WEBVTT - Bill Gurley on Entrepreneurs and Technology (Podcast) 0:00:02.040 --> 0:00:06.760 This is Mesters in Business with very Renaults on Bluebird 0:00:06.880 --> 0:00:10.600 Radio this weekend on the podcast, Boy Do I have 0:00:10.680 --> 0:00:15.480 an extra special guest, venture capitalist Bill Gurley of Benchmark. 0:00:16.000 --> 0:00:19.599 What a rock star. He's been just right at the 0:00:19.640 --> 0:00:23.000 forefront of everything that's been going on UH in venture 0:00:23.040 --> 0:00:27.560 capital over the past twenty years. Grub Hub, Open Tables, Zillo. 0:00:27.680 --> 0:00:30.520 He was one of the very first investors into Uber, 0:00:30.760 --> 0:00:34.560 was a board member there. Really just a fascinating career 0:00:35.159 --> 0:00:39.280 from a design engineer a compact to becoming an Wall 0:00:39.320 --> 0:00:42.760 Street analyst. Turns out he's the lead analyst on the 0:00:42.800 --> 0:00:47.800 Amazon I p O to eventually becoming a VC at Benchmark, 0:00:48.600 --> 0:00:55.040 where really he just has tremendous insight into entrepreneurs and 0:00:55.200 --> 0:00:59.880 technology and to think about things like the network of 0:01:00.080 --> 0:01:05.280 fact and what is this technology also UM parallel to 0:01:05.520 --> 0:01:09.400 and where can we see UH scale and leveraging capital 0:01:09.840 --> 0:01:12.320 all come together in a way that that is unique. 0:01:12.800 --> 0:01:19.080 UM just really a fascinating, fascinating person, very forthcoming UM, 0:01:19.120 --> 0:01:22.920 including about things that were really challenging periods of his 0:01:23.040 --> 0:01:26.560 career that I would imagine wasn't a whole lot of fun. 0:01:26.920 --> 0:01:30.039 If you read the book Super Pumped about Uber, UM 0:01:30.080 --> 0:01:33.160 really he's the only guy that comes through that that 0:01:33.280 --> 0:01:36.720 whole book with his reputation. Intact, he's really the only 0:01:36.760 --> 0:01:39.240 good guy in the book. And the book is an amazing, 0:01:39.440 --> 0:01:43.759 uh amazing story about Uber, which in of itself is 0:01:43.760 --> 0:01:47.040 is just madness. Um. So, if you are at all 0:01:47.200 --> 0:01:54.200 remotely interested in venture capital, investing, technology, direct listings replacing 0:01:54.240 --> 0:01:56.360 I P O S, I think you're going to find 0:01:56.400 --> 0:02:00.560 this conversation to be absolutely fascinating. So, with no further ado, 0:02:00.960 --> 0:02:07.800 my conversation with Benchmarks Bill Gurley. This is mesters in 0:02:07.840 --> 0:02:13.840 Business with very Results on Bloomberg Radio. My extra special 0:02:13.840 --> 0:02:17.359 guest this week is Bill Gurley. He is a legendary 0:02:17.480 --> 0:02:22.760 venture capital investor at Benchmark, where he's been since Some 0:02:22.919 --> 0:02:27.200 of his better known investments have included grub Hub, next Door, 0:02:27.440 --> 0:02:31.799 Open Table, Zillo, and of course Uber. He is a 0:02:31.800 --> 0:02:34.880 member of the board of trustees of the Santa Fe Institute, 0:02:35.160 --> 0:02:38.280 and he is considered one of the most influential dealmakers 0:02:38.280 --> 0:02:42.960 in technology. In sixteen, he was named Tech Crunches VC 0:02:43.160 --> 0:02:47.560 of the Year. Bill Gurley, Welcome to Bloomberg. Thanks for 0:02:47.560 --> 0:02:49.799 having me. Yeah, this is overdue. We were supposed to 0:02:49.840 --> 0:02:53.600 get together a couple of years ago and then events intervened. 