In growing startups, founders face a choice: stay private or go public? It’s a hugely consequential decision, and a hard one to navigate. Public and private capital markets are constantly in flux, responding to factors like the broader economy, regulation, and technology. With those fluctuations, the implications of both choices for founders also shift. Founders looking to make wise funding decisions in this complicated context must understand how and why markets shift and what it means for them.

A new paper in the Annual Review of Financial Economics, “Private or Public Equity? The Evolving Entrepreneurial Finance Landscape,” by Columbia Business School Professor Michael Ewens and co-author Joan Farre-Mensa of the University of Illinois Chicago, aims to help founders make informed decisions. It explains changes during the past two decades in the US entrepreneurial finance market, what caused them, and what they mean for founders. (You can find a brief on the paper here.)

Ewens is the David L. and Elsie M. Dodd Professor of Finance at CBS and co-director of CBS’s Private Equity Program, which connects students and alumni with the private equity industry. He’s also a researcher at the National Bureau of Economic Research and an editor at four different academic finance journals. Here’s what Ewens and Farre-Mensa, also an entrepreneurial finance expert, say is the most significant shift over the past two decades: Firms stay private longer and increasingly favor private over public capital for fundraising. It’s important for founders to understand why. 

What’s Driving Founders to Stay Private

“Private markets have become a viable substitute for public markets,” the researchers say, for a few reasons. The main one is that there’s simply much more late-stage private capital available now: Between 2002 and 2019, private equity invested in venture capital-backed startups raising later stage capital leapt from $14.2 billion to $80 billion. Capital has become more available because regulatory changes over the past 20 years have made it easier for VC and private equity funds to raise large sums. 

The authors also say funds now have more money because institutional investors like public pension funds and higher education endowments have increasingly turned to private equity over public markets. They note that from 2002 to 2019, the average allocation to private equity by public pension funds increased from 2 percent to 7 percent and by endowments from 5.5 percent to 20 percent. 

Another factor that explains firms staying private longer is that new technologies like cloud computing have vastly lowered early-stage capital needs. Plus, regulations have made other fundraising options possible, like online platforms and incubators. As private equity investors chase deals, private capital has become more accessible to early-stage startups as well. All around, the supply of private capital has outstripped demand, leading to favorable conditions in deals for both early- and late-stage startups. 

Why Stay Private?

While staying private is more possible now, that doesn’t always make it the better choice — but often it is. Staying private means founders stay in control of their firms, which in turn helps avoid pitfalls like shortsighted decision-making that can be a consequence from separating ownership and control. It also means founders keep more stake in equity after raising initial funding, reaping more rewards from their hard work. Plus, in staying private, they avoid the costs and burdens of disclosure that is required when going public. 

Going Public Has Benefits Too

With all the benefits of staying private, it’s easy to see why IPOs have decreased substantially over the past 20 years. However, founders should know that recent regulations have made strides in decreasing the burden of disclosure, especially for small firms. Going public is worth considering for a few reasons, starting with the fact that public equity is simply cheaper. As the authors note, “Private targets sell at an average discount of 15-30% relative to industry- and size-matched public targets.” Also, public firms can sell their shares to the public and investors more freely. This means more liquidity; it’s easier for founders, employees, and investors to sell their shares. Last, a diversified pool of investors mitigates risk, which can allow for riskier, more aggressive strategies. 

The Book Isn’t Closed on This Topic

As markets continue to shift, there will be more for founders to consider. Even now, the study authors say additional research would be beneficial for increasing the information used to make this key startup decision. For example, it’s possible that the continued growth of capital markets might (or should) prompt a regulatory response. Also, it would be useful to understand the patterns and tradeoffs in markets outside of the United States — especially if that information could foster a thriving entrepreneurial finance market in other countries or help multinational launches. And further study should evaluate if the increased availability of private capital has changed the characteristics of individuals becoming entrepreneurs. It’s possible that more available capital is translating into more opportunity for different kinds of people. 

Founders deciding whether to stay private or go public are navigating a dynamic, ever-evolving capital ecosystem. Questioning, evaluating, and mapping out changes and implications is a must, and this new research provides a grounding in information to help them make that vital decision. 


Watch CBS Professor Dan Wang discuss his latest research on the science of social networks and the role they play in relationships between VCs, entrepreneurs and startups: