WEBVTT - How To Analyze An IPO 0:00:10.960 --> 0:00:14.800 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:15.040 --> 0:00:19.080 I'm Joe Wisenthal. My colleague and co host Tracy Elway 0:00:19.239 --> 0:00:22.160 is out this week, so not going to be a 0:00:22.160 --> 0:00:25.880 long introduction. But one of the big things that's going 0:00:25.920 --> 0:00:29.800 to happen, at least expected to happen in markets in 0:00:29.920 --> 0:00:34.760 t is the flotation of some pretty big, highly anticipated 0:00:34.880 --> 0:00:38.120 I p O s, some of those Silicon Valley unicorns 0:00:38.159 --> 0:00:42.720 that people have been talking about forever Uber lived Slack, 0:00:43.200 --> 0:00:46.760 all of them plus more likely to go public uh 0:00:46.800 --> 0:00:49.600 this year after a long wait. Of course, many of 0:00:49.640 --> 0:00:52.440 them are huge, and they're going public at a stage 0:00:52.560 --> 0:00:55.560 in life UH that is much later than many of 0:00:55.560 --> 0:00:58.840 the big tech companies that are currently public when they 0:00:58.840 --> 0:01:00.720 decided to go public or when they decided to do 0:01:00.800 --> 0:01:03.200 their I p O. So I want to talk more 0:01:03.240 --> 0:01:06.240 about the I p O market on today's episode, and 0:01:06.280 --> 0:01:09.080 to discuss this I have with me Rhet Wallace. He 0:01:09.200 --> 0:01:13.160 is the founder and CEO of triton Ai, a company 0:01:13.200 --> 0:01:17.399 that analyzes I p O s for various proprietary measures, 0:01:17.600 --> 0:01:19.840 and we're going to talk about the evolution of the 0:01:19.880 --> 0:01:23.399 I p O market as well as how to analyze 0:01:23.400 --> 0:01:25.760 an IPO because theoretically there might be people out there 0:01:25.760 --> 0:01:27.959 looking at some of these that would like to have 0:01:28.080 --> 0:01:31.280 some perspective on how to think about the value and 0:01:31.319 --> 0:01:34.440 the investment appeal of these well known companies. So, Rhett, 0:01:34.480 --> 0:01:36.319 thank you very much for joining us. Great to be here. 0:01:36.360 --> 0:01:40.800 Thank you. Let's start with that question about why these 0:01:40.840 --> 0:01:46.319 companies are so people say coming public much later in life. 0:01:46.520 --> 0:01:51.320 So company is like Amazon and Microsoft and Apple. They 0:01:51.480 --> 0:01:54.440 essentially became did their I p o s when they 0:01:54.440 --> 0:01:58.760 were fairly tiny startups, at least by today's standards. What's 0:01:58.840 --> 0:02:03.760 changed since then eighties to two thousand nineteen such that 0:02:04.280 --> 0:02:08.320 these big companies are already produced billionaires and people have 0:02:08.360 --> 0:02:13.320 gone on to great fortunes ever before floating a sheriff stock. Sure, well, 0:02:13.800 --> 0:02:15.919 like most things, there are a couple of different narratives. 0:02:15.919 --> 0:02:19.280 By way of explanation, what you will hear from people 0:02:19.280 --> 0:02:22.040 in Silicon Valley is that founders don't like to take 0:02:22.080 --> 0:02:25.519 their companies public because being a public company CEO is 0:02:25.560 --> 0:02:27.640 kind of a pain in the neck. And so anybody 0:02:27.639 --> 0:02:31.040 who's abut to comply with the sarbians Oxley Act and 0:02:31.080 --> 0:02:35.359 other things that were imposed on publicly traded companies as 0:02:35.360 --> 0:02:39.120 a protection against retail investors who buy their shares. You know, 0:02:39.200 --> 0:02:42.200 if you have access to capital in the private markets, 0:02:42.680 --> 0:02:44.840 it might be easier for you to stay private and 0:02:44.880 --> 0:02:48.240 not expose your numbers, expose yourself to liability, and so forth. 0:02:48.600 --> 0:02:51.120 So almost all of the reasons that you could think 0:02:51.160 --> 0:02:54.280 of why a company wouldn't go public are regulatory there. 