0:02:54.280 --> 0:02:58.120 Let's start with your early career. You began as a 0:02:58.200 --> 0:03:02.640 design engineer at Impact. What does the design engineer do 0:03:02.960 --> 0:03:06.040 and what sort of lessons did you take away from 0:03:06.040 --> 0:03:08.880 that experience at Compact? You know that the job I 0:03:09.000 --> 0:03:13.320 fell into a Compact which was super super interesting for 0:03:13.639 --> 0:03:17.120 a person with a brain like mine. Um, we were 0:03:17.160 --> 0:03:21.520 a bit of a like a fire squad that came 0:03:21.560 --> 0:03:24.560 in when they were problems. So when they were bringing 0:03:24.639 --> 0:03:27.720 new computers to market, they would pass them off to 0:03:27.840 --> 0:03:30.400 the test group, and the test group would take all 0:03:30.480 --> 0:03:33.240 the latest and greatest software. And back then it was 0:03:33.320 --> 0:03:38.400 like banion vines and running three comic conneted actors, a 0:03:38.400 --> 0:03:41.880 lot of stuff that doesn't existing or today. Um, But 0:03:42.040 --> 0:03:46.120 inevitably they would break and and someone had to figure 0:03:46.120 --> 0:03:49.920 out why, and the the people that are doing the 0:03:50.040 --> 0:03:54.000 hardware design work didn't have enough understanding of how the 0:03:54.080 --> 0:03:57.720 software worked to kind of reverse engineer the failure, and 0:03:57.760 --> 0:04:01.040 so we kind of lived in between these two. What 0:04:01.120 --> 0:04:04.480 was what was fun about it is that you know, 0:04:04.720 --> 0:04:07.720 oftentimes they were holding up shipping until we could get 0:04:07.720 --> 0:04:10.440 our job done. So it was this kind of they 0:04:10.520 --> 0:04:12.800 put us in a room with a bunch of pizzas 0:04:12.840 --> 0:04:16.400 and expect us to work like eighteen hour days until 0:04:16.480 --> 0:04:19.640 we found the problem. But it was fun because it 0:04:19.720 --> 0:04:22.640 was you know, shortened scope would usually be like one 0:04:22.720 --> 0:04:25.480 day to a week before we figure it out. And 0:04:25.640 --> 0:04:28.880 it felt important because everyone was kind of waiting on us, 0:04:29.160 --> 0:04:32.280 um and it was fun and it was super interesting, 0:04:32.320 --> 0:04:34.520 I think also for me just because of the problem 0:04:34.560 --> 0:04:37.159 solving nature of the whole thing. I don't even know 0:04:37.200 --> 0:04:39.920 if a group like that exists anymore. So when you're 0:04:39.960 --> 0:04:44.279 involved in both hardware and software, we're talking thirty plus 0:04:44.360 --> 0:04:48.400 years ago, how magical did the software look? Was it 0:04:48.520 --> 0:04:53.880 still all potential? You're dealing with both hardware and software? 0:04:53.920 --> 0:04:57.359 What what intrigued you? Well, Client server was starting to 0:04:57.440 --> 0:05:00.240 happen already, and and and there were different way these 0:05:00.440 --> 0:05:02.120 you know, I have no idea how they do this 0:05:02.200 --> 0:05:05.839 today because the clock speeds are so dramatically faster. But 0:05:06.880 --> 0:05:09.719 there were different types of analysis tools that you could 0:05:09.800 --> 0:05:12.640 run either virtually in the background or you know, and 0:05:12.680 --> 0:05:15.520 we plug this thing called an ice, which was a 0:05:15.520 --> 0:05:18.839 Medusa head like thing on top of the processor where 0:05:18.839 --> 0:05:21.960 you can measure every pin and you'd watch the signals 0:05:22.000 --> 0:05:26.320 go by and you try and reverse the software failure 0:05:26.360 --> 0:05:29.640 all the way down to where something was happening on 0:05:29.680 --> 0:05:32.520 the on the motherboard that was causing a race condition 0:05:32.640 --> 0:05:34.919 or this kind of thing. And there were always odd 0:05:34.960 --> 0:05:37.440 things like you could, you know, make it really cold 0:05:37.520 --> 0:05:39.680 and the failure would go away and then you knew 0:05:39.720 --> 0:05:43.839 you had some type of analog rice time problem. But 0:05:43.839 --> 0:05:46.279 but it was fun. I mean, you really had to 0:05:47.000 --> 0:05:50.960 understand how the system worked all the way through or 0:05:51.000 --> 0:05:54.680 you couldn't. You couldn't pull that that down. You know. 0:05:55.000 --> 0:05:58.720 The funny thing is, you know when we were we 0:05:58.720 --> 0:06:01.560 were already running into city stations where the equipment that 0:06:01.640 --> 0:06:04.680 you would put on it, uh to measure it would 0:06:04.839 --> 0:06:08.560 would mess with it. Um And back then, you know, 0:06:08.640 --> 