below chart.
It’s showing us that, over the last ten years or so, there’s been a major shift in where investors earn their profits.
The grey portion of each bar chart reflects the profits captured by public stock market investors. In other words, people who invested after a company had gone public.
The orange portion, on the other hand, shows the profits captured by private investors — those who invested when the company was still a private start-up.
As you can see, for many years, public investors reaped the lion’s share of the profits.
But starting around 2004, things started to change.
Instead of making money after a company IPOd, all the profits were being made by investors who got in before the company was public.
To see what we mean, let’s start by looking at Microsoft (NASDAQ: MSFT):
When it went public in 1986, Microsoft’s earliest private investors made about 200 times their money. Not bad.
But after it went public, stock market investors made even more than that:
They made about 600 times their money.
But look what happened in 2004...
How to Turn $1,000 into $1.1 Million
On August 19th, 2004, a major event took place.
That’s the day Google went public — and it became one of the largest IPOs in history.
The company raised over $1.6 billion, and was valued at more than $23 billion.
Since then, Google’s done very well for its investors:
For every $1,000 you invested on the day it went public, today you’d have $22,000.
However, if you’d invested that same $1,000 into Google when it was just getting off the ground — back when it was still a young, private start-up— you’d have earned much more:
On the day Google went public, your $1,000 private investment would have turned into a staggering $1.1 million.
As you can see, the vast majority of the wealth generated from Google has gone into the pockets of the company’s earliest private investors.
And we’ve seen this trend happen again and again:
Early, private investors make hundreds of times their money...
While public market investors make just a tiny fraction of that — and that’s if they earn anything at all:
You see, according to a recent report from Renaissance Capital, the average IPO in 2015 provided a negative return on its first day, falling 3.5%!
So, what’s going on here?
Private Market Profits
There are two major trends at work here:
Trend #1: Staying Private Longer – In the year 2000, the average amount of time between a company being founded and going IPO was 6 years; today, that number is closer to 10 years.
Those four extra years allow a company to build its business — and allow it to increase its value dramatically.
Privately-held Uber, for example, is nearly 9-years-old, and is currently worth an estimated $68 billion.
Back in the dot-com days, Uber would have gone public years and years ago. But in today’s market, it’s content to stay private for as long as it can.
Trend #2: Raising More Money in the Private Markets – These companies can stay private longer now because they have access to massive pools of private capital.
You see, in the past, if a company needed to raise a significant amount of capital, it had no other option but to go public — there just wasn’t enough private capital available.
But thanks to private investing success stories — like the one we shared about Google — just about everyone is eager to invest in early-stage private companies these days.
In fact, from multi-billion dollar private hedge funds like Tiger Global, to global mutual fund companies like Fidelity, many of world’s biggest investors are now pulling back on their public market investing in favor of private market investing.
That’s what’s giving young start-ups all the capital they need to stay private longer — and to grow their businesses further.
How You Can Profit From These Trends
Ultimately, these private companies will need to go public — if only to allow their early investors to “cash out” of their investments.
But here’s the thing:
By the time these start-ups finally go public, they’ll already be big, stable, fully-valued companies — so it’s unlikely there’ll be much upside left for investors.
That’s not to say that all of this year’s IPOs will be duds…
It’s just that we believe there’s lower-hanging fruit out there.
Which is why we aim to invest in start-ups before they go public.
And now that everyone can invest in private companies — regardless of their net worth or income — we believe that you should be doing the same thing.
So don’t get caught up with today’s “hot” IPOs…
There’s far more money to be made by investing in private start-ups — before they IPO.