Author: Citrini Research
Translation: Felix, PANews
Retail investors’ chances of earning high returns in the stock market are becoming increasingly slim, largely due to companies delaying going public. Research firm Citrini published an article exploring the issue of modern capital markets where companies tend to stay private for extended periods, resulting in growth value mainly captured by VC firms, with public markets often reduced to liquidity exit tools. Below are the details.
Companies staying private for the long term is simply nonsense.
While I personally understand the motivations behind this and do not blame founders for doing so, such actions undermine the system that originally created these companies. Fundamentally, it is a breach of the promise that keeps capitalism functioning.
The social contract in the United States has always worked quite well for capital markets.
That’s right, you might work at a dull small business, or have a job that’s not particularly outstanding; you may never become extremely wealthy, nor have transformative ideas, and sometimes you might feel that this system doesn’t serve you at all.
But at least you have the opportunity to participate in the great achievements created by this system.
For most of the post-war period, these transactions were roughly as follows: the public bore the market volatility, inefficiency, and the dullness of holding broad indices. In return, they were occasionally given opportunities for transformative growth.
It created upward mobility opportunities that didn’t exist before—especially for those who believed in the growth prospects of the US economy but were not direct participants.
I have shared two stories before: a woman in her sixties who retired, invested in Apple stock with two salaries after the company aired its first Super Bowl ad, and never sold. A childhood neighbor invested in AOL in 1993; by the time it merged with Time Warner, his stock sale was enough to pay for all three children’s college tuition and pay off his mortgage.
Today, companies like Apple in the 70s or AOL in the early 90s are almost nonexistent.
Even if you are just a janitor, you still have the chance to invest in companies that are writing America’s history. The elite system of the market means that if you are sharp enough, you could have bought AOL stock in 1993.
And this is just the tip of the iceberg: a few visionary individuals noticed certain changes.
The broader, more socially significant impact is reflected in those who are not particularly attentive to social dynamics. They go to work day after day. As part of the system that keeps everything running, they have the opportunity to participate in creating enormous wealth.
Even if you are not the smartest individual investor, even if you have never bought stocks in your life, your pension will eventually be invested in companies building the future. As a small part of the capitalist engine, you don’t need luck.
You are already very fortunate, as part of your salary is invested in your future. Sometimes, you find yourself a small shareholder in a company that eventually becomes a cornerstone of the future.
Thanks to this system, some companies generate annual revenues of billions of dollars. But today, those maintaining this system cannot benefit from it because, in the eyes of capital markets, they are not equal.
In this dynamic, capitalism will regress into feudalism. A small elite controls the means of production (land), while others work for them, and social mobility becomes a fantasy. If companies do not go public, they are merely reconstructing the same structure with different assets. Equity in transformative companies is the new land.
You must have a net worth of at least $1 million (excluding real estate), or have an income of $200,000 for two consecutive years. The median net worth of American households is about $190,000. Legally, they are too poor to qualify for investing in the future. But it is these median households, through work and consumption, that use these companies’ products, making these companies valuable.
Without hundreds of millions of users, ChatGPT and OpenAI could not reach a valuation of $500 billion. Users create value. No matter how many B2B transactions occur in the industry chain, the end of the chain is always individual consumers. They should at least have the opportunity to share in the benefits.
In a sense, it might even be worse than feudalism today: at least peasants knew they were peasants. Today, people “participate in capitalism” through 401(k)retirement plans but are systematically excluded from the most transformative wealth markets.
The rich getting richer has always been how capitalism operates. But until recently, the powerful US capital markets at least ensured you were a stakeholder. Winners will win, but you can also participate in their victories.
You could have been one of AOL’s first million users and said, “Cool, I want to invest in this company.” Over the next six years, its stock price increased by 80 times. Today, the good products of any new company you use are almost never traded on the public market.
In 1996, there were over 8,000 publicly listed companies in the US. Despite the exponential growth of the economy today, the number of listed companies is less than 4,000.
Adjusted for 2024 inflation, the median market cap of companies listed in 1980 was $105 million. In 2024, it is $1.33 billion.
The focus here is not on the median market cap. Over the past century, nearly half of the growth in market value has been contributed by the top 1% of companies.
Anthropologie, SpaceX, OpenAI.
These companies should have been among that 1%. Today, the only way for the public to participate in their growth is through IPOs after their growth rate stabilizes.
Amazon was founded just three years before going public, with revenue of only $148 million and operating losses. Apple went public four years after its founding.
When Microsoft went public in 1986, its market cap was about 0.011% of US GDP. Within ten years, it created approximately 12,000 millionaire employees. Secretaries and teachers in Washington state also became millionaires by buying and holding shares of this software company.
SpaceX is arguably one of the most inspiring and milestone companies in the US today, with a valuation of $800 billion, about 2.6% of GDP.
OpenAI recently completed a $500 billion funding round and is reportedly trying to raise an additional $100 billion at a valuation of $830 billion. As of October 2024, its valuation is $157 billion. If OpenAI had gone public at that time, it would likely be included in the S&P 500 index very quickly, perhaps as the sixth or seventh largest holding (possibly higher given the trading activity of AI companies).