0:06:10.800 I think the last thing I worked on was a 0:06:10.920 --> 0:06:15.160 forty six fifty And I can't imagine how they do 0:06:15.240 --> 0:06:17.280 it today, Like I just I mean, I know they 0:06:17.320 --> 0:06:19.480 do it, but I just can't imagine because the clock 0:06:19.520 --> 0:06:22.440 speeds we would have never imagined back then the clock 0:06:22.520 --> 0:06:25.200 speeds would be as fast as they are today. Yeah, 0:06:25.279 --> 0:06:28.480 Moore's law just keeps on compounding. So so you um, 0:06:29.080 --> 0:06:31.760 you moved to Wall Street as a research channelist in 0:06:31.760 --> 0:06:36.800 the ninety nineties. What led you to cover tech stocks? Well, 0:06:36.960 --> 0:06:41.440 Somewhere along the way, while I was had become an 0:06:41.440 --> 0:06:47.320 engineer and was working at compact Um, I started trading stocks. 0:06:47.600 --> 0:06:51.840 And I can't remember exactly how I fell into it. UM. 0:06:51.880 --> 0:06:56.560 I'm sure I have a vivid memory of reading uh 0:06:56.680 --> 0:07:01.800 Peter Lynch's book, and I also remember Prodigy. You remember 0:07:01.800 --> 0:07:04.680 a Prodigy, which you're kind of a precursor to a 0:07:04.760 --> 0:07:09.440 O L with a You could get a trading account 0:07:09.720 --> 0:07:13.880 on Prodigy. And so I was buying stock and one 0:07:13.920 --> 0:07:16.240 of the ones I bought. You know, if you read 0:07:16.360 --> 0:07:18.840 read that Peter Lynch book, was it one up on 0:07:18.880 --> 0:07:22.640 Wall Street? Was that the name um exactly? You know? 0:07:22.920 --> 0:07:25.880 He said, by stocks of companies you love well. I 0:07:25.920 --> 0:07:30.800 was doing a ton of programming in Borland, UH Borland, 0:07:31.360 --> 0:07:35.440 Turbo Pascale, and I loved the Quadro spreadsheet. Liked it 0:07:35.520 --> 0:07:39.400 way better than Lotus, and we're using those tools every day, 0:07:39.880 --> 0:07:42.720 and so I bought I bought the Borland stock on 0:07:42.840 --> 0:07:44.920 the I t o like the day of the I. 0:07:45.280 --> 0:07:48.720 I don't think I got allocations be a good conversation 0:07:48.840 --> 0:07:51.480 for direct listenings. I don't think I got allocation through 0:07:51.520 --> 0:07:55.120 Prodigy but I bought it today of the offering. UM, 0:07:55.160 --> 0:07:59.200 so see that kind of thing was already happening in 0:07:59.280 --> 0:08:04.160 my brain. Um I ended up. I ended up leaving Compact, 0:08:04.280 --> 0:08:07.800 going to business school before I transitioned into Wall Street. 0:08:08.120 --> 0:08:11.320 And I think when I got to business school and 0:08:11.440 --> 0:08:16.520 started really understanding, you know, different companies and reading about 0:08:16.560 --> 0:08:20.600 companies and and that fun that I was having thinking 0:08:20.640 --> 0:08:25.240 about stocks and stock prices. I when I when I 0:08:25.320 --> 0:08:31.640 really started reading you know, magazines, Wall Street Journal, Fortune. Um, 0:08:31.680 --> 0:08:35.719 I noticed that these analysts were quoted a lot, especially 0:08:36.160 --> 0:08:42.720 Goldman had this killer team with Dan Benton, rich Sherlin, 0:08:43.400 --> 0:08:47.319 you know, and uh they they owned it like every 0:08:47.600 --> 0:08:51.200 like the top five tech Analystic Goldman, We're all all 0:08:51.280 --> 0:08:54.600 considered to be the opts. And um, their names would 0:08:54.600 --> 0:08:56.920 just come up and up and up. So, you know, 0:08:56.960 --> 0:08:59.480 and I was getting a little more spirited, and you'd 0:08:59.480 --> 0:09:02.680 reached store is about people knocking on doors. So I 0:09:02.800 --> 0:09:06.000 spent a week in the summer of my in between 0:09:06.040 --> 0:09:09.960 my two business school just begging for meetings on the 0:09:10.000 --> 0:09:15.000 Wall Street, including with with Dan and Rick. And you 0:09:15.120 --> 0:09:18.920 end up at CS First Boston, where it turns out 0:09:18.960 --> 0:09:21.720 that you end up as the lead analyst for an 0:09:21.760 --> 0:09:25.640 I p O for a little company