The hottest start-ups in Silicon Valley are finding ways of staying private for longer, dashing the hopes of investors waiting for blockbuster public listings to cash in their holdings.
A series of recent tech deals have furnished the biggest start-ups with billions of dollars of new capital to continue growing and given employees a way to cash out valuable stock options — resolving two of the main issues that have traditionally pushed companies to go public.
Artificial intelligence and data analytics company Databricks raised $10bn in December, the largest venture capital fundraising round of 2024. That followed SpaceX’s $1.25bn raise in November, which made it the most valuable private start-up in the world, and OpenAI’s $6.6bn haul in October.
“We are operating as a public company already,” Databricks’s chief Ali Ghodsi told the Financial Times about its recent fundraise — a round so oversubscribed he said investors had offered $19bn. “The absolute earliest we would go public is [this year], but we have flexibility now.”
The deals put the spotlight on a new class of start-ups, often far larger than their peers on public markets, with unprecedented scale and sophistication for the private markets.
While smaller groups — including a number of private equity-backed start-ups — are expected to take advantage of buoyant US equity markets to float this year, the biggest tech start-ups, particularly those in AI, are under little pressure to follow.
They “have so much access to capital at so much scale there isn’t an incentive driving them to go public”, said Kelly Rodriques, chief executive of Forge Global, a marketplace for trading private company stock.
Private markets have ballooned over the past few years. The seven largest private companies in the US are worth $695bn today, according to Forge Global, with SpaceX and OpenAI alone valued at more than $500bn.
The emergence of a cadre of massive venture firms has enabled and capitalised on that expansion. A decade ago, it was rare for any VC to write a single start-up a cheque for $100mn. Today, some investors are willing to invest many times that figure.
Josh Kushner’s Thrive Capital has invested more than $1bn into each of Databricks, Stripe and OpenAI in the past two years, part of a strategy that bears little resemblance to traditional venture investing.
The largest 15 to 20 start-ups, including Databricks and Stripe, “have effectively had their IPOs as private companies”, according to Mitchell Green, managing partner of Lead Edge Capital and an investor in Alibaba and Uber.
Having found a way to scale and to provide ways to cash out on their shares — a vital weapon in the fight for talent — private companies are also dodging some gruelling aspects of going public.
“If you have a bad quarter you can be hammered for it, you can have activists,” said Luke Ward, an investment manager at Baillie Gifford who has invested in SpaceX. “There’s an argument that some of these pioneering companies wouldn’t have been able to do what they have done if they had been on public markets and had those short-term pressures.”
But the scrutiny of public markets can also be valuable, as private start-ups can have valuations that appear detached from the strength of their underlying business. WeWork’s $47bn valuation, obtained during a SoftBank-led funding round in 2019, plummeted after it launched its roadshow ahead of a planned IPO, for instance.
“It feels as though the VC firms are in a parallel universe which has no relation to the real world,” said the head of investment at a US foundation that invests in multiple venture firms, who asked not to be named. “They have their own valuations, their own liquidity, which is self-generated. It’s a game of pass the parcel.”
Away from the top tier of start-ups, some companies have gone public or are preparing to do so — though often for esoteric reasons.
ServiceTitan, a software company, listed on the Nasdaq in December. The company’s decision to float was motivated by terms agreed with its venture backers during a funding round in November 2022.
As part of that deal, led by private equity group TPG, ServiceTitan agreed to a “compounding IPO ratchet”. In effect, that set a countdown to go public, beyond which the company would have to list at a higher price or pay out more of the proceeds to those investors.
Others will be pushed on to public markets because they need to give early employees a way of cashing out stock options before they expire or vest, at which point they are taxed as income.
Looming stock vesting dates were a factor for many of the biggest IPOs of the past 18 months, including Instacart, Klaviyo and Rubrik. That has not stunted their success, with each company’s shares rising significantly since their stock market debuts.
That could incentivise other fast-growing start-ups waiting to list, such as Dataminr, Netskope, CoreWeave and Klarna, according to Rodriques.
For now, there is little need for top start-ups in Silicon Valley to kick off IPO processes. “Databricks, Stripe, companies that can [access funding], they are not going to go public in 2025,” said Kyle Stanford, lead VC analyst at PitchBook. “The first companies that go out will be those that are forced. It will be a bunch of water-testers before it’s the $50bn companies.”