Stevan Popovic'

Public Markets

November 9th, 2016

I’ve been a startup guy and VC enthusiast for a few years now, which means I’m mostly interested in private markets and how private companies grow and scale.

However, as I’ve got a bit older I have started to pay a lot more attention to the public markets as well. I think this has been driven mainly by the current market, were public markets have been gaining some attention.

But, I’ve also come to realise that public markets, private markets and startups are more connected than perhaps I initially realised.

1) It’s all capital allocation and where you choose to invest – Private and public markets aren’ separate buckets, but rather different points on a spectrum. Startups are at one end: privately held, closed, owned by a few people, high growth, high risk. Public companies are at the other end: publicly held, open, owned by ‘many’ people, lower growth, lower risk. For many startups, an IPO is the end goal, so a private company evolves into a public company. Which leads me to the next point.

2) Public markets are an extension of VC – They both fund companies. VC’s do the risky end of the market, but eventually companies get larger and can opt to IPO and raise money from the public market. This link is crucial. Without public market investors upstream, the VCs can;t exit their money to reinvest downstream. Similarly, without VC’s downstream, public markets don’t have the opportunities to fund companies with growth opportunities. They rely on each other.

3) The public market acquirer – We already discussed that one way for startups/startup investors to ‘exit’ was to IPO (raise money from public markets). Another way is to be acquired by a large public company (e.g. Apple, Amazon, Facebook, Google). Companies acquire companies mostly infrequently, but it’s very important nonetheless to ensure the health of the ecosystem. Like an IPO, it allows money to be re-invested downstream. Having acquirers that are public as apposed to private is particularly important for simplicity of the transaction. Acquiring a company is never easy; it requires the acquiring company to place a value on a company – an incredibly tough thing to do when a company is private (value the market, it’s assets, it’s IP, etc.). Now, imagine both companies are private, this has to happen both ways. Not only does the acquirer have to value the company it is purchasing, but the company being bought has to judge the value of the acquiring company (presuming it is being bought with some stock, not pure cash). Now, if the acquiring company is public, the valuation is stated simply by the stock market at the time, which makes things infinitely more easy.

I realise as I write this the above is probably stating the obvious for seasoned investors and people within the capital markets. But, it’s taken me a few years to appreciate the connections between these various entities and I think your understanding of the startup ecosystem can greatly benefit from appreciating the above too.

(Note – I’ve purposefully chosen to ignore the affect of a Trump election on public markets. Maybe another time.)