Daniel Hom of Tableau performs insightful analysis on his blog, IPO Dashboards. Most recently, he exposes the differences between the shareholder returns of large and small IPOs. Daniel finds smaller IPOs outperform larger IPOs by a factor of 10. What is the driving factor?

Investment gestation times, the duration from initial venture investment to exit, have more than doubled in the past 10 years according to the NVCA. Faced with such long hold times, companies and investors must make a choice to take a company public early, young and small or wait until a truly large IPO.

Liquidity Event 1998 2008
IPO 4.5 9.6
M&A 3 6.5

When companies go public at an early stage, VCs lose a significant portion of the return. Microsoft is an extreme example. On its offering day, Microsoft’s market cap totaled $60M.  99% of the enterprise value growth occurred post-public offering.

Unfortunately, VCs cannot claim those returns as their own because VCs distribute shares of public companies to their investors soon after portfolio companies go public. Instead of forgoing earning carry on this growth, VCs raised growth funds to invest in pre-IPO companies, to keep them private a bit longer and capture more of the returns, to wit the many billion dollar valuations observed during the past 24 months.

It’s not surprising larger IPOs are efficiently priced and offer menial returns. With growth capital, these large startups delay IPOs for 24 months or so at which point more growth has been captured, more insight into the company’s performance in the market has been recorded and a better idea of the value of the company can be established.