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Investors Beware: Today’s $100M+ Late-stage Private Rounds Are Very Different from an IPO

by
Bill Gurley
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Over the last few years, the late-stage (pre-IPO) market has become extremely competitive as “late-stage” financing is no longer reserved for high-revenue, pre-profitability companies preparing for an IPO.

The size of these private companies’ valuations can be similar to public company’s valuations, but there are many major differences:

  1. Late-stage private companies have not endured the immense scrutiny that is a part of every IPO process 
  2. Investors assume that the numbers they see in a deck are the same as what they would see in an S-1, but private company audits are less frequent and thorough 
  3. Companies may also mischaracterize their financial positioning relative to industry standard or norm 
  4. Marketplaces such as eBay report revenues on a net basis, but often times startups report gross revenue which is extremely misleading 
  5. As companies move closer to IPO, they are expected to become more profitable, however, raising large rounds pushes profitability further into the future  
  6. There are structural issues in private company investing 
  7. Instruments such as preferred stock with liquidation preferences makes the cap chart complicated and unfriendly to new investors 

We seem to be in a risk bubble

  1. Companies are taking on huge burn rates to justify spending the capital they are raising 
  2. Late-stage investors are desperately afraid of missing out on acquiring shareholding positions in possible “unicorn” companies 
  3. Traditional early-stage investors, institutional public investors, and anyone with extra millions are rushing in to the high-stakes, late-stage game 
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