called Amazon. Tell 0:09:25.720 --> 0:09:28.480 us what that experience was like and did anybody have 0:09:28.640 --> 0:09:34.200 any idea then what Amazon might become? Forget what it is? 0:09:34.760 --> 0:09:38.760 What was it? Even? The skipped about four years so, 0:09:39.120 --> 0:09:43.840 which is so it's kind of interesting because it involves 0:09:43.840 --> 0:09:46.720 someone I know, I know, you think quite highly up. 0:09:47.160 --> 0:09:51.360 So I um ended up getting a job. I ended 0:09:51.400 --> 0:09:53.280 up getting turned down by every firm and set for 0:09:53.320 --> 0:09:56.160 one which was Credit Pas First Boston and the research 0:09:56.200 --> 0:09:59.000 director there was a guy named Al Jackson who I 0:09:59.080 --> 0:10:03.120 still talked to the UM and you know, I went 0:10:03.200 --> 0:10:06.480 to Texas. In my entering class, we went around a 0:10:06.520 --> 0:10:09.560 room and stay wherever it was from you know, Wharton, Harvard, 0:10:09.720 --> 0:10:11.800 like there was I was the only one that wasn't 0:10:12.120 --> 0:10:16.679 like those five schools. And you know, I'll just felt 0:10:16.720 --> 0:10:18.680 like taking a bet on me. And I don't know 0:10:18.720 --> 0:10:20.600 where I'd be to day if he hadn't have done that. 0:10:21.280 --> 0:10:25.520 I show up and um, they were going to assign 0:10:25.559 --> 0:10:31.240 me passive components with some obscure tech category. UM. And 0:10:31.760 --> 0:10:34.040 Charlie Wolf I don't know if you've ever heard of him. Oh, 0:10:34.520 --> 0:10:38.000 Charlie was very well. He covered Apple when nobody liked 0:10:38.000 --> 0:10:43.040 the apple. Charlie was the PC analyst, and two weeks 0:10:43.040 --> 0:10:45.880 after I showed up, Charlie said he wanted to retire 0:10:45.920 --> 0:10:48.920 and teach more Columbia. And I mean to just talk 0:10:48.960 --> 0:10:52.400 about wild fortune. And so I went into my apartment 0:10:52.800 --> 0:10:56.320 and spent all weekend writing this kind of assessment of 0:10:56.360 --> 0:10:59.520 the PC industry and went in it begged alf for 0:10:59.520 --> 0:11:01.880 for char his job, and he gave it to him. 0:11:02.960 --> 0:11:05.640 And then Charlie, you know, stayed on the payroll part 0:11:05.720 --> 0:11:08.960 time and became a mentor and helped me with all 0:11:09.000 --> 0:11:12.920 my work and kind of was my shepherd and was incredible. 0:11:12.960 --> 0:11:16.760 And then you know, the other part is just couldn't 0:11:16.760 --> 0:11:20.440 be more fortunate. You know, my first weekend, I've become 0:11:20.480 --> 0:11:23.280 friends with the food analysts you're talking about, Michael Mobison. 0:11:23.480 --> 0:11:27.880 I assume, correct, correct. The sequence of fortunate events is 0:11:27.960 --> 0:11:32.640 so like mind boggling. So I, um, I get to 0:11:32.640 --> 0:11:37.319 know Mike. Mike hands me a book called Valuation that 0:11:37.440 --> 0:11:40.200 Mackenzie had written in another one by Stern Stewart, all 0:11:40.240 --> 0:11:43.880 about return on invested capital, which he's using in the 0:11:43.880 --> 0:11:48.840 food space. Um, out of curiosity and because he's pushing me, 0:11:48.920 --> 0:11:52.360 I run the numbers for all the PC manufacturers, and 0:11:52.440 --> 0:11:57.360 it turns out Dell is crushing everyone on this metric 0:11:57.480 --> 0:12:01.160 that no one's using in the in the analysis of 0:12:01.240 --> 0:12:06.120 that market. And it also turns out that they've got 0:12:06.200 --> 0:12:10.360 an option scandal problem and a laptop battery problem and 0:12:10.480 --> 0:12:15.800 the stocks trading at six times earned. And so through 0:12:15.960 --> 0:12:19.160 through using that methodology that Michael taught me and spending 0:12:19.200 --> 0:12:21.240 a ton of time with Tom Meredith, who was the 0:12:21.280 --> 0:12:25.440 CFO deal at the time, UM, you know, we went 0:12:25.520 --> 0:12:28.480 to a strong by when everyone was was had a 0:12:28.520 --> 0:12:31.280 cell rating, which was the only strong Bye I ever 0:12:31.360 --> 0:12:34.360 did in my career. Um and I think the stock 0:12:34.400 --> 0:12:36.760 went up a hundred acts in the public market from there. 0:12:37.600 --> 0:12:42.120 So now let's let's fast forward to the Amazon I 0:12:42.240 --> 0:12:47.120 p O. You're the lead analyst, tell us about that experience. Yeah, So, 0:12:47.720 --> 0:12:51.040 in my third year as an analyst at CSFP, I 0:12:51.120 --> 0:12:53.800 was about to I was about to jump shift and 0:12:53.800 --> 0:12:55.760 go to the Bye side. I've been spending a bunch 0:12:55.800 --> 0:12:58.520 of time with Capital Group, actually who I think the 0:12:58.520 --> 0:13:02.520 world of um uh you know, and still still keep 0:13:02.520 --> 0:13:04.920 in touch with people there all the way until today. 0:13:05.080 --> 0:13:08.200 And Frank Quatroum called me out of the Blue and 0:13:08.240 --> 0:13:10.600 he said, I've heard a lot about you. We're leaving 0:13:10.600 --> 0:13:15.240 Morgan Stanley. We're going to start this boutique in that 0:13:15.400 --> 0:13:18.920 tech investment bank called d MG Technology Group. And when 0:13:19.000 --> 0:13:22.120 you really want us to join? And I really wanted 0:13:22.120 --> 0:13:28.200 you to join, and um I called Roger McNamee UM 0:13:28.240 --> 0:13:31.000 because I did. I was looking for some advice and 0:13:31.160 --> 0:13:34.160 Roger was a client of mine at TSFP and he said, 0:13:34.200 --> 0:13:35.880 you got to meet with Frank. You have to meet 0:13:35.920 --> 0:13:39.960 with Frank. And so I met with Frank. He he asked, 0:13:40.000 --> 0:13:41.880 what do you want to do long term? And I 0:13:41.960 --> 0:13:44.640 said I'd love to be a venture capitalist and he said, 0:13:44.679 --> 0:13:46.800 I'll tell you what come work for me. I'll move 0:13:46.840 --> 0:13:49.080 you to Silicon Valley. I'll introduce you to every DC 0:13:49.240 --> 0:13:52.560 that I know. So that was a pretty good Uh, 0:13:52.720 --> 0:13:56.319 that's a pretty good offer. Um. When when I got 0:13:55.760 --> 0:14:00.440 to Frank, well, Frank and I then started. He said 0:14:00.600 --> 0:14:02.360 he said what else? And I said, well, I don't 0:14:02.360 --> 0:14:05.680 really want to cover PCs anymore because they're gonna they're 0:14:05.679 --> 0:14:08.280 gonna merge with the Big Box Group and I'm gonna 0:14:08.320 --> 0:14:12.320 have to cover HP and DECK and that's boring. He goes, well, 0:14:12.600 --> 0:14:14.120 what do you want to cover and I said, this 0:14:14.240 --> 0:14:20.280 Internet things popping up, let's do that. He said, fine, So, UM, 0:14:20.320 --> 0:14:23.120 this is the priest Fitzer Wall so the bankers in 0:14:23.200 --> 0:14:25.360 the research and now it's spent a lot more time together. 0:14:25.880 --> 0:14:30.880 But UM I had already I believe UH reached out, 0:14:31.200 --> 0:14:33.960 you know, the bezos one way or another, just paying 0:14:34.000 --> 0:14:37.560 attention to what was happening with the internet. UM and 0:14:37.680 --> 0:14:40.520 made a couple of trips up to Seattle UH to 0:14:40.600 --> 0:14:44.600 speak with him. UM got to know him pretty well. 0:14:44.680 --> 0:14:47.200 We're still close friends today and he's a large investor 0:14:47.240 --> 0:14:54.320 in Benchmark and UM and you know it, luckily we 0:14:54.400 --> 0:14:56.080 got to know him before it happened. But they ended 0:14:56.120 --> 0:14:59.640 up being a bake off, and it was it was 0:15:00.040 --> 0:15:03.160 you know, I think Morgan Stanley was in before us 0:15:03.160 --> 0:15:06.840 in Goldman after the meetings were a Decliner building on 0:15:07.000 --> 0:15:11.200 sand Hill and somehow we won the man do I 0:15:13.160 --> 0:15:15.640 To this day it's one of my favorite trivia questions. 