Private versus Public Company Liquidity

Today I had a good chat with a friend about valuations of tech companies. A lot of capital has been raised in Atlanta and the Southeast over the last six months. I’ve read about acquisitions, venture capital rounds, and private equity recapitalizations. Our conversation began with private companies and moved to public companies. Both have seen valuations increase rapidly this year.

One of the points I made was the difference between private and public liquidity. Public company stock shares tend to be very liquid. They can be bought and sold in a matter of minutes. The liquid nature of the stock market means that market capitalization (i.e., valuation) of a company is always—for the most part—known and agreed to by a large pool of people (i.e., the market). The market cap reflects all known information about a company and the macro environment at any given time. A large pool of people reach consensus every day.

Private company ownership usually isn’t as liquid. Most owners can’t decide to sell private company shares and complete the transaction in the next few minutes. It’s more of a process. Parties interested in ownership in the company usually take time to become familiar with the business’s performance and other factors they deem important. Then they agree on a valuation with the owner and a transaction is completed. The business’s performance or the macro environment could change after the transaction, but the valuation of the company is usually pegged at the most recent transaction. And the valuation is usually agreed to by a small number of people.

I don’t have an opinion on the current state of tech valuations. I do think that the difference in the liquidity of private and public tech companies affects their valuations. I view one is a snapshot in time and the other as a daily consensus that incorporates the latest information.

There are lots of other differences between private and public tech companies that I won’t get into. I’m curious to see how valuations of both trend, and I’ll be watching them closely.