The initial public offering has for decades been the favored means by which fast-growing technology companies have raised their cash and credibility.
Yet the relationship between the IPO and the CEOs of today's most-valuable tech start-ups more resembles a frosty glance than a warm embrace.
Those who care about financial transparency may want to root for this rocky marriage of Silicon Valley and Wall Street to survive. Whatever may replace the traditional IPO could result in technology investors — even large ones, like hedge funds and giant mutual funds — having even less say in how these inherently risky companies are run.
Steep share-price drops that followed high-profile market debuts in recent years have taken some shine off a storied financial instrument that helped make household names of many tech firms.
So have the rising costs of being a public firm in the wake of financial regulations that followed the dot-com stock crash of 2000–2001 and the financial meltdown of 2008–2009.
"There's a lot more liability" to being a public company in the wake of Sarbanes-Oxley reforms, said Max Levchin, founder and CEO of consumer-lending company Affirm, which remains private five years after its founding, even as its grown to 230 employees.
The harsh glare of being public is also a disincentive, says Levchin, who sits on an advisory board of the Consumer Financial Protection Bureau and is a former Yahoo board member. "It's a huge distraction," he said.
Signs of a rocky relationship
Signs abound that large, private tech firms have fallen out of love with the IPO:
Uber, now in its ninth year, has raised money only in private markets, even as its valuation reached $68 billion.
Its rival, ride-provider Lyft, in April said it hit a $7.5 billion valuation courtesy of a $500 million round. A month before, the No. 1 company on the 2017 CNBC Disruptor 50 list Airbnb raised $1 billion in a private financing round that gave it a valuation of $31 billion.
These rounds and valuations are of a size once reserved for public tech firms.
Google, for example, raised just under $2 billion and was valued at roughly $23 billion in its 2004 IPO.
"When private valuations are this high, there's no pressing need to go public," said Ken Goldman, chief financial officer of Yahoo and a veteran CFO who took three previous tech start-ups through the IPO process.
Now the music service Spotify reportedly wants to bypass an IPO altogether, opting instead for a direct listing of shares on a public exchange.
Some may see that potential move as one made out of desperation, as much as a distaste for the IPO process, given that Spotify's previous round of financing reportedly required making concessions to investors.
And Spotify's business model, which requires making massive royalty payments to keep pace with the music libraries of huge rivals like Apple and Amazon, is perhaps best left to private investors who can better gauge its risks.
Even so, Spotify's move is a sign that today's tech start-ups have options that firms like Apple, Microsoft, Oracle and Cisco Systems in their early days did not.
"Spotify is evidence of the evolution to new modes of liquidity," said Barrett Cohn, co-founder and managing director of Scenic Advisement, a San Francisco-based investment bank that executes private stock sales for tech companies, their employees and investors.
"Sellers want a market price," said Cohn, who previously worked for Lehman Brothers and for Maveron, a venture capital and private-equity firm, and who declined comment on whether Scenic had worked with Spotify. "They don't want to wait for an IPO that might not come."
Vibrant market
Despite the emergence of new alternatives, the IPO market remains vibrant.
Even without some of the largest private companies executing IPOs, activity and performance is better than it's been in several years.
As of Friday, 56 companies had raised $16.4 billion via U.S. IPOs this year, according to Renaissance Capital.
That compares with 22 companies raising just $3.5 billion in the same period a year earlier. The 20 issues that went public in April were the most in that month since 2014, according to Renaissance chairman and co-founder Kathleen Smith.
Even severe, post-IPO price drops in the shares of Facebook, Twitter and Alibaba — in 2012, 2013 and 2014, respectively — have yet to cool investors' appetites for big names.
Buyers of Snap were similarly whipsawed, with the stock plunging more than 20 percent last Thursday after its first financial report as a public company, then rising more than 8 percent on Monday after it was revealed that some big hedge funds had taken positions in the stock.
"Snap will put a chill on some unicorns'" pursuing IPOs, predicts Smith, whose company runs . Even so, IPO shares are up an average of 11 percent in 2017 as of May 12, according to Renaissance.
Smith is skeptical of Spotify's rumored plans. IPO buyers are "looking for more transparency, not more product," she said. "It's hard to develop a public market. Someone has to put buyers and sellers together."
The balance of power has shifted
While the IPO market remains healthy, the same can't be said of the financial statements of some newly public companies, including Snap and Box, a cloud-computing firm that debuted in 2015.
Both firms had operating losses that exceeded revenue at the time of their IPOs, a sign of how much investment their business models require.
Twitter also posted a string of losing quarters before its 2013 offering and still trades below its IPO price. It has never posted a quarterly profit.
The board of Snap in 2015 paid a $750 million bonus to CEO Evan Spiegel as an incentive to move the company into the public markets.
Less than two years later Spiegel did agree to IPO, but only after he and fellow co-founder Robert Murphy pushed through a share structure that gives IPO investors no voting rights.
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Google (now part of parent company Alphabet) and Facebook also have dual-class share structures that insulate founding executives from agitation by activist shareholders.
But those two companies also were earning income at the time they went public.
The ability of today's tech firms to raise money on terms less attractive to investors is a sign of how the balance of power has changed between Silicon Valley and Wall Street.
In the days when the market valuation of the tech industry was dominated by companies selling to other companies — Microsoft, Cisco, Oracle and so on — IPOs gave young tech companies not only cash but a stamp of legitimacy.
Yet private companies that target consumers and already have well-known brand names — like Uber and Airbnb — don't need that imprimatur of legitimacy or publicity.
"For a long time, most software companies that went public were cash-flow positive; they didn't need the money," said David Golden, a managing partner at tech investing firm Revolution Ventures in San Francisco.
By stark contrast, Uber and Lyft — like Snap — are hemorrhaging money.
"There was a badge of honor associated with going public," Golden said. "That's kind of gone now."
For all its warts, though, the much-maligned IPO will survive because it gives both sides of the transaction what they want.
Sellers get cash and liquidity, and buyers get a chance to earn market-beating returns.
Indeed, the IPO may even entice some of the very companies that have so far kept it at arm's length.
In an increasingly competitive global tech market, where rivals are now coming from not only the United States and Europe but also Asia, an IPO is "still the best way to create liquidity for employees and early investors," Levchin said. He helped found PayPal in 1998 and sold his gaming company, Slide, to Google for $228 million in 2010.
"I'm a big believer in transparency. ... Why not show your numbers?" he asked.
"We probably will (IPO) eventually," Levchin said.
— CNBC reporter Ari Levy also contributed to this report.