0:15:15.640 --> 0:15:17.680 Who was lead left on the Amazon I p O 0:15:17.800 --> 0:15:21.240 because not many people will be able to say Deutsch 0:15:21.240 --> 0:15:24.760 to Morgan Gruntsfeld. But but there there is a photo 0:15:24.800 --> 0:15:26.520 of it on the internet. If you do a search 0:15:27.000 --> 0:15:30.120 to have a book somewhere right, don't you have a 0:15:31.160 --> 0:15:34.320 I do. I have the prospectives and and I also 0:15:34.680 --> 0:15:39.200 my my assistant at the time, JULIETT. Wilson, who was 0:15:39.800 --> 0:15:42.800 it was really great. She had this idea that we 0:15:42.840 --> 0:15:47.000 would find the pitch book, and she found a company 0:15:47.040 --> 0:15:50.240 in San Francisco that was opened all night that would 0:15:50.240 --> 0:15:53.400 bind a book for you. The bankers thought we were 0:15:53.480 --> 0:15:55.560 nuts because they loved to put pages in at the 0:15:55.640 --> 0:15:59.000 last minute, and these like three ring binders, but they 0:15:59.040 --> 0:16:01.400 agreed to it. So like she drove to the city 0:16:01.400 --> 0:16:05.080 at like two am and and we we used bound 0:16:05.160 --> 0:16:07.680 pitch books for them. And I still have a copy 0:16:08.000 --> 0:16:10.600 of that, which is kind of cool. That's quite amazing. 0:16:11.160 --> 0:16:16.760 How did you value companies back then when there wasn't 0:16:16.800 --> 0:16:20.440 a lot of revenue. There certainly wasn't any profit. There 0:16:20.440 --> 0:16:23.520 were eyeballs, there were clicks. How do you put evaluation 0:16:23.640 --> 0:16:27.800 on on a a relatively young startup? You know, I 0:16:28.560 --> 0:16:33.360 um got that opportunity to jump to venture only thirteen 0:16:33.360 --> 0:16:36.720 months after I joined Frank and I did, and so 0:16:37.000 --> 0:16:42.200 I was I would I had left the equity research business. 0:16:42.240 --> 0:16:47.920 By the times stuff started going really crazy um in 0:16:47.960 --> 0:16:52.680 the in the in UM and so I started thinking 0:16:52.720 --> 0:16:55.400 about it as a as an investor in less the 0:16:55.760 --> 0:17:01.520 research analyst. But I didn't, I wasn't forced into that quandary. Um. 0:17:01.640 --> 0:17:05.000 I wrote a blog post way back then though about 0:17:05.160 --> 0:17:11.120 proxy valuations, and I noted that people like John Malone, 0:17:11.640 --> 0:17:14.679 you know, had been able to convince Wall Street to 0:17:14.800 --> 0:17:18.600 think about homes past instead of you know, a pe 0:17:18.680 --> 0:17:21.520 multiple and that there's a value for home past if 0:17:21.560 --> 0:17:23.600 we can grow homes path and there were so there 0:17:23.600 --> 0:17:27.840 were other people at that time that had been successful 0:17:27.880 --> 0:17:32.080 at it, kind of changing on how you think about things. 0:17:32.160 --> 0:17:37.640 But of course in things just went super nutty. They 0:17:37.640 --> 0:17:42.960 may be super nutty again. Um and uh and it. 0:17:42.520 --> 0:17:46.040 It can cause a lot of anxiety for someone who 0:17:46.200 --> 0:17:51.000 was brought up rooted in financial history and you know, 0:17:51.080 --> 0:17:55.640 someone who's who felt like a study partner of Mike Mowison, 0:17:55.800 --> 0:18:00.600 like it's it's hard when you see craziness. So you're 0:18:00.680 --> 0:18:05.639 not a specially big fan of initial public offerings. What's 0:18:05.720 --> 0:18:08.800 the problem with traditional I p O s. There's a 0:18:08.800 --> 0:18:11.800 problem that's been inherit for a very long time, and 0:18:11.840 --> 0:18:14.960 then there's a problem that's gotten way worse than the 0:18:15.000 --> 0:18:17.760 past five years. The problem that's been around for a 0:18:17.840 --> 0:18:21.920 very long time. You know. Bill Hamburg was pushing on 0:18:22.000 --> 0:18:25.800 this over twenty years ago. You know, he said it's 0:18:25.840 --> 0:18:28.760 an insider's game and it's rigged, and he was one 0:18:28.800 --> 0:18:33.800 of the inside. You know, Um, and Pierre and Evey 0:18:33.920 --> 0:18:37.600 got upset about it. Larry Sergey got upset about it. 0:18:37.760 --> 0:18:41.760 You know. So I think it's and and net sweet 0:18:42.000 --> 0:18:46.399 you know, Uh got upset about it. Uh, Allison was 0:18:46.520 --> 0:18:49.760 upset and as a result of the team at that 0:18:49.920 --> 0:18:53.320 sweet and So I think it's always important when this 0:18:53.440 --> 0:18:56.320 topic comes up to highlight that there were plenty of 0:18:56.320 --> 0:18:58.920 other people in Silicon Valley that we're ringing this bell 0:18:59.040 --> 0:19:02.639 before I was. Um, I'm just the latest person to 0:19:02.720 --> 0:19:08.280 pick up the baton. Um. There's two real problems, um 0:19:08.320 --> 0:19:13.480 that have been exacerbated recently. One is they don't let 0:19:13.520 --> 0:19:19.160 everyone been so you're there's a very restricted set of 0:19:19.200 --> 0:19:22.960 people who get to decide if they get if they 0:19:23.000 --> 0:19:26.160 want to buy stock in and office, and it's it's 0:19:26.160 --> 0:19:29.360 not everybody. There's not even any oversight as to who 0:19:29.720 --> 0:19:32.760 gets led into that circle. And then the second thing 0:19:32.840 --> 0:19:37.080 is they don't use price, Uh just they don't use 0:19:37.359 --> 0:19:40.080 supplying demand to set the price. And determine who gets 0:19:40.119 --> 0:19:44.159 the shares. They literally have humans saying we think the 0:19:44.200 --> 0:19:45.919 price should be this, then we're going to give it 0:19:45.960 --> 0:19:50.919 to this many people. Um, it's no shock that that 0:19:51.119 --> 0:19:55.640 has resulted in miss prices. And now there's forty years 0:19:55.680 --> 0:20:00.840 of under pricing data. Professor j ritterd at uh Eurosity 0:20:00.920 --> 0:20:03.879 of Florida has aggregated all this on his website. He 0:20:03.960 --> 0:20:06.080 keeps it up to date, so I just get the 0:20:06.160 --> 0:20:10.760 point of his stuff. Um, those numbers have gotten insane recently. 0:20:11.080 --> 0:20:14.280 So the previous two years were six and seven billion 0:20:14.280 --> 0:20:17.919 dollars one day underpricing, and then was thirty five billion. 0:20:18.160 --> 0:20:21.000 So Bill, some people might say, on at least on 0:20:21.040 --> 0:20:23.919 Wall Street, that that's not a bug, that's a feature. 0:20:24.440 --> 0:20:28.800 Oh maybe for that client. You know. I do think 0:20:29.000 --> 0:20:31.880 that all of it makes sense when you realize that 0:20:31.960 --> 0:20:36.159 the key customer of the investment bank is the institutional 0:20:37.040 --> 0:20:40.320 share the firms to the fidelities and t ros and 0:20:40.400 --> 0:20:43.960 cathital groups. Um, that is the customer that's being served. 0:20:44.200 --> 0:20:48.720 And I guess that's fine to a certain extent, except 0:20:49.320 --> 0:20:53.240 the banker UM acts as if they're looking after your 0:20:53.240 --> 0:20:59.800 best interests. Also, there's no high dollar transaction that you'll 0:20:59.800 --> 0:21:03.000 do in your life very where you use the same 0:21:03.080 --> 0:21:08.200 agent as the counterpart. It's the only one there. There 0:21:08.240 --> 0:21:10.920 literally isn't. You wouldn't do that in M and A transaction, 0:21:11.080 --> 0:21:14.639 you don't. You don't do it when you sell a house. UM, 0:21:14.800 --> 0:21:17.280 you always get your own you know, agent to look 0:21:17.320 --> 0:21:21.840 after your best interests. So it's bizarre how much trust 0:21:21.920 --> 0:21:25.959 there is UM when people go into that process. And 0:21:26.040 --> 0:21:28.800 I think that trust gets taken advantage of. When I 0:21:28.920 --> 0:21:32.560 was on Wall Street, UM, there were these huge sales 0:21:32.680 --> 0:21:36.000 forces in every region, and when you did an I 0:21:36.119 --> 0:21:40.280 T O there was variable compensation for people that could 0:21:40.280 --> 0:21:43.639 play shares, and even between the banks, there was this 0:21:43.680 --> 0:21:48.679 thing called jump ball economics where your bank was encouraged 0:21:48.720 --> 0:21:51.639 to outperform the other bank, so that they used to 0:21:51.720 --> 0:21:54.760 use this word distribution. I'm looking to get this offering 0:21:54.760 --> 0:21:58.680 out and you got to go sell it, right. The 0:21:58.840 --> 0:22:02.080 sales force at the two largest