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22 years after Amazon's dream IPO, startups shun public listings

Flood of venture capital allows tech companies to avoid scrutiny of markets

WeWork raised far more money than Amazon before attempting to go public, but now it finds itself in trouble.

TOKYO -- Private tech companies are increasingly shunning the traditional use of public listings as a springboard to growth, as a glut of venture capital gives them ready access to funding without the scrutiny and regulatory restrictions required by equity markets.

We Co., parent of office-sharing startup WeWork, was valued as high as $47 billion early this year before it filed for an initial public offering in August -- 485 times the valuation in its initial venture capital funding round in 2012. But investors were skeptical about its prospects for growth beyond this level, dampening demand for the shares and slashing its likely post-IPO valuation. The company ended up withdrawing its filing last month.

Venture capital firms refer to a company's first significant infusion of outside capital as a series A round, followed by series B, series C and so on. Previously, companies would typically go public after series C rounds, using venture capital to get established and then focusing on growth after listing.

 But the number of rounds has been rising, inflating the valuations of unlisted companies. We Co.'s last round, a $2 billion infusion by Japan's SoftBank Group, was its series H. is a classic example of the traditional model. It held just a seed round and a series A round, lifting its valuation by a factor of seven, before its 1997 IPO. Since then, its market capitalization has swelled from $400 million to $1 trillion -- a 2,600-fold increase.

Facebook's 2012 listing is seen as a turning point toward the new private-market-centric route. The company was valued at $104 billion in its IPO, 800 times its initial valuation, but has grown just sixfold since then.

In recent years, some big-name, high-value unicorns have even found themselves worth less after going public, such as ride-hailing business Lyft and work chat app operator Slack Technologies.

A combination of weak economic growth and a venture capital market awash in cash have driven the surge in private valuations, as yield-starved investors chase after a small set of fast-growing companies seen as the vanguard of the digital revolution.

SoftBank's $100 billion Vision Fund has injected vast sums of Saudi Arabian oil money into the market. Institutional investors the world over, such as Japan Post Bank, have joined the fray, along with investors that had typically stuck to public markets, such as hedge funds. Assets under management at venture capital firms tripled over a decade to $856 billion at the end of last year, according to U.K. research firm Preqin.

The shift toward fundraising on private rather than public markets has been striking. Unlisted companies raised $257 billion from venture capital firms last year, surpassing the $223.6 billion earned from public listings.

Stock markets serve as a mechanism to distribute resources to businesses widely considered to have healthy prospects. The profits brought in by these companies are in turn redistributed to shareholders, driving consumption and more investment.

The expansion of private markets, which are accessible to only professional investors, risks distorting this distribution. Even if particular investors have a knack for making good bets, the small number of players involved means that valuations still tend to rise excessively, according to Japanese investment advisory firm HiJoJo Partners.

The ready availability of funding has tilted the balance of power away from venture capital firms and in favor of startup founders, giving them freer rein to solidify control and engage in management practices that investors frown on.

Larger private markets also risk concentrating wealth generated by companies into a smaller set of hands. Jay Clayton, chairman of the U.S. Securities and Exchange Commission, recently expressed concern that retail investors have "extremely limited, and in many cases costly and otherwise less attractive, access to our private markets."

Some companies are bypassing the IPO process entirely, going public without new shares just to give existing shareholders a chance to exit and recoup their investments, as seen with last year's direct listing by music streaming service Spotify.

If public markets become just a place for profit-taking by private investors, that would undermine one of the main systems underpinning capitalism.

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