0:02:54.360 --> 0:02:57.359 They stem from the changes in the regulations of the 0:02:57.400 --> 0:02:59.840 securities business. And there's a long, geeky narrative that we 0:03:00.080 --> 0:03:04.320 get into about that. When companies like Amazon and Netscape 0:03:04.360 --> 0:03:07.360 and Yahoo went public on a couple of million dollars 0:03:07.360 --> 0:03:10.560 of sales, and you know, earlier generations of companies like 0:03:10.720 --> 0:03:13.240 Intel and so forth went public, you know, really as 0:03:13.240 --> 0:03:16.520 soon as they got to revenue. That's because capital formation 0:03:16.600 --> 0:03:19.760 happened in the public market. Let's actually, let's back up 0:03:19.800 --> 0:03:22.600 for a second. Tell me about your firm and why 0:03:22.720 --> 0:03:25.480 this is an area that you pursued. What is it 0:03:25.520 --> 0:03:28.040 about I p O s that are interesting in general, 0:03:28.520 --> 0:03:31.400 and what is your background that caused you or that 0:03:31.480 --> 0:03:34.400 prompted you to go into analyzing them and providing the 0:03:34.600 --> 0:03:38.920 service of breaking them down. Sure, well, it's I p 0:03:39.040 --> 0:03:41.880 O s are a very good example of what came 0:03:42.080 --> 0:03:45.760 after the Great Depression when the government decided to reform 0:03:45.840 --> 0:03:48.120 the securities industry so that you didn't have a big 0:03:48.160 --> 0:03:51.840 speculative bubble anymore of the kind that created the stock 0:03:51.880 --> 0:03:54.920 market crash. And so the innovation at that moment was 0:03:55.000 --> 0:03:58.720 that securities come with data stapling, the ten k's and 0:03:58.760 --> 0:04:02.920 the ten queues, the regular are recurring reporting and disclosure 0:04:03.240 --> 0:04:05.680 so investors would know what they are buying was the 0:04:05.720 --> 0:04:11.400 great innovation after and that prompted a situation where companies, 0:04:11.440 --> 0:04:13.360 if they wanted to trade stocks with each other or 0:04:13.400 --> 0:04:16.080 have people by their shares, they had to be public. 0:04:16.400 --> 0:04:19.680 And so companies went public much earlier. If you you 0:04:19.720 --> 0:04:23.600 know again geekily read like the biography of Rockefeller, for example, 0:04:23.720 --> 0:04:25.640 before the crash, one of the reasons he was so 0:04:25.760 --> 0:04:29.039 successful in investing is that he had access to information 0:04:29.080 --> 0:04:33.360 that wasn't broadly available. That always helps, right, So information 0:04:33.680 --> 0:04:37.160 has always been a key component of being successful as 0:04:37.160 --> 0:04:40.799 an investor. And so the origin story of our firm 0:04:41.440 --> 0:04:44.200 is that we saw what was happening that fewer and 0:04:44.200 --> 0:04:46.640 fewer companies were going public, and that meant that more 0:04:46.680 --> 0:04:49.479 and more of the interesting companies were private. And these 0:04:49.520 --> 0:04:53.520 companies operated outside of the information regime of the Securities 0:04:53.560 --> 0:04:56.800 Acts of the United States. The other thing that we 0:04:56.920 --> 0:05:00.599 noticed is that all of the information architecture that was 0:05:00.680 --> 0:05:04.719 installed as the operating system of the securities trading institutions 0:05:04.839 --> 0:05:08.480 was developed in the nineteen thirties, So, like generally accepted 0:05:08.520 --> 0:05:12.520 accounting principles, some people will tell you it's like, you know, 0:05:12.960 --> 0:05:15.920 the perfect information that you could have about a company, 0:05:15.960 --> 0:05:19.000 but it never existed until like Moses did not come 0:05:19.040 --> 0:05:22.880 down from the mountain with gap company categorization, this standard 0:05:22.920 --> 0:05:27.560 industrial classification system again like the nineteen thirties, and so 0:05:27.640 --> 0:05:32.880 these pieces of data architecture haven't iterated an advanced so 0:05:32.920 --> 0:05:35.040 we're still sort of stuck in the thirties with the 0:05:35.040 --> 0:05:37.920 way companies are analyzed. So the origin story of our 0:05:37.920 --> 0:05:40.680 company was we were looking for ways to be smart 0:05:40.720 --> 0:05:44.280 about investing in companies that were generally private companies, and 0:05:44.320 --> 0:05:46.960 the architecture that people used to look at public companies 0:05:47.200 --> 0:05:49.720 wasn't particularly serviceable to that end, so we had to 0:05:49.720 --> 0:05:52.400 build a new one. So obviously, when a company files 0:05:52.440 --> 0:05:54.840 to go public, and it files, it's s one to 0:05:54.960 --> 0:05:59.200 the sec the company engauges in the practice of putting 0:05:59.240 --> 0:06:03.560 its numbers into a type of a structure that's similar 0:06:03.600 --> 0:06:06.760 to other public companies are identical. It then has to correct. 