It is something that I have been expecting and predicting for a few years now. Eventually these companies that have raised a ton of capital in the private markets will choose to go public and generate liquidity for the shareholders who plowed all of that capital into them.
And yet storm clouds are on the horizon for the capital markets in 2019. Rates have risen significantly in the last 18 months, pulling capital out of the equity markets and into the fixed income markets. There are some leading indicators that suggest a business slowdown is on the horizon, which would be the first one in the U.S. in a decade. And, of course, the situation in D.C. is getting dicey and that will weigh on markets as well.
Good companies can go public in bad markets so I am not saying that the long delayed IPO plans of juggernauts like Uber will be squashed by a bear market in 2019.
But what I am saying is that 2019 is shaping up to be a very interesting year for the capital markets that power the startup economy.
There is a big difference between the private markets and the public markets. They do not move in lockstep. For years now, the late-stage private markets have been trading at valuations that are well in excess of their public market comps. That is true for a number of reasons. First, private market investors have longer time horizons and are looking for a three to five year return, not an immediate one. Second, private market investors get a liquidation preference which in theory protects them from losses. Finally, deals in the private markets clear in an auction like environment where the highest bidder wins the deal. All of these factors mean that a hot company can raise capital in the private markets at valuations well in excess of where they can raise capital (and trade) in the public markets.
But the public and private markets are connected to each other. If the Nasdaq falls significantly, and it is down roughly 15 percent from its highs in the late summer/early fall, then it will eventually weigh on the private markets.
And, if Uber, Lyft, and Slack do go public in 2019, where they price and where they trade will impact startup valuations, both late-stage and ultimately early-stage too.
These markets--public, late-stage private, and early-stage private--feed off each other and the participants in one look to the others for supply of deals and liquidity. So while they may appear to be disconnected, and often are, they do ultimately sync up.
And so I'm wondering if 2019 is the year they start to sync up again, after quite some time being out of sync. And if that comes to pass, what it means for our portfolio companies and their financing and liquidity options.
Fortunately for most of our portfolio companies, and most companies in the startup sector, we have had a number of years of very flush capital markets and many companies have strong balance sheets and a lot of staying power. The same is true of most venture capital firms as the past few years have been a great time to raise capital.
So if things slow down in 2019--and I am not predicting they will, but I think they might--the startup sector is in good shape to weather it. But at some level, the startup capital markets are a game of musical chairs and you don't want to be the one who can't find the chair when the music stops.