The public markets today are undergoing one of the largest shifts since the birth of the Motley Fool
When the Motley Fool was founded 25 years ago, many individual investors found the public markets opaque and difficult to access.
Back then it was still common to follow the performance of your favorite stocks by reviewing yesterday’s gains/losses in your daily newspaper.
To make a stock trade, we worked with a broker over the phone and paid commissions of $20 dollars or more (in some cases as much as $100 or more).
When www.fool.com first launched, individual investors couldn’t even always listen to quarterly earnings calls in real time along with Wall Street analysts! Thank goodness The Motley Fool and its community helped to drive the introduction of Regulation Fair Disclosure by the SEC, a rule that ensures everyone has access to receive material information from a company at the same time.
The internet brought access to real-time stock quotes on brokerage sites, as well as company financials, and an overwhelming number of financial ratios and tools to assist in finding investment ideas. Today we can all make investments for just a few dollars a trade (if not for free) with no broker assistance required.
As fortune or luck would have it, just as the public markets were opening up to individual investors, the IPO market was really heating up (particularly in the technology sector) reaching a peak we haven’t seen before or since:
Looking back at these early years for The Motley Fool investing guidance, we celebrate the recommendations of then recently-IPO’d companies like AOL and Amazon as examples of the life-changing, wealth-generating opportunities that anyone can invest in–if you know where to find them.
That’s why, over the last two decades plus, The Motley Fool has sought to help individual investors access and find success in the public markets.
But take another look at the chart above, and you can see that the public markets today are undergoing one of the largest shifts since the birth of the Motley Fool. Can you see it?
In short, the chart above shows that the IPO market is drying up. In its place, significantly more money is pouring into companies who remain private.
Perhaps by coincidence, perhaps not, as the playing field was leveled in the public markets, professional investors have led a transformation in the private markets. Perhaps by coincidence (perhaps not), these are markets that are more opaque and difficult to access. What’s going on?
The trend is striking. Since the .com crash, there has been a steady decline in public listed companies and IPOs.
There were more than 7,000 companies publicly traded in 1996. That number now stands at about 3,600.
The Tech sector, which drove the growth in IPOs in the late 90s as well as much of the growth in market returns generally, tells the story of what’s going on:
The impact of this dramatic increase in private company funding suggests that the types of innovative companies that generated significant wealth for Motley Fool members as they entered the public markets (companies such as AOL, Amazon, and Netflix and others), are remaining private. The venture capital firms and Wall Street investors are driving returns for themselves in the private markets and depriving public market investors from accessing the same life-changing investment opportunities.
And you can’t necessarily make it back as a patient long-term investor when these companies do go public. Take Facebook for example, which the Fool recommended shortly after its IPO in 2012. The company went public at $100 billion. For Facebook investors at the IPO to match the public market returns of Microsoft since their IPO, they’d need their shares to be worth $76 trillion in the future (for context, the entire world’s GDP is $78 trillion).
Companies that would have in the past required IPOs to secure large amounts of capital to pursue huge growth opportunities can stay private for decades without ever needing to list on public stock exchanges. In 1999 the median time it took to get to an IPO was 4 years. Today it’s 11 years. This time continues lengthening every day.
Markets change over time and investors adapt. In 2018, investors looking for world-changing ideas in their infancy should look to access the markets where the largest amount of wealth creation is occurring. The chart below shows returns to private investors (ORANGE) vs. returns to public investors (GREY) across time for some of the most well-known IPOs.
It’s worth repeating again: The public markets today are undergoing one of the largest shifts since the birth of the Motley Fool.
A Tale of Two Companies – once again showing how the returns have moved
In mid-2011, HomeAway IPO’d at $27 per share giving the company a market cap of $3 billion. Around the same time, Airbnb chooses to raise more money in the private markets instead of IPO. It received a $1 billion valuation.