0:06:06.920 --> 0:06:09.599 There's a template that everyone has to adhere to. But 0:06:10.200 --> 0:06:13.719 there's still the problem of investors haven't really gotten to 0:06:13.720 --> 0:06:17.839 know these companies, and even within generally accepted accounting principles, 0:06:18.000 --> 0:06:22.120 there's all kinds of idiosyncrasies and opinions and different approaches. 0:06:22.440 --> 0:06:24.840 And companies that have been public for a while, people 0:06:24.880 --> 0:06:27.680 become familiar with aspects of their business model and they 0:06:27.760 --> 0:06:30.720 understand the moving parts, and that just doesn't exist yet, 0:06:30.880 --> 0:06:33.960 certainly at the time of the S one filing. So 0:06:34.640 --> 0:06:37.200 when you look at an S one filing, besides the 0:06:37.240 --> 0:06:39.720 obvious the balance sheet and the income statement and the 0:06:39.800 --> 0:06:43.159 cash flow statement, what else are you looking for when 0:06:43.200 --> 0:06:46.640 you start to break down what you know looking at 0:06:46.680 --> 0:06:49.440 these companies from the perspective of an investor. So our 0:06:49.600 --> 0:06:52.120 point of view on companies is that a company is 0:06:52.160 --> 0:06:56.080 really just a receptacle for different product lines. So our 0:06:56.160 --> 0:07:00.560 trope example is that uber x and uber Eats live 0:07:00.600 --> 0:07:03.960 inside the same company, but they're totally different businesses, completely 0:07:03.960 --> 0:07:07.480 different product lines. So as companies go public much later 0:07:07.520 --> 0:07:10.400 in their life, what it means is that the audit 0:07:10.920 --> 0:07:15.640 of the consolidated entity disguises all of the individual operations 0:07:15.680 --> 0:07:17.840 that are happening inside of a company that might have 0:07:17.920 --> 0:07:20.800 a bike sharing you know business, and a scooter sharing 0:07:20.800 --> 0:07:23.240 business and operates all over the world in different types 0:07:23.280 --> 0:07:26.560 of jurisdictions, and so the bigger it is, the harder 0:07:26.600 --> 0:07:28.400 it is to get your arms around it unless you 0:07:28.400 --> 0:07:32.240 can see the detail. So that's that's really interesting points. 0:07:32.320 --> 0:07:35.120 So if a company is just in the business of 0:07:35.560 --> 0:07:39.000 making widgets, then you can have some sense of like, okay, 0:07:39.080 --> 0:07:42.720 widgets cost the company this much to build, and raw 0:07:42.800 --> 0:07:45.320 materials cost as much, and labor costs as muge, and 0:07:45.360 --> 0:07:47.400 you sell the widgets for this much, and then you 0:07:47.440 --> 0:07:50.000 look at the gap between costs and the sale and 0:07:50.040 --> 0:07:53.800 you know something about the business. But with these big 0:07:53.840 --> 0:07:57.040 companies and with new businesses that people don't understand and 0:07:57.160 --> 0:08:01.920 sort of novel business models, simply so tracting costs from revenues, 0:08:02.520 --> 0:08:04.440 it just doesn't tell you that much about the company. 0:08:04.480 --> 0:08:08.200 The architecture of a digital company is just completely different 0:08:08.360 --> 0:08:12.520 than the architecture of a nineteen thirties railroad or metals 0:08:12.560 --> 0:08:15.120 and mining company. One of the things that you know, 0:08:15.160 --> 0:08:16.960 for again, geeks that have spent a lot of time 0:08:17.000 --> 0:08:20.280 studying how gap works and have suffered through accounting class 0:08:20.640 --> 0:08:23.160 inventory accounting is one of the things that's like really 0:08:23.200 --> 0:08:25.920 painful and the fiefold life folk kind of stuff. How 0:08:25.960 --> 0:08:29.720 do you track the inventory of Facebook? Well, so then 0:08:29.760 --> 0:08:32.280 that gets to the question, Okay, going back to the 0:08:32.400 --> 0:08:37.080 Uber example, Obviously it's still probably mostly a car sharing company, 0:08:37.080 --> 0:08:39.640 but in many different businesses, and they do also now 0:08:39.679 --> 0:08:43.640 have several different lines and in some places they have scooters. 