News today that Tencent had postponed an initial public offering of its music streaming operation got us to thinking about the fickleness of what the Street calls the “IPO window”. If any deal should have been able to muscle its way past the current market volatility, it is Tencent Music. Price talk had a valuation range of $25-$30 billion, large enough to make it a “must own” slice of the Chinese Tech scene. And it’s not like the company’s business, which controls half the market for music streaming in China, is especially exposed to trade/tariff concerns.
All this is both a cautionary and explanatory tale of how disruptive technology is funded and eventually monetized. Simply put, a disruptive company can execute well and capture a large slice of an important market and still be left on the sidelines when it comes time for venture capital/sponsor companies to reap the rewards. Yes, if equity markets calm down the Tencent Music IPO will go forward. But at this point that “If” has a sizable cloud over it.
In a narrow sense, the Tencent Music story underlines one reason venture capital backed companies have taken more time coming to public markets than prior cycles. By most estimates we read in the VC news space, there are well over 20 private disruptive tech companies with valuations over $10 billion. And as many as 100 have last-round valuations over $1 billion. But very few have immediate plans to go public, despite the fact most still require significant investment capital to grow.
The problem: public equity markets may have attractive valuations, but access to capital is not assured. The IPO window comes and goes and, once public, stock price volatility can yield uncertain valuations for follow-on equity offerings. All that makes venture capital an attractive, more stable, alternative.
There is also the problem that disruptive companies are now global and therefore need years to develop and scale to critical mass. Even mega-unicorns like Uber, Airbnb, WeWork, and Slack are still expanding quickly and need reliable growth capital for existing products and adjacent offerings. Venture capital can provide that on relatively attractive terms that do not shift as dramatically as public markets’ animal spirits.
And given how late we are in the US economic cycle, there is also the next recession to consider. That’s when the IPO window can be shut for a year or more, and Tech sector valuations can decline by +30%. Venture capital can afford to take a cross-cycle view, knowing that the typical fund has a 5-7 year life. And no real need to mark investments to market.
The upshot here: now you know one more reason why SoftBank is raising another huge (possibly $100 billion) fund and why other VC players are in the process of doing the same. Venture capital has grown to the point where it can comfortably fund the tens of billions of dollars required to develop global disruptive technology. Now, it will take the next step: making sure that disruptor companies do not need to rely on volatile public markets for the next stage of their growth.
In short, venture capital is disrupting public equity markets just as the companies they fund are challenging publicly held incumbents.
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