Comment by TrackerFF 4 days ago
What’s the obvious rationale for going through the whole alphabet of funding rounds, instead of going public / IPO after «the usual» number of raising money.
Wouldn’t the current strategy result in some serious stock dilution for the early investors?
At least in some sort, this new venture market dynamics in those private markets is looking more similar with the Art market. I remember that J used to follow several private auctions where most of the auctioneers had some sort of ring where in time to time someone needed some liquidity.
Even in some situations where some artworks could have way less value at the public auction houses (Christie’s, Phillips, Sotheby's) their preference was to market between in this circuit of private auctions.
The company itself seems healthy and generating revenue
Right I'm curious how long many of these deca/centa unicorn startups can make payroll & pay their cloud bills if all of this AI FOMO unlimited exit liquidity VC investment takes even a pause.
Stock dilution doesn't work like that. If a seed investor invests for 5% at a $10mil valuation, and the company goes 10x (ie. a valuation of $100mil), if the company now raises a $100mil Series K, that means the Series K investor owns 50% of the company, and the seed investor got diluted down to 2.5%. However, the new valuation of the company is now $200mil with the cash that the new investor brought in, effectively making the seed investor's investment worth the same.
It's a smaller piece of a bigger pie.
To answer your question, the right question to ask is why go public when you can remain private? Public means more paperwork, more legalese, more scrutiny, and less control for the founder, and all of that only to get a bit more liquidity for your stock. If you can remain private, there really isn't much of a reason to not do that.
An IPO means selling a whole bunch of people, whereas fundraising rounds pre-IPO mean courting a small number of large investors. I think it's partly a sign of the times that there's enough concentrated capital that you can get enough money from private hands to not need to go the IPO route yet.
The private market is getting out of hand, then. I think it makes sense for private companies beyond a certain size to have the same reporting requirements that listed ones do. At these valuations the private market for startups is becoming systemically important.
To some degree, they do -- under SEC rules (Exchange Act §12(g)), private companies with >$10M in assets and 2,000+ shareholders (or 500+ non-accredited investors) have to start public-style reporting. I assume there's some clever accounting to ensure they're not at the 2,000 shareholder cap (perhaps double-trigger RSUs don't count as being a shareholder yet?)
Both have benefits. Staying private means a lot less distractions, less investor scrutiny (good and bad), and the general ability to do whatever you want (good and bad).
It's a lot easier to stay long-term focused without investors breathing down your neck. As a private company you're not dealing with shortsellers, retail memers, institutional capital that wants good earnings now, etc..
Of course, the bad side is that if the company gets mismanaged, there's far less accountability and thus it could continue until it's too late. In the public markets it's far easier to oust the C-suite if things go south.
It's a shame that the trend of staying private longer means retail gets shut out from companies like this.
An order of magnitude less scrutiny, but also an order of magnitude in size of investor base. The private markets trade at Palantir levels so why go public. Also the private markets are now routinely doing secondary transactions so even less reason to go public.
A new round is easier than IPO. Especially when the IPO outcome is not necessarily positive.
it's funny how we're letting private companies get away with made up numbers. Rather than making IPOs easier, owning a private company above a certain valuation should come with at least an obligation for GAAP accounting, indepndent audits etc. This is really for the greater good - so what is we see 2-5 years of a beautiful AI bubble if it's going to come crashing down again. It's lawmakers and regulators role to smooth out and dampen the natural tendency for the markets to go bubbly.
Investors put 10 billion in in a previous round; that's a lot. Somehow, more is needed now. 100M is just 1% of that. So it's not going to massively move the needle. But it does raise the question where all that cash is going.
My guess is that they might be about to embark on a shopping spree and acquire some more VC backed companies. They've actually bought quite a few companies already in the past few years. And they would need cash to buy more. The company itself seems healthy and generating revenue. So, it shouldn't strictly need a lot of extra capital. Acquisitions would be the exception. You can either do that via share swaps or cash. And of course cash would mostly go to the VCs backing the acquired companies. Which is an interesting way to liquidate investments. I would not be surprised to learn that there's a large overlap with the groups of VCs of those companies and those backing databricks. 100M$ on top of 10B sounds like somebody wants in on that action.
As a financial construction it's a bit shady of course. VCs are using money from big institutional investors to artificially inflate one of their companies so that it can create exits for some of their other investments via acquisitions financed with more investment. It creates a steady stream of "successes". But it sounds a bit like a pyramid game. At some point the big company will have to deliver some value. I assume the hope is some gigantic IPO here to offload the whole construction to the stock market.