0:08:43.720 --> 0:08:47.880 So how do you go about essentially trying to disassemble 0:08:48.440 --> 0:08:52.840 the business from this consolidated these consolidated financial states. So 0:08:52.920 --> 0:08:55.439 when we started out, we were looking for ways to 0:08:55.480 --> 0:08:58.480 be smart about how to tell which dog walking app 0:08:58.600 --> 0:09:00.520 is going to be better than the other dog walking apps, 0:09:00.559 --> 0:09:03.400 for example, because you listen to the young entrepreneurs come 0:09:03.400 --> 0:09:05.800 and pitch you a company, and it always sounds good, 0:09:05.800 --> 0:09:08.320 but you don't have a comparative base of data. And 0:09:08.360 --> 0:09:10.640 so the s I C code system was no use 0:09:10.679 --> 0:09:14.240 to us whatsoever in how to categorize companies into the 0:09:14.280 --> 0:09:16.800 bucket of dog walking apps and then figure out which 0:09:16.800 --> 0:09:18.600 one was going to be the best dog walking app. 0:09:18.920 --> 0:09:21.000 So we had to design an architecture that you could 0:09:21.000 --> 0:09:23.600 get the apples and apples in the same buckets and 0:09:23.640 --> 0:09:25.920 separate them from the oranges and the grab apples and 0:09:25.960 --> 0:09:28.360 the tangerines and everything else. And so one of the 0:09:28.400 --> 0:09:31.079 things that was fairly funny about this is if you 0:09:31.200 --> 0:09:34.000 use a sort of you know, a top down E. 0:09:34.280 --> 0:09:37.640 S I. C. Level type categorization system, and you use 0:09:37.679 --> 0:09:42.199 a word like transportation, what we found is that companies 0:09:42.240 --> 0:09:46.760 like Uber bucketed into the same bucket as zip car, right. 0:09:47.000 --> 0:09:48.720 But you look at it and you're like, okay, well, 0:09:49.080 --> 0:09:52.640 Uber doesn't own any cars. Zip car owns thousands of 0:09:52.679 --> 0:09:56.560 cars that they have to park, maintain, fuel, paint, all 0:09:56.559 --> 0:09:58.840 that sort of stuff. So it's like, okay, even though 0:09:59.120 --> 0:10:02.480 from a a sort of narrative perspective, these things look 0:10:02.559 --> 0:10:05.319 the same, they're really not the same. So our response 0:10:05.360 --> 0:10:08.000 to this was to flip everything upside down and to 0:10:08.080 --> 0:10:10.720 look at how the thing works in terms of what 0:10:10.760 --> 0:10:13.520 does the customer pay for and what does the customer 0:10:13.600 --> 0:10:16.600 actually get. So in this example, if you're trying to 0:10:16.640 --> 0:10:20.720 go to Brooklyn from Manhattan, you could rent a car 0:10:20.800 --> 0:10:23.280 with zip car and drive it yourself, or you could 0:10:23.280 --> 0:10:25.800 have Uber drive you there, and it just turns out 0:10:25.840 --> 0:10:28.840 that the mechanics of the system that delivers a ride 0:10:29.040 --> 0:10:32.920 versus the access to a car are totally different things. 0:10:33.000 --> 0:10:37.600 So is there enough information straight from the s ones 0:10:37.800 --> 0:10:39.520 or I guess zip car has been public for a 0:10:39.520 --> 0:10:44.280 while right to actually perform that calculation, or do you 0:10:44.280 --> 0:10:46.360 need to go elsewhere? Well, so what's great about it 0:10:46.400 --> 0:10:48.720 is usually you don't need the s one to know 0:10:48.880 --> 0:10:51.000 like how a zip car works, because zip car tells 0:10:51.000 --> 0:10:53.600 you everything about how it works on their website. So 0:10:53.640 --> 0:10:55.400 if you flip the thing upside down and look at 0:10:55.400 --> 0:10:58.160 it like a user, it's actually not very difficult to 0:10:58.200 --> 0:11:16.839 figure out how these mousetraps work. Now, one of the 0:11:16.920 --> 0:11:19.720 things we've talked about, because we've talked on air on 0:11:19.760 --> 0:11:26.439 TV before is sort of non financial statement characteristics of companies. 