What if the Current Tech IPO Drought isn't a Drought but the New Normal for Venture?

What happens in a world where we have fewer, bigger IPOs that take longer to mature?

I spent much of last year thinking about the liquidity challenges in venture capital and what would have to change for things to improve. For most venture funds, there are three ways to obtain liquidity: IPO, M&A, and secondary sales. Given the state of the markets, I was primarily focused on the role of secondary sales, as there was relatively little M&A and IPO activity in 2024.

Coming into this year, I read many articles suggesting the IPO window would reopen meaningfully as the new administration removed some of the perceived barriers to IPOs and large-scale M&A transactions for big tech companies. It’s still too early to tell how that will all play out, but it doesn’t feel like the first half of Q1 has been an opening of the floodgates on either front. IPO roadshows and M&A deals take time, but we haven’t seen an instant snapback in activity yet.

However, after talking to founders in my network and people who work with companies evaluating whether or not to go public, I wonder if this drought narrative is the wrong analogy. In the past few weeks, I’ve read good articles by Katie Roof and Erin Griffith, reinforcing my hunch that something else might be at work.

Many in the venture business have described the recent slowdown in IPO activity as more of a blip than a fundamental change in our industry. What if the IPO drought is not so much a drought as a reset to a new, lower volume of IPOs going forward?

I’m not arguing that we won’t see any IPOs for venture-backed startups; that strikes me as unlikely. Instead, I think we will see fewer companies going public, but those that do go public will be materially more mature than we’ve seen in the past. I’m unsure how their private valuations will translate to the public markets. Still, I am sure those businesses will be easier to evaluate and have much longer operating track records to analyze. A few observations that lead me to believe this is true:

• Conventional wisdom says a software company needs $250-500M+ in annual revenue to go public. Most companies will take a decade or more to achieve these revenue thresholds. A new crop of AI companies have scaled early revenue much more quickly, but we don’t yet know enough about whether those fast ramps will persist as customers make renewal decisions. If this continues to be the bar, the hold period from initial investment to IPO will be at least a decade, likely longer.
  

• Companies that achieve IPO-readiness milestones can also continue to raise significant amounts of capital in private markets. One of the ironies of the revenue threshold above is that companies that can achieve those revenue levels don’t have to go public; plenty of private capital is still available to fund their continued growth or provide liquidity to those who want to sell. Examples include the Plaid tender offer, the Stripe tender offer, and the Databricks Series J round.
  

• Money continues to flow into the venture capital industry, and most of those dollars are flowing to large venture funds that can underwrite later-stage investments in mature private companies. I don’t expect the inflows into private equity and venture to decrease any time soon, as the venture capital industry is still small relative to other sectors of finance. Of course, I might be guilty of motivated reasoning here as I am a VC, but I think the industry will grow, and I think most of that growth in terms of assets under management will come from large firms staying large or getting bigger over time. Those large firms can support the mega-rounds required to keep these companies private.

• I’m not sure these companies' leadership teams and boards see much benefit in going public. These IPO-scale companies can raise the capital they need to keep growing, so most don’t need to tap the public markets for capital to fund growth. They also can transact and generate liquidity (more on that later) without going public. Given the regulatory and financial costs associated with going public, some of these companies look at the cost-benefit analysis and have concluded that being private is preferred and life as a public company management team isn’t more attractive.

• The emergence of secondary liquidity for founders, early employees, and early investors in hot companies means you no longer need IPOs to get liquidity. This feels like the most profound change I’ve seen in my time in venture. When I entered the business, most system participants (investors, employees, and founders) needed IPOs or M&A to get liquidity. We didn’t have as many organized off-ramps to take money off the table along the way, so you needed liquidity from public markets or M&A to generate cash returns. We don’t live in that world anymore. Founding teams of hot startups can get meaningful liquidity at Series A and B while maintaining significant chunks of ownership. Early angels and seed funds (including mine) can find investors who will buy them out in later rounds.
  
  In the end, I think this era of fewer but bigger IPOs less frequently will lead to secondaries becoming the primary way in which smaller funds achieve liquidity for their investors. It’s okay for shares to change hands between investors over time, as each type of investor or shareholder has different needs and different hold periods. As the time to IPO extends, I don’t think it makes much sense to think of the venture business as just a buy-and-hold business at the early stage. As I wrote four years ago, we only have 100 points of equity to distribute and not everyone is set up to hold even their best companies for 15 years.

My bias is to look through changes in venture capital for what it means for smaller, sub $250 million venture funds because that’s the world that I understand best. A world where fewer companies go public but do so much later in life and as substantially more mature companies puts a lot of pressure on the business model for people who get in early and are looking at a 12-15 year hold period to IPO. Secondaries will likely become the primary way small funds deliver returns to their LPs if this world comes to pass.

I recognize there is always some risk in writing about a segment of the market that I don’t spend as much time in and isn’t central to the day-to-day of my firm, but I’ve been thinking about these themes for a while and wanted to share my thoughts.