Record levels of private capital and the recent and rapid rise of VC-funded unicorns suggest to some that public markets are a thing of the past, a holdover from the capitalism of yesteryear. Financial news of the past two decades is littered with stories of companies delaying IPOs and growing despite it — Meta, Uber, Airbnb and the like. Some still remain private, most notably Elon Musk’s SpaceX. If they can find success without going public, why should anyone else?
Take the example of Klarna — a 20-year-old company — which recently had a successful IPO on the NYSE, with a nice pop on its first day.
Why would a company like Klarna choose to go public? Public companies have to deal with public investors, follow specific rules on governance, and disclose extensive information. Klarna had no trouble accessing private capital in the past. Surely some of their original backers were looking for liquidity, but there is plenty of private liquidity around if that is all they need.
Many companies have decided that the private markets are a better place to be. Over the last couple of decades, the number of listed companies and new IPOs in developed markets has dropped dramatically. The rigor and scrutiny of being publicly traded, and the perceived pressures that come with opening up the shareholder roll, are burdens many companies would prefer to avoid.
So why go public? The answer is that there are great benefits to being a listed company in a deep, global market. While there are plenty of capital options besides going public, public markets help companies grow up. That discipline and credibility, as well as the opportunity for founders, employees, and investors to benefit from the value created, still make public markets the destination of choice.
And while listings did indeed drop over the past 30 or so years, in that same timeframe, global public market capitalization rose to over $90 trillion, or about 112% of global GDP. Public markets aren’t dead — they’re just misunderstood. The idea that companies must choose between the quarterly spin cycle and the refuge of private markets is a myth. With the right strategy and the right investors, public companies still deliver superior long-term value.
Avoid the short-term cycle
It’s true, public companies spend a lot of time on the quarter — hitting or missing targets, talking to the Street, etc. But the reality is that providing estimates of your next quarter’s earnings only encourages traders to make short-term bets and increases the volatility of your stock price. It’s a habit, not a requirement.
The best companies recognize that such a myopic focus on the quarterly cycle is a distraction from building a great business. To avoid it, most companies don’t issue quarterly earnings guidance anymore; by 2024, only 21% of S&P 500 companies were still doing so, down from 36% in 2010.
Attract the right shareholders
Public companies have plenty of opportunities to talk to the investment community. But “investors” are not a monolith, something many CEOs find out too late. They have different horizons and incentives; some are seeking durable returns over decades, while others are simply looking for alpha. This is not criticism. It’s reality.
But evidence shows that an increase in short-term, transient investors is associated with cuts to long-term investments (R&D, marketing, etc.) in order to increase short-term earnings, leading to temporary boosts in equity valuations that reverse over time. While CEOs can’t bar investors from buying stock in the public markets, they can have an investor strategy that tries to attract the best long-term investors by understanding their time frames and incentives.
Companies that find success in this regard employ several key tactics: they engage consistently with large shareholders throughout the year (rather than limiting interactions to AGM seasons). They deploy CEO and board-level leadership for key shareholder meetings and, importantly, align IR professional incentives with long-term shareholder success metrics rather than short-term sell-side ratings. This comprehensive approach reduces an emphasis on 90-day cycles, creates deeper shareholder support, and unlocks mutual value for both investors and public companies.
To be sure, there are advantages to staying private for companies in certain circumstances. But public markets remain an unmatched source of capital, credibility, and the opportunity to scale. It’s time to stop viewing them as a necessary evil and instead as a strategic asset — as long as companies can navigate them with intent and with the right strategies in place.
Public companies aren’t dying, but CEOs who don’t adapt their investor strategy will.
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Politics8 years ago