The chances of retail investors achieving high returns in the stock market are becoming increasingly slim, a situation that may be related to companies delaying their IPOs. Research firm Citrini has published an article exploring the tendency for companies to remain private for extended periods in modern capital markets, leading to growth value being primarily captured by venture capital firms, while the public market may have become merely a liquidity exit tool. Details are as follows.
The idea that companies should remain private indefinitely is utter nonsense.
While I personally understand the motivations behind it and don't blame the founders, this action damages the very system that initially created these businesses. Fundamentally, it violates the very promise that makes capitalism work.
The social contract in the United States has always worked remarkably well for the capital markets.
Yes, you may work for a boring small business or have a mediocre job; you may not become extremely wealthy or have transformative ideas, and sometimes you may feel that the system simply doesn't serve you.
However, at least you have the opportunity to participate in the great achievements created by this system.
For much of the postwar period, this trade-off went something like this: the public bore the brunt of market volatility, inefficiency, and the tedium of holding broad indices. In return, they were occasionally given opportunities for transformative growth.
It created upward mobility opportunities that didn't exist before, especially for those who believed in the prospects for U.S. economic growth but weren't direct participants.
I've shared two stories before: a retired woman in her sixties invested two salaries in Apple stock after Apple aired its first Super Bowl ad and never sold it. A childhood neighbor invested in AOL in 1993, and by the time it merged with Time Warner, the stock he sold was enough to pay for all three of his children's college tuition and pay off his mortgage.
Nowadays, there are almost no companies that went public like Apple in the 1970s or AOL in the early 1990s.
Even if you were just a janitor, you had the opportunity to invest in companies that were writing chapters in American history. The market's meritocracy meant that if you were astute enough, you could have bought AOL stock in 1993.
And this is just the tip of the iceberg: a few visionary individuals have noticed certain changes.
The broader and more socially significant impact is felt by those who don't particularly follow social dynamics. They clock in and out of work day after day. As part of the system that drives it, they gain the opportunity to participate in creating enormous wealth.
Even if you're not the most astute individual investor, even if you've never bought stocks in your life, your retirement savings will eventually be invested in companies that are building the future. As a small part of the capitalist engine, you don't need to rely on luck.
You're already very fortunate to have a portion of your salary invested in your future. Sometimes, you find yourself becoming a small shareholder in a company that ultimately becomes the cornerstone of its future.
Thanks to the support of this system, some companies have annual revenues of billions of dollars. But those who maintain this system are no longer able to benefit from it, because in the eyes of the capital market, they are not treated equally.
In this dynamic, capitalism only regresses to feudalism. A small group controls the means of production (land), while others labor for them, and social mobility becomes an illusion. If a company is not publicly listed, it is merely rebuilding the same structure with different assets. The equity of transformative companies is the new land.
You must have a net worth of $1 million (excluding real estate) or an income of $200,000 for two consecutive years. The median net worth of a U.S. household is approximately $190,000. Legally, they are too poor to invest in the future. But it is precisely these median households that use the companies' products in their work and consumption, which gives these companies their value.
OpenAI could not have reached its $500 billion valuation without hundreds of millions of users using ChatGPT. Users create value. Regardless of how many B2B transactions are involved, the end of the value chain is always the individual consumer. They should at least have the opportunity to get a share of the profits.
In some ways, it may even be worse than feudalism: at least peasants knew they were peasants. Today, people "participate in capitalism" through 401(k) retirement plans, yet are systematically excluded from the most transformative wealth markets.
The rich getting richer has always been how capitalism works. But until recently, America's powerful capital markets at least ensured that you were a stakeholder. Winners win, but you also get to participate in their victory.
You could have been one of AOL's first million users and said, "Cool, I'm going to invest in this company." Over the next six years, its stock price increased 80-fold. Today, almost no new company with a good product has its stock traded on the public market.
In 1996, there were over 8,000 publicly traded companies in the United States. Despite today's exponential economic growth, the number of publicly traded companies is less than 4,000.
In 2024, the median market capitalization of publicly traded companies was $105 million in 1980, and $1.33 billion in 2024, adjusted for inflation.
The focus here is not on the median market capitalization. Over the past century, nearly half of the market capitalization growth has been contributed by the top 1% of companies.
Anthropologie, SpaceX, OpenAI.
These companies should have been among that 1%. Now, the only way for the public to participate in their growth is through an IPO after the company's growth has plateaued.
When Amazon went public, it was only three years old, with revenue of just $148 million and was operating at a loss. Apple, on the other hand, was four years old when it went public.
When Microsoft went public in 1986, its market capitalization accounted for approximately 0.011% of the US GDP. Within a decade, it created about 12,000 millionaire employees. Secretaries and teachers in Washington state also became millionaires by purchasing and holding shares in the software company.
SpaceX is arguably one of the most inspiring and landmark companies in the United States today, with a valuation of $800 billion, approximately 2.6% of GDP.
OpenAI recently completed a $500 billion funding round and is reportedly seeking to raise another $100 billion at a valuation of $830 billion. In October 2024, its valuation was $157 billion. If OpenAI had gone public then, it would likely have been quickly included in the S&P 500, perhaps becoming the sixth or seventh largest holding in the index (or even higher, given the trading activity in AI companies).
