How Private Funding Fuels Modern Corporations

April 17, 2018

Earlier this month, the music streaming service Spotify went public on the New York Stock Exchange with a valuation worth approximately $30 billion. And while that is certainly an enormous amount of money, it pales in comparison to the $93 billion that the Japanese telecom giant Softbank privately raised last year to create a technology investment fund. In the past, major IPOs such as Spotify’s tended to be the most dependable way for up-and-coming companies to receive a major infusion of capital. Today, however, private investors like the ones who are fueling Softbank’s fund have become the biggest players in the world of finance.

In 2017 companies raised an estimated $2.1 trillion through public markets like stock exchanges. Meanwhile, private investors supplied $2.4 trillion in funds, widening a gap that has been growing since 2011. In fact, the total number of public companies has shrunk by more than half since 1996. According to experts, many companies turn to private investors as a way to earn capital quickly without disclosing too much information about their business. After all, public companies must register with the SEC and provide specific details about their finances. Privately held businesses, on the other hand, only need to answer to their direct stakeholders. Many Silicon Valley startups operate this way, allowing them to encourage innovation without publicly detailing every minor impact on profits.

Of course, all this secrecy makes it difficult to hold some privately funded companies accountable. And since securities law forbids small investors from entering high-risk markets, private fundraising opportunities are available exclusively to wealthy individuals. As a result, hugely successful but privately held companies like Uber or Airbnb are off limits to the average investor. After Spotify’s blockbuster IPO, though, some analysts are predicting that today’s tech companies could start going public with more frequency. “At all levels, there are more and more companies who are thinking about should we go public this year or next?” said JPMorgan Chase vice-chairman Noah Wintroub. “You’ve got an environment now that’s conducive to asking that question, and also a lot of companies that have scaled up to the point where they can go now.”

Questions:

  1. What are the advantages and disadvantages of raising money from private investors?
  2. Why are only wealthy individuals or organizations allowed to invest in high-risk private ventures?

Source: Jean Eaglesham and Coulter Jones, “The Fuel Powering Corporate America: $2.4 Trillion in Private Fundraising,” The Wall Street Journal, April 3, 2018; Jack Nicas, “Silicon Valley Venture Capitalists Prepare for an I.P.O. Wave,” The New York Times, April 15, 2018; Seth Fiegerman, “Spotify Valued at Nearly $30 Billion in Unusual Wall Street Debut,” CNN, April 3, 2018.

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