Silicon Valley startups love to go public. They just hate being public companies. CEO Elon Musk’s plan to take Tesla private, announced by tweet on Aug. 7, points to a world in which even the biggest companies can leave the public markets behind.
“[Tesla] is the canary in the coal mine,” says Barrett Cohn, co-founder of Scenic Advisement, which brokers private deals for Silicon Valley startups. Almost all the rising Silicon Valley startups Cohn spoke to four years ago planned to go public in the foreseeable future. Now only half are seriously considering it. “We see little value for companies today to go public where as decade ago it made a lot of a sense,” he said.
Tesla is only the latest in a mounting trend. Witness the lengths founders are willing to avoid public exchanges, or enter on their own terms. Spotify decided to skip a bank-brokered initial public offer (IPO) in favor of selling several million shares directly on the New York Stock Exchange. Uber did its own mini-IPO, raising $9 billion (paywall) from a SoftBank-led consortium in 2017. Airbnb, now valued at $31 billion, recently ditched its CFO, who was eager for an IPO, and said the company would “make decisions about going public on our own timetable.” Since 2000, the average number of new companies deciding to IPO each year has fallen from 300 to about 100 (paywall).
Public markets just no longer offer the same value as they once did, says Rohit Kulkarni, managing director of equity research at SharesPost. He argues there are only four main reasons to go public: access to capital, liquidity, institutional credibility, and branding. “You can get almost all of them on private markets the way they’ve evolved in the last 10 years,” says Kulkarni which is dedicating to giving startups access to private markets. So far, it’s found plenty of startups, or their shareholders, willing to participate including Lyft, Uber, Spotify, SoFi, Palantir and others.
As private markets have matured, the amount of capital has risen alongside the quality of investors. Pension funds and other asset managers began looking to startups for potential returns.The trend started with T. Rowe Price’s investments in Twitter in 2009 and Workday in 2010 (whose valuations were $1 billion at $2 billion, respectively, just a fraction of today’s) is now mainstream. Other financial firms like Fidelity and Morgan Stanley are pouring billions into growth-stage companies. Kulkarni says SharesPost tracks 85 mutual funds with shares in more than 200 private companies.
As for credibility, branding and marketing, Silicon Valley’s unicorns no longer need the imprimatur of a NASDAQ. Customers see the names of these companies in the press every day. Risk-averse enterprise customers are now comfortable using these startups as vendors, confident venture capitalists will keep them afloat.
That bring us to Tesla. It will be one of the most difficult companies in history to take private. It has never generated a reliable cash flow, and its current ownership is a mash of retail investors, asset managers and sovereign wealth funds. Tesla’s biggest shareholders include Price T. Rowe, Baillie Gifford, Fidelity, China’s Tencent, and Vanguard. Saudi Arabia’s Public Investment Fund just took a $2 billion stake in the company.
The estimated $66 billion price tag to buy back shares would be the largest in history. But even a private Tesla would remain public in many ways. Its public debt carries extensive reporting requirements. Musk’s unprecedented “special purpose fund” would retain thousands of retail investors as stakeholders in whatever corporate structure Tesla cooks up.
That may be enough for Musk. No more “boring, boneheaded” (paywall) questions from Wall Street analysts. No more grilling over quarterly earnings. No shortsellers, who Musk says have stoked “negative propaganda” about the company.
The real argument, it seems, is Silicon Valley’s belief that the most radical innovation can’t happen in the glare of the public eye. That’s right in line with venture capitalists who see Musk as the right kind of crazy.
Who else would take on the car industry and NASA at the same time? Morgan Housel of the Collaborative Fund compares him to legendary fighter pilot John Boyd, an Air Force pilot who wrote the book on aerial combat—but who also burned down hangers because he didn’t like their heating systems. Musk, like Boyd, is a maniac.
“Rude. Erratic. Disobedient. Impatient,” writes Housel. “People love the visionary genius side of Musk, but want it to come without the side that operates in his distorted I-don’t-care-about-your-customs version of reality. But I don’t think those two things can’t be separated. They’re the risk-reward tradeoffs of the same personality trait.”
That’s Silicon Valley’s formula for some of its most successful founders: unstoppable ego, insane ambition and the bare minimum of restraint to hold it all together until IPO day.
Tesla, of course, is exceptional, but its desire to avoid the churn of Wall Street is universally shared. For now, Silicon Valley is content assembling private markets that serve as an alternative to the stock exchanges in New York. But, eventually, Silicon Valley plans to displace Wall Street itself.
The Long-Term Stock Exchange (LTSE), started by Eric Ries, a San Francisco entrepreneur and author of “The Lean Startup,” is its first attempt. The firm, now wending its way through regulatory approval, intends to incentivize long-term thinking by both managers and investors. It will award shareholders more voting weight based on how long they’ve held their shares, and tie executive pay to long-term business performance.“We are building a modern exchange that gives modern companies permission to build for the long term,” says Martin Alvarez, chief commercial officer of the LTSE. Tesla, he claims, would be a “perfect fit” for what it’s trying to do.
Tesla exists as a major carmaker today because public markets backed Musks’ vision with billions of dollars. But the Silicon Valley CEO has found the transparency and accountability from its public listing, along with the criticism from investors, analysts, and reporters, is no longer worth the price. He’s had enough and he’s prepared the break some furniture on his way out.