Four years later in June 2015, Airbnb once again announces that it will not IPO and instead takes $1.5 billion more in funding. The company is now valued at $25 billion. The deal is not lead by venture capitalists, but by Wall Street—with Fidelity, T. Rowe Price, and Wellington Investments all in the round.
In November 2015, HomeAway accepts a buyout offer for $38.31 / share.
Public market investors in HomeAway earned a nice 141% return on the IPO price, but that pales in comparison to the 25X return of Airbnb in the private markets during the same period.
To be sure, these two companies, while both successful, have very different growth stories. The point is not to treat them as the same. But for someone looking to invest in the world-changing idea of owner-owned rental properties, the public markets did not provide an opportunity to invest in the best company available to capitalize on it.
So, while the Fool celebrates stories such as Amazon and its (now 200-bagger!) history, stories like these are increasingly hard to find, if they exist at all. Amazon went public 2 years and 10 months after becoming a company. Today it could wait to be worth $50 billion (or more) before The Motley Fool ever got a shot to recommend the company to its members.
Where We Go From Here
Fortunately, with Motley Fool Ventures we can take our mission to help the world invest better—and extend it to the private markets where the vast majority of wealth-generation is occurring today.
According to PitchBook, there are 99,300 venture-backed companies that are active and not yet preparing for an IPO. That’s a 27X+ larger opportunity field than what exists in the public markets.
That said, private market investing has many similarities to investing in the public markets during the early days of The Motley Fool’s investment newsletter business. Acess to information on private companies is limited. The ability to invest in private companies is often gated by venture capital firms or large Wall Street institutional investors, and frequently only ultra high net worth individuals have access to these investment vehicles.
In the worst-case scenario, Wall Street firms would hold the best companies private, structure their own deals to guarantee minimum returns, and spin out low-quality IPOs to the hungry public market investors.
Once again we want to level the playing field on behalf of Motley Fool members. Our goals are to:
- Provide Motley Fool members who are qualified investors with access to the best private company investment opportunities that we can find. Remember the SEC limits who can invest in a venture fund (more on what’s required to be considered a qualified investor can be found in our fund documentation) because the risks are significantly greater than the public markets—and, as we have shown, so are the potential rewards.
- Leverage our financial resources, reputation, network, and experience to support the entrepreneurs who can develop work-changing businesses and life-changing investment opportunities.
We intend to invest in companies from “Seed to Series B.” Like allocating a portfolio across small, mid and large caps companies, we are looking to invest in companies that are in the early stages of validating the market opportunity for their product or service, alongside companies that have accomplished “market fit” and are maturing their commercial or revenue model, as well as companies that have strong product demand, traction on their commercial model and are focused on scaling their business. As with our public market portfolios, our earliest stage investing (Seed) will come with more risk and potentially the greatest rewards.
Having been a VC-backed private company ourselves at The Motley Fool, we believe we understand what it takes to be a successful private company just as Foolish investors have a track record of finding successful public companies. We will be opportunistic in terms of where we look for our investments but will be most comfortable with sectors we know well at The Motley Fool and for which we are most able to provide support to entrepreneurs–sectors such as fintech, culture/performance in the workplace, and consumer-facing companies with subscriptions and recurring revenue models.
As operators and investors, we understand the journey that private companies are undertaking, and we will be committed to helping them succeed, having spent the last 25 years at The Motley Fool building an award-winning culture, hiring and unhiring, negotiating $100MMs in financings/redemptions/restructurings/partnerships, and developing scalable business models:
What we’re looking for in an investment may vary somewhat for each opportunity, but we will always be on the hunt for:
- Fantastically Foolish, Inspiring Founders
- Alignment with the Founder Purpose and Timeframe
- Companies that Solve a Problem in a Big, Exciting Market
- Demonstrated Product and Business Traction
- Off or On the “Beaten Path”
- A Bit of Motley
We look forward to exploring opportunity to take this journey into the private markets together. Fool On!