Many people date the start of the 1990s technology boom to August 9, 1995, the date Netscape had its initial public offering. At this point, the company was just 15 months old, yet it was already offering its shares to the public for anyone to buy. After the offering, Netscape's stock surged, valuing the company at more than $2 billion at the end of the first day of trading.
The IPO became a rite of passage for technology startups during the 1990s. Some of today's technology giants, including Amazon, Yahoo, and eBay, had their IPOs in the late 1990s. Lots of other companies held IPOs and then imploded when the market crashed.
Today Silicon Valley is booming again, but there's been a big change in the way technology companies are financed: Technology startups are increasingly turning to rich insiders, rather than the general public, to finance their growth. Here are four charts from Benedict Evans, of the venture capital firm Andreessen Horowitz, that show how the finances of Silicon Valley have changed.
1) There are a lot fewer technology IPOs today than in the 1990s
Both the number of technology IPOs and their value are down dramatically from the 1990s. Indeed, over the past decade the number of IPOs has been below the level of the early 1980s — though the amount of money raised has been higher.
2) Technology startups are turning to private funding sources instead
IPOs aren't becoming less common because people have stopped investing in technology companies. Rather, technology startups are increasingly turning to private sources — venture capital firms, private equity firms, and so forth — for funding instead of offering their stock to the general public. These private sources of funding have always been an important part of Silicon Valley, but recently they've become the dominant way technology companies raise money.
In some cases, technology companies only turn to the public markets when they're forced to by government regulators. The Securities and Exchange Commission effectively requires companies to go public when the number of shareholders exceeds 500. The rule was a big reason Facebook had its IPO in 2012.
3) Later IPOs means fewer opportunities — and risks — for non-wealthy investors
An investor who bought $1,000 of Microsoft stock shortly after the company's 1986 IPO and held it for the next decade would have wound up with more than $100,000 by the late 1990s. And as this chart shows, big post-IPO gains (represented by the gray bars) weren't that unusual in the 1980s and 1990s.
Things have been different in the new century. Facebook was already worth $100 billion at the time of its IPO in 2012. Since then, the stock has more than doubled, providing investors with a pretty good return. But there's no chance that people who invested in Facebook at the time of the IPO will see their funds grow by a factor of 100. Apple, the most valuable company in the world, is worth around $700 billion — less than seven times Facebook's IPO price.
And the story is the same with other recent technology IPOs. Companies are waiting a lot longer to do their IPOs, leaving public investors with much less potential upside. And because non-wealthy people are legally prohibited from investing in private companies, that means most people have fewer opportunities to make high-risk, high-reward investments than they did two decades ago. Of course, that also means there's less risk that these investors will lose their life savings betting on unproven technology stocks.
4) Stock prices don't reflect a technology bubble
The value of technology stocks has been soaring recently, causing some people to worry that we're in the middle of another technology bubble. But this chart shows that when you compare tech stock prices to company earnings, recent stock price increases look downright tame.
In the 1990s, technology stock prices soared without any corresponding rise in technology company earnings. When the market realized that companies couldn't possibly deliver on the absurd expectations implied by these high prices, the market crashed. Today, by contrast, stock price increases are largely being driven by growing technology company profits. As a percentage of earnings, technology stocks are actually a bit cheaper than they were five, 10, or 20 years ago.