0:11:26.480 --> 0:11:29.120 So people are interested in things like, you know, just 0:11:29.200 --> 0:11:33.480 the level of transparency period, structural things like voting control. 0:11:33.600 --> 0:11:36.200 What are the other things that you look at when 0:11:36.240 --> 0:11:39.360 you analyze a private company or assumed to be public 0:11:39.400 --> 0:11:44.240 company beyond just the numbers? Sure, well, one of the 0:11:44.280 --> 0:11:48.240 things about GAP is that GAP translates everything into dollars. 0:11:48.600 --> 0:11:50.840 So like the numbers, you see on a GAP pan 0:11:50.920 --> 0:11:54.240 L are all dollar denominated, but most of the numbers 0:11:54.280 --> 0:11:57.400 that are the most interesting about companies aren't dollar denominated, 0:11:57.559 --> 0:11:59.559 like how many customers and how much do they pay? 0:11:59.559 --> 0:12:01.480 And how long do they stick around? And where do 0:12:01.520 --> 0:12:03.520 I get them from? And things just how many cars 0:12:03.520 --> 0:12:07.000 they might have an inventory, for example, right, And so 0:12:07.040 --> 0:12:09.360 there's a big debate that you could read about. Matt 0:12:09.400 --> 0:12:12.079 Levin here is very articulate on the subject about non 0:12:12.160 --> 0:12:14.959 gap reporting, and some people get kind of religious about 0:12:14.960 --> 0:12:17.199 this and say that you shouldn't report things that aren't 0:12:17.200 --> 0:12:20.520 gap because then companies aren't comparable anymore. But the problem 0:12:20.600 --> 0:12:22.600 is that if you only have the P and L, 0:12:23.200 --> 0:12:25.000 like for example, if you were looking at the Snap 0:12:25.000 --> 0:12:27.400 I PO and you saw that Snap lost a billion 0:12:27.440 --> 0:12:30.160 dollars in the trailing year, you don't know very much 0:12:30.160 --> 0:12:33.240 about Snap. But the intuition that people have about that 0:12:33.280 --> 0:12:35.680 company as well, I know my teenager can't put it down, 0:12:36.240 --> 0:12:38.800 But you don't have the statement about how many teenagers 0:12:38.960 --> 0:12:40.880 and how long they stick around. And what you definitely 0:12:40.960 --> 0:12:43.920 don't have is the statement of how many advertisers and 0:12:43.960 --> 0:12:46.160 how long they stick around, and how many salespeople it 0:12:46.160 --> 0:12:48.320 takes to go get those advertisers to pay you and 0:12:48.360 --> 0:12:51.800 so forth. So to us. Again, the numbers that matter 0:12:52.200 --> 0:12:55.680 are the numbers that help you calculate the mechanics of 0:12:55.720 --> 0:12:58.800 how the masse trap works, and those things are often 0:12:58.880 --> 0:13:00.880 not disclosed in an US one at all, and you 0:13:00.960 --> 0:13:03.000 need other ways to go get them. What do you 0:13:03.040 --> 0:13:06.439 think you know? It's interesting you mentioned snap And maybe 0:13:06.440 --> 0:13:09.120 this is a slight tangent or maybe not, but it 0:13:09.200 --> 0:13:12.400 feels like there have been efforts with a lot of 0:13:12.400 --> 0:13:16.000 these Internet companies to essentially standardize some of these non 0:13:16.000 --> 0:13:19.480 financial metrics. So m a use monthly average users is 0:13:19.480 --> 0:13:22.200 a popular way to compare them, but it feels like 0:13:22.280 --> 0:13:25.520 the companies are really pushing back against that or like 0:13:25.640 --> 0:13:27.559 to and they want to create their own bespoke ones 0:13:27.559 --> 0:13:29.760 and they say, no, no, no, you can't compare our 0:13:29.920 --> 0:13:32.360 m a US to facebooks or our d a used. 0:13:35.920 --> 0:13:39.240 Twitter recently announced that they were going to for the 0:13:39.320 --> 0:13:43.440 first time start revealing d a use daily average users. 