investment banks today's one 0:22:02.160 --> 0:22:04.760 tenth the size it was back then, so they don't 0:22:04.760 --> 0:22:08.919 even have the people anymore. And what they've done is 0:22:09.000 --> 0:22:12.240 they now focused the majority of the I P O process, 0:22:12.359 --> 0:22:15.959 unlike the top twenty accounts UM, so there's no effort 0:22:16.000 --> 0:22:18.879 anymore to push it out. It's just more of an 0:22:18.920 --> 0:22:23.560 effort to see what these people want. And they've settled 0:22:23.600 --> 0:22:29.720 in on an optimization function, which is truly remarkable that 0:22:29.800 --> 0:22:34.080 they get that this actually passes muster. But they tell 0:22:34.640 --> 0:22:38.159 each and every CEO and CFO and board that comes 0:22:38.160 --> 0:22:41.639 to go public that their goal should be being thirty 0:22:41.720 --> 0:22:47.960 to fifty x over subscripts. Amazing. Supplying demand was understood 0:22:48.040 --> 0:22:51.560 three or four years ago. How you could sell the 0:22:51.600 --> 0:22:54.440 most important asset in your firm, which is your stock, 0:22:55.080 --> 0:23:00.200 um into a process where you're being told that x 0:23:00.280 --> 0:23:07.119 oversubscribed is optimization. It's shocking. It's literally shocking to me. 0:23:07.400 --> 0:23:12.120 So let's talk about an alternative like direct listings. How 0:23:12.160 --> 0:23:15.119 do they work and what are their advantages versus a 0:23:15.160 --> 0:23:17.920 traditional I P O. Yeah, so, like forty years ago, 0:23:18.160 --> 0:23:22.720 people built algorithms into exchanges that allows you to match 0:23:23.080 --> 0:23:29.040 supplying demand to determine price. And every single stock these days, 0:23:29.080 --> 0:23:32.840 every day when it opens, goes through that process. Right 0:23:32.920 --> 0:23:35.919 every morning, you know you gotta start trading a stock, 0:23:35.960 --> 0:23:39.960 how do you determine which price? Where's the first trade happen? Um? 0:23:40.000 --> 0:23:43.520 And it's all just a simple matter of matching supplying demand. 0:23:44.240 --> 0:23:49.119 The most u highly used algorithms called priced time, which 0:23:49.200 --> 0:23:51.720 is if if you put in a bit at the 0:23:51.760 --> 0:23:54.359 price that they evinced the open apt or if you 0:23:54.400 --> 0:23:56.239 put a bit of a pity above the price they 0:23:56.240 --> 0:23:58.679 open at, you automatically get filled. If you're at that 0:23:58.760 --> 0:24:01.639 price whoever had order in first. So that's the price 0:24:01.680 --> 0:24:05.919 in the time. UM. That's exactly how every stocks opened 0:24:05.960 --> 0:24:08.920 every day on both the NAT deck and the n 0:24:09.040 --> 0:24:13.560 y C. And here's the best part. That same technique 0:24:14.080 --> 0:24:17.320 is used the day after a hand allocated i p O. 0:24:17.960 --> 0:24:21.800 So every company that does an i p O does 0:24:21.840 --> 0:24:24.879 a direct listing that the very next morning, except the 0:24:24.920 --> 0:24:27.600 only people allowed to sell, and I feel are the 0:24:27.600 --> 0:24:29.879 ones that you gave the stock to the night before, 0:24:30.800 --> 0:24:34.480 which is also perverse. Um. But the technique that I 0:24:34.520 --> 0:24:37.679 think the most elegant thing about the direct listing is 0:24:38.000 --> 0:24:41.240 it uses the systems that are already in place. And 0:24:41.320 --> 0:24:44.119 so if you talk to the guys that Citadale that 0:24:44.160 --> 0:24:48.280 have done all four of the high profile direct listing, um, 0:24:48.440 --> 0:24:51.359 they they actually, you know, will tell you, yeah, this 0:24:51.480 --> 0:24:53.600 is just like how we open every other stock, or 0:24:53.840 --> 0:24:55.919 just like we opened a stock after an i p O. 0:24:55.960 --> 0:24:58.560 The day before um, and now I had a front 0:24:58.640 --> 0:25:00.960 row seat on a Sonic because we or an investor there. 0:25:01.400 --> 0:25:05.679 But um, they just start announcing a range. People tighten 0:25:05.880 --> 0:25:08.639