In a recent McKinsey article Grow Fast or Die Slow: Why Unicorns are Staying Private the company’s Silicon Valley experts flagged a few fascinating developments in the startup landscape. More unicorns (companies valued at over USD1 billion in private markets) than ever before have reached that magic number without having to go public (see Figure). And startups lower-down in the valuation chain are keeping their autonomy as angel investors dig deep to show confidence in the high tech sector. While some startups will continue to be exploited by large multinationals “wanting to sit on the front row for a nickel” as the Dutch say we are slowly seeing the end of an era where they can be acquired for next to nothing after months, even years, of hardship and struggle.
There are several reasons given for this shift in high-tech investment. Regulatory changes in the U.S. such as the Jumpstart our Business Startups (JOBS) Act in 2012 mean a company can now have many more investors before it is required to disclose financial statements. The flow of capital to private companies in the U.S. has tripled in the last two years alone, and this trend is expected to continue as investors seek high-growth investments in troubled global financial markets.
McKinsey captures the benefits of this trend for start-ups perfectly:
With ample private funding available and technology companies facing challenges in public markets, no wonder more and more software companies are choosing to gain scale as private entities. Remaining private does have a number of benefits. These include allowing companies to focus on long-term strategy rather than short-term quarterly earnings, retaining the competitive advantage that comes from not disclosing business details, minimizing the time and resources that management spends on shareholder-facing activities, and protecting companies from activist investors and hostile takeovers.
Expect to see fewer startups taking the IPO route, or at least delaying it considerably, and much more competition among angel investors to find the next unicorn. These developments are going to benefit ALL parties and, we are convinced, will stimulate increased and more rapid innovation and development in the volatile high-tech sector.