0:13:43.480 --> 0:13:45.880 They're no longer going to report monthly average users, but 0:13:45.960 --> 0:13:49.120 even their d A numbers, they're calling them m d 0:13:49.280 --> 0:13:53.080 a U s monetize herble daily average users to distinguish 0:13:53.160 --> 0:13:55.240 from users who they probably are gonna make any money 0:13:55.240 --> 0:13:58.040 from so their m d a us are going up anyway. 0:13:58.080 --> 0:14:00.360 The point is, what is your view on this. Do 0:14:00.440 --> 0:14:03.880 companies have an incentive to sort of try to break 0:14:03.880 --> 0:14:06.760 out of the standardized comparable numbers and come up with 0:14:06.800 --> 0:14:09.040 their own sort of vanity metrics that are always going 0:14:09.120 --> 0:14:11.280 up into the right? Yeah? I think you know, the 0:14:11.320 --> 0:14:15.480 world doesn't divide on this, Like people don't like accountability, right, 0:14:15.520 --> 0:14:18.520 so if you don't have to be accountable to particular metrics, 0:14:19.000 --> 0:14:21.800 you'd rather not. One of the things that's interesting about 0:14:21.840 --> 0:14:25.400 what's happened in capital formation right now is that private 0:14:25.400 --> 0:14:29.040 company investors have access to all this information, all the 0:14:29.080 --> 0:14:33.160 real information, not the fake you know, monetize herbal daily 0:14:33.200 --> 0:14:35.480 average users that you know. They can see all of 0:14:35.480 --> 0:14:37.520 that sort of stuff, and they have a real sense 0:14:37.560 --> 0:14:40.560 of how those mechanics work. Once you arrive in public 0:14:40.560 --> 0:14:44.240 company lands, many of those numbers are not disclosed anymore. 0:14:44.280 --> 0:14:47.600 So you find a situation where as capital is forming 0:14:47.600 --> 0:14:50.000 around these companies, the investors that put up the money 0:14:50.240 --> 0:14:54.440 have much better access to information, so more transparent situation, 0:14:54.920 --> 0:14:58.280 but an a liquid situation, and then you trade liquidity 0:14:58.320 --> 0:15:00.960 for transparency in the sense that the look. Investors don't 0:15:01.000 --> 0:15:03.040 really get to learn any of the you know, the 0:15:03.080 --> 0:15:05.560 way that the mouse trap works, but at least they 0:15:05.560 --> 0:15:08.160 can sell the stock. And so that's the trade. As 0:15:08.160 --> 0:15:10.600 far as your question about the standardization, and sorry to 0:15:10.600 --> 0:15:15.680 go on so long, using like an ad supported companies 0:15:15.720 --> 0:15:20.560 metrics to analyze the subscription business is just not very helpful. 0:15:21.160 --> 0:15:24.080 So like engagement metrics, for example, people ask us about 0:15:24.080 --> 0:15:26.600 our engagement metrics, which I always laugh because I think 0:15:26.680 --> 0:15:29.600 engagement is bad. We want our users to figure out 0:15:29.640 --> 0:15:32.160 the answer in as little time as possible because I'm 0:15:32.200 --> 0:15:34.640 not trying to serve. And add to that, right, so 0:15:34.760 --> 0:15:37.000 each company is different. This is what we spent years 0:15:37.040 --> 0:15:39.600 doing is developing an architecture so that you can understand 0:15:39.600 --> 0:15:41.320 what kind of company you're looking at and look at 0:15:41.320 --> 0:15:44.040 the appropriate metrics to do So, going back to what 0:15:44.080 --> 0:15:48.480 you were saying about the trade between liquidity and transparency, 0:15:48.520 --> 0:15:51.600 we had a recent episode a few months ago. We 0:15:51.600 --> 0:15:55.040 were talking to um a VC and he was arguing 0:15:55.320 --> 0:15:58.720 that one of the things that made this period in 0:15:58.800 --> 0:16:03.760 market unique is that whereas in the past, uh illiquidity 0:16:03.840 --> 0:16:07.080 was a penalty for a company and a private company 0:16:07.200 --> 0:16:10.240 had to offer a bigger premium to get um private 0:16:10.280 --> 0:16:13.480 capital because that was more locked in. These days, people 0:16:13.480 --> 0:16:16.880 are paying a premium for access, in his view, to 0:16:17.240 --> 0:16:20.120 a liquid companies. Maybe they didn't want to have to 0:16:20.200 --> 0:16:22.760 mark their books day to day, or maybe there was 0:16:22.880 --> 0:16:26.040 some sort of prestige value of being in a