The Purpose of an IPO Has Changed

So far, Snap’s gains have all gone to its private investors.

Photographer: Michael Nagle/Bloomberg

One of the themes of this economic cycle has been that tech startups have stayed private for a long time, choosing to raise money via venture capital rather than going public. When a downturn inevitably arrives, some may regret that.

As prior cycles have shown, even if good startups technically can go public in a bad market, they generally don't — and that might mean being forced to stay private for several years longer than they want. A few big startups are avoiding that trap as they finally look to go public – Dropbox and Spotify have forthcoming listings – but many other mature companies have stayed private, like Airbnb.

It's a sign that the purpose of initial public offerings has changed. At one time, going public was considered a rite of passage, a necessary step for a startup on its way to maturity. When Amazon went public in 1997, it raised $54 million, giving it a valuation of $438 million. Going public served several purposes for companies. Not only did it provide a bump of funding for startups that often weren't yet profitable, but also it created a mechanism to raise more money if needed in the future. It provided transparency and legitimacy to investors and potential clients and business partners of the company. And it provided liquidity to the private investors and employees who had financed and built the company, allowing them to cash out their holdings and stock options.