However, most of this added value will not end up in the hands of U.S. citizens, but will instead flow into venture capital and sovereign wealth funds.
Based on 2024 dollar values, Apple's market capitalization at the time of its IPO was $1.8 billion. It wouldn't even rank among the top 100 companies by market capitalization.
In 1997, Amazon's initial public offering (IPO) was valued at $438 million. The IPO process was chaotic and highly volatile. During the dot-com bubble burst, its stock price plummeted by 90%.
But it was precisely because the public bore the brunt of this volatility that they also reaped the subsequent 1700-fold increase.
They don't need enough capital to invest in venture capital funds, nor do they need to "build connections." The only barrier to entry is the price of the stock.
Let's take a look at Uber.
This company has always attracted the interest of ordinary public investors because Uber is used everywhere. However, when Uber went public in 2019 at a valuation of $89 billion, its value had already increased by about 180 times compared to its earlier venture capital rounds.
If this were the 1990s, individual investors might have had the opportunity to notice that the world was changing. Suppose an Uber driver noticed it in 2014 when the company's cumulative orders surpassed 100 million (at a valuation of $17 billion), that would also be a 10x return, a 22% annualized compound growth rate.
But the reality is that the public has only benefited from Uber's stock price doubling in the past seven years.
I want to clarify one point: this is not an advocacy for all startups to go public. Those who invested in Uber from its seed to Series C rounds clearly took on significant risks and reaped substantial rewards.
But when Uber went through its Series D funding round, one couldn't help but wonder if keeping it private was simply to ensure a smoother path to market dominance and easier cashing out, with all the profits ultimately flowing to the VC circle.
It must be reiterated that venture capital has always been an integral part of technological progress. Many companies that would otherwise have been eliminated by the market have survived, likely because they were able to raise funds from a group of long-term investors.
But if venture capitalists want the game to continue, they need to ensure that the entire system doesn't collapse due to its own overload.
We are now seeing the emergence of a "K-shaped economy".
High-income Americans: Wealth and Income Growth
- Asset appreciation: The value of stocks and real estate increases.
- Stability of remote work: stable work, reduced expenses, and increased savings.
- Stronger income growth: wages, bonuses, and financial buffers increased.
Low-income families: struggling financially and facing inflationary pressures.
- Slowing income growth: Wages are stagnant or growing slowly.
- Soaring prices (inflation): Prices of rent, food, energy, and daily necessities are rising.
- Financial vulnerability: increased debt, limited savings, and susceptibility to shocks.
There's more than one way to solve this problem, but anything that broadens asset ownership aligns incentives. The impact of AI will likely only exacerbate this dynamic. The situation will worsen if the upper half of the K-shape becomes narrower due to over-concentration of beneficiaries. This dynamic is inherently unsustainable if public markets become mere liquidity exit tools for already established venture capital projects.
Capitalism will give way to neo-feudalism. Social unrest will become more widespread.
In contrast, China is likely to see more early- and mid-stage AI companies go public this year, surpassing the number in the US. The STAR Market looks strikingly similar to Nasdaq in the early 1990s, offering mass investors the opportunity to create enormous wealth. China seems to understand that this move will help build a strong middle class, a fact the US appears to have forgotten.
Companies don't want to be exposed to market volatility. They don't need to go public until they're large enough that venture capitalists can no longer fund them. Venture capitalists know they can simply inflate valuations in later funding rounds, so they won't push for companies to go public.
It is unclear whether this situation will change, or how it will change, but it is clear that the United States is heading towards a world where the S&P 500 index has essentially become a tool for exiting liquidity.
OpenAI and Anthropic will go public as some of the world's largest companies, forcing people to buy their shares as part of their retirement income. By then, even if the stocks perform well, the public will have been excluded from wealth creation and will suffer from reduced future returns.
The total value of companies on Crunchbase's unicorn list reaches $7.7 trillion, exceeding 10% of the S&P 500's market capitalization.
Given the list of some of the most successful companies of the last century above, some might accuse there of survivorship bias. But that's precisely the point. Part of the reason investing in passive indices like the S&P 500 is so effective is that, over time, it tends to retain high-quality companies and weed out low-quality ones. It benefits from periods when companies are dominant, especially when those companies are actively striving for dominance.
Apple was included in the S&P 500 index just two years after its IPO, replacing Morton Norwich (a salt company that later merged with a pharmaceutical company, became responsible for the Challenger space shuttle disaster, and was eventually broken up by private equity).
Look at the companies that have truly created wealth over the past 50 years:
Even Google, the company with the highest market capitalization at its IPO (US$23 billion), was only at the bottom of the top 100 companies at the time.
If capitalism is to continue, it needs to encourage investment. But if investment becomes merely a tool for a few to profit, the system will be difficult to sustain. Viewing IPOs as an exit strategy and limiting companies to becoming national giants ignores the very institution that created the conditions for these companies' survival. If the returns on investment in epoch-making companies are monopolized by a few, the majority will gradually lose faith in the system.
I don't know how to change this situation, nor do I know if the existing incentive mechanism is so deeply ingrained that it cannot be changed, but if there is the ability to change it, it should be improved.