lift 0:16:26.200 --> 0:16:29.240 or an uber that caused people to overpay. Do you 0:16:29.320 --> 0:16:32.600 see that that the sort of traditional discount that would 0:16:32.640 --> 0:16:35.640 have in the past come along with private equity stock 0:16:36.080 --> 0:16:38.520 has flipped. So I'm gonna give you two answers to 0:16:38.600 --> 0:16:41.800 that question. One, just to verify with data the claim 0:16:41.920 --> 0:16:45.080 that people pay a premium. Over the last five years, 0:16:45.080 --> 0:16:47.480 the I p O s that we've looked at tend 0:16:47.560 --> 0:16:51.040 to trade up in the first half of the first 0:16:51.080 --> 0:16:54.080 year that they're public and then in general trade down 0:16:54.120 --> 0:16:57.440 again below the ip O price. Right, so public public 0:16:57.480 --> 0:16:59.880 market investors. And that's not just that that's over the 0:17:00.040 --> 0:17:02.360 US five years. So it's not just we're not just 0:17:02.400 --> 0:17:05.960 looking at effect and it's not just DOLLI Bober or whatever. 0:17:06.000 --> 0:17:08.720 It's you know, a hundred and fifty odd transactions. And 0:17:08.760 --> 0:17:11.360 so what happens is as a capital markets matter, these 0:17:11.400 --> 0:17:14.200 things come out. They you know, the I p O prices, 0:17:14.280 --> 0:17:16.400 it begins to trade. You get the famous pop which 0:17:16.400 --> 0:17:18.959 some people love and some people hate, and in general, 0:17:19.040 --> 0:17:21.840 these things trade up for a while and then large 0:17:21.840 --> 0:17:24.760 amounts of shares are unlocked and people stop paying attention 0:17:24.800 --> 0:17:26.640 and they change the channel and they look at something else, 0:17:26.640 --> 0:17:29.879 and then they trade down. And so it's definitely true 0:17:30.440 --> 0:17:33.320 that private market investors have paid a premium. Like the 0:17:33.359 --> 0:17:36.800 guys who bought the last round of those deals could 0:17:36.840 --> 0:17:38.960 end up underwater if they didn't sell, but they could sell, 0:17:39.600 --> 0:17:43.000 so it's unclear if they've been penalized for paying that 0:17:43.040 --> 0:17:45.400 premium because they had a moment where they probably could 0:17:45.400 --> 0:17:48.040 have made made a profit on the trade. But in 0:17:48.080 --> 0:17:50.200 general it's not a good trade for the broad base 0:17:50.240 --> 0:17:52.560 of shareholders. So that's out of number one. But item 0:17:52.640 --> 0:17:55.800 number two, why do people pay a premium for this? 0:17:56.320 --> 0:17:59.160 And the answer we think is because if you want 0:17:59.200 --> 0:18:02.760 to invest in growth companies, you have to pay the price. 0:18:03.200 --> 0:18:06.200 And so if you are a long only manager who's 0:18:06.240 --> 0:18:08.399 managing a growth fund, who has a carve out that 0:18:08.440 --> 0:18:12.280 allows you to invest in Uber Lift, whatever, your ability 0:18:12.320 --> 0:18:15.399 to set prices very limited, but you want to participate 0:18:15.440 --> 0:18:18.359 in those deals, and as more and more capital has 0:18:18.400 --> 0:18:22.159 flowed into this place. What happens when there's more demanded supply, 0:18:22.280 --> 0:18:24.800 prices go up. So it's kind of like it's a 0:18:24.880 --> 0:18:27.320 function of the fact that, even if we're just looking 0:18:27.320 --> 0:18:30.440 in public markets, we know that the growth factor has 0:18:30.440 --> 0:18:33.680 done extremely well in recent years, and that's just even 0:18:33.720 --> 0:18:37.760 more exacerbated in the ultra high growth private area. So 0:18:37.800 --> 0:18:40.520 that could explain at least part of this premium. Sure. 0:18:40.600 --> 0:18:43.280 I mean, if you were a growth investor in you know, 0:18:43.320 --> 0:18:47.200 the ninety nineties, you would be investing in companies publicly 0:18:47.600 --> 0:18:50.320 that we're young, and you'd be buying you know, Amazon 0:18:50.680 --> 0:18:54.120 or you know Yahoo or the globe dot Com, right, 0:18:54.400 --> 0:18:56.040 you know, you buy the good and the bad. But 0:18:56.080 --> 0:18:58.040 you get to do all of that in the public