As hedge funds, mutual funds and other investors vie to put money into hot startups, pre-IPO valuations have soared. As a result, companies are waiting longer to go public and collecting on this glut of funding that’s inflating their values beyond what they can reach in an initial public offering. The latest example is Square Inc., the payments startup that is set to go public this week at a valuation of as much as $4.2 billion. That’s well below the $6 billion the company sought in its last funding round in 2014.
This is a classic FOMO (fear of missing out) scenario. The fastest growing, most buzzworthy tech companies have been raising money in the private markets through a strategy of limiting access to their shares.
By not going public as early in their growth cycle as companies have historically, they are playing on the emotion of fear of missing out in the next great investment. This is driving up the valuations of private companies, and only now are we starting to see some of the companies come public with lower valuations than they had in the private market.