However, most of this new value will not go into the hands of American citizens but will flow into venture capital and sovereign wealth funds.
In 2024 dollars, Apple’s market cap at IPO was $1.8 billion. It even ranks outside the top 100 companies by market cap.
In 1997, Amazon’s valuation at IPO was $438 million. The process was chaotic, with extreme volatility. During the dot-com bubble burst, its stock price fell 90%.
But because the public bore this volatility, they also reaped a subsequent 1,700-fold increase.
They didn’t need enough capital to invest in venture capital funds, nor did they need to “build connections.” The only threshold to enter the market was the stock price.
Look at Uber.
This company has always attracted ordinary investors’ interest because Uber rides are everywhere. However, when Uber went public in 2019 with a valuation of $89 billion, its value had already increased about 180 times compared to early venture rounds.
If this had happened in the 1990s, individual investors might have had a chance to notice the changing world. Suppose a driver for Uber noticed when the company’s cumulative orders surpassed 100 million in 2014 (then valued at $17 billion); that would be a 10x return, with a 22% annual compound growth rate.
But the reality is, the public has only enjoyed a doubling of Uber’s stock price over the past seven years.
To clarify: this is not a call for all startups to go public. Those who invested in Uber’s seed to Series C rounds clearly took on significant risks and reaped substantial rewards.
But by the time Uber reached Series D, one might ask whether staying private was merely to ensure a smoother path to market dominance and easier exit, with all profits ultimately flowing to VC circles.
It must be reiterated: venture capital has always been an essential part of technological progress. Many companies that would have been eliminated by the market survive precisely because they can raise funds from a group of long-term investors.
But if venture capitalists want the game to continue, they need to ensure the entire system doesn’t collapse under its own overload.
Today, we see the emergence of a “K-shaped economy.”
High-income Americans: Wealth and income growth:
- Asset appreciation: rising stock and real estate values.
- Remote work stability: stable jobs, reduced expenses, increased savings.
- Stronger income growth: higher wages, bonuses, and financial buffers.
Low-income families: Struggling with living costs and inflation:
- Slower income growth: stagnant or slowly increasing wages.
- Rising prices (inflation): rent, food, energy, and essentials costs increase.
- Financial vulnerability: rising debt, limited savings, more susceptible to shocks.
There is more than one way to address this issue, but anything that broadly increases asset ownership aligns incentives. The impact of AI is likely to only intensify this dynamic. If the top half of the K-shaped economy becomes narrower due to concentrated benefits, the situation will worsen. If public markets become liquidity exit tools for mature venture projects, this dynamic is inherently unsustainable.
Capitalism will give way to new feudalism. Social unrest will become more common.
Looking at China, this year may see more early- and mid-stage AI companies going public, with the number surpassing that in the US. The STAR Market (Sci-Tech Innovation Board) looks eerily similar to Nasdaq in the early 1990s, offering opportunities for the public to create enormous wealth. China seems to understand that this move helps build a strong middle class, while the US appears to have forgotten this.
Companies do not want to bear market volatility. Before they grow so large that venture capital can no longer fund them, they don’t need to go public. VCs know they can just raise valuations in later rounds, so they won’t push for IPOs.
Whether this situation will change or how it might change is uncertain, but it’s clear that the US is heading toward a world where the S&P 500 essentially becomes a liquidity exit tool for mature venture projects.
OpenAI and Anthropic will go public as some of the world’s largest companies, and the indices that sustain retirement will be forced to buy their stocks. By then, even if stocks perform well, the public will have been excluded from wealth creation, and future returns will be compromised.
The total value of companies on Crunchbase’s unicorn list reaches $7.7 trillion, exceeding 10% of the market cap of the S&P 500.
Given the successful companies listed in the previous century, some might accuse of survivor bias. But that’s precisely the point. Investing in passive indices like the S&P 500 is so effective partly because, over time, it tends to retain high-quality companies and eliminate poor ones. It benefits from periods when these companies dominate, especially as they actively move toward dominance.
Apple was included in the S&P 500 just two years after going public, replacing Morton Norwich (a salt company that later merged with a pharmaceutical firm, becoming responsible for the Challenger disaster, and was eventually split by private equity).
Looking at the companies that truly created wealth over the past 50 years:
Even the highest-valued IPO company—Google ($23 billion)—was just at the bottom of the top 100 companies at that time.
If we want capitalism to continue, we need to encourage people to invest. But if investment merely becomes a tool for a few to profit, the system will be hard to sustain. Viewing IPOs as exit strategies and limiting companies before they become national giants neglects the very system that creates the conditions for these companies to survive. If the returns from investing in epoch-making companies are monopolized by a few, most people will gradually lose confidence in the system.
It’s uncertain how this situation can be changed or whether existing incentives are so deeply ingrained that they cannot be altered, but if there’s the ability to change them, it should be done.
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