market. Now, 0:18:58.080 --> 0:19:01.119 all of that capital formation and all of that value 0:19:01.160 --> 0:19:04.439 appreciation happens in the private market, and the guys with 0:19:04.520 --> 0:19:07.479 large pools of capital want to participate in that. But 0:19:07.520 --> 0:19:10.040 what it's also done is created a situation where larger 0:19:10.080 --> 0:19:14.440 pools of capital, the vision funds for example, have formed 0:19:14.800 --> 0:19:18.960 to participate in that trade. I'm glad you mentioned the 0:19:19.000 --> 0:19:22.520 I p o s prior to the bubble, because obviously 0:19:22.640 --> 0:19:25.440 everyone knows you'd be rich if you had bought into 0:19:25.480 --> 0:19:27.520 that Amazon i p O, but you would have lost 0:19:27.520 --> 0:19:29.360 all your money if you bought into the Globe dot 0:19:29.400 --> 0:19:33.560 Com i p O. People bemoan the decline of I 0:19:33.720 --> 0:19:36.760 p o s for precisely because they have memories of 0:19:36.840 --> 0:19:39.680 Amazon and Microsoft in their mind, and they say, well, 0:19:39.920 --> 0:19:42.119 the stock market used to be this avenue where people 0:19:42.160 --> 0:19:44.760 could make a lot of money investing in these companies. 0:19:44.800 --> 0:19:48.120 Now that's closed off to anyone who doesn't have access, 0:19:48.160 --> 0:19:50.040 but of course there is. It does seem like there's 0:19:50.080 --> 0:19:53.480 a lot of hindsight bias because most of them, most 0:19:53.520 --> 0:19:55.880 companies are more like the Globe, right. Sure, well, Mary 0:19:55.880 --> 0:19:58.240 Meeker has a great statistic that was in her deck 0:19:58.280 --> 0:20:01.399 for a long time after the bust that two of 0:20:01.440 --> 0:20:05.080 the companies that went public during that moment in our 0:20:05.119 --> 0:20:09.000 culture created more than the returns. So it's just so 0:20:09.119 --> 0:20:12.879 the vast majority of them were total flow totally adds. 0:20:12.920 --> 0:20:15.679 You know, well, if you were in the two that 0:20:15.800 --> 0:20:19.520 compensated for you know, the negative jacurb. Right, So it's 0:20:20.240 --> 0:20:22.280 the vast majority were a bust and more money was 0:20:22.359 --> 0:20:25.119 lost than made in aggregate. Right, So you had to 0:20:25.119 --> 0:20:27.040 be very very picky to not be one of the 0:20:27.080 --> 0:20:29.119 losers is the decline of the I p O a 0:20:29.200 --> 0:20:31.840 bad thing. It's bens. I mean, if you were a 0:20:31.840 --> 0:20:35.359 retail investor and in hindsight you're totally convinced that you 0:20:35.359 --> 0:20:38.199 would have absolutely put your life savings into Uber if 0:20:38.200 --> 0:20:40.359 you'd been able to buy it, you know, five years ago, 0:20:40.920 --> 0:20:44.159 then it's a bad thing. But one of the reasons 0:20:44.200 --> 0:20:46.360 that the bar has been raised so much for companies 0:20:46.400 --> 0:20:50.399 to go public is to protect retail investors from themselves. Right, 0:20:50.480 --> 0:20:53.320 Retail investors fueled a lot of the bubble that happened. 0:20:53.320 --> 0:20:55.840 There are other structural reasons why the Internet bubble happened, 0:20:56.160 --> 0:20:58.399 but there was a huge amount of demands in the 0:20:58.440 --> 0:21:01.320 same way that people now spect laid in cryptocurrencies and 0:21:01.359 --> 0:21:03.680 other things like that. Because it was perceived to be 0:21:03.760 --> 0:21:07.359 an easy buck, people are always gonna look for actions. 0:21:08.160 --> 0:21:11.919 Let's uh talk about Okay, So as of this moment, 0:21:12.040 --> 0:21:14.480 when we're recording and we don't know any day now, 0:21:14.520 --> 0:21:17.000 we could get s one filings from some of these 0:21:17.000 --> 0:21:22.800 companies that we mentioned, so Uber and Lived and Slack 0:21:22.840 --> 0:21:25.199 and a bunch of others that we could get for 0:21:25.240 --> 0:21:29.680 the first time public data on these companies. So when 0:21:29.720 --> 0:21:31.720 these come out. What are going to be the first 0:21:31.720 --> 0:21:34.679 things that you look at and what should people listening 0:21:34.680 --> 0:21:38.520