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So Lisa Spy as a privilege is that have you on the NFX podcast today? At least we've known each other for a while, and you're known as the Pete whisperer. You famously were an architect of Google's IPO back in 2004, and then we had the pleasure of working together on the truly IPO where you were a consultant the company, and you've just an incredible experience where multiple different hats to advise tech companies and the public Morgan.
So so we'll honor to have you on the podcast today and ready to help for the benefit of founders and tech CEOs navigate what has just been a rapidly changing market in IPO Land and over the last year or so So maybe, like, why don't you take us back? It is perhaps a little bit of a history lesson about what's happened in the public markets. One thing that's sort you know, go back a few years ago. I think when we were working together, it's like there was a a version to go in public.
Companies were staying private much longer, and there was also just only really one op like, how have things have changed and what's been going on the market today? 1st, thank you so much for inviting me to join you on this. And secondly, years later, thank you again for privilege of getting to work with through you through the process because that was just a great experience all the way around. So catching up on some old thank yous. Yes. Things have change. And that's so good. Right?
Founders are gonna have an option to choose what is the format, what is the process that best suits what they're trying to when I set up my business, like, 4 37 years ago or whatever it was, and the point was management teams understand their business. So well. Founders understand their business so well. Pete rid of the nuances of the IPO process, and it matters a lot.
So wouldn't it be great if we could make sure that the entrepreneurs and the management team and the folks that we're gonna have to be with the company long after the IPO Understood the ramifications of all the decisions they made along the way. And, yes, as you referenced in the intro, back in 2004, Googled in things very differently from the way any tech companies had done them before. And the company took a lot of slings and arrows for having done it. Oh, that's not the way it's done.
Terrible. Flint to this day, there are people who will say, well, that wasn't a success. And there are those of us who were involved who say, I think it was a great success in accomplished everything the founders and the management team wanted, and that's the key. There is no one size fits all. So With that, going back to the history, it was true everybody did things the very same way.
And again, some companies were going public because they just wanted to raise as much money as they could to pour into the business to grow it. Some companies just want a liquid security 1 because that was kind of an implicit deal that they've made with their employees. And also because they wanted to be able to use the stock as a currency in M And A. And when you are a private company, it's very difficult to get agreement on what stock is worth on any given day.
When you are a public company, the market is valuing your security every single minute of every single public trading hour of the day. So you know exactly how many shares equal, how many dollars. So depending on what kind of companies wanna go public just because it gets a lot of publicity for them. In fact, right now, I'll throw it to you. Pete, why did truly I wanna go public when it did? Why did we wanna go public? Well, I guess, you know, a couple of things were on the mind.
One was the scale of the business at the time that we needed to raise capital. And I think frankly, we felt that the public markets were more receptive than the private markets. And so raising in the public markets was just frankly more attractive at the time. 2 was the sort of branding credibility event, you know, which Beller to kind of, like, help the company be a bit more credible, frankly, in the eyes of employees and the eyes of customers.
And then thirdly, just the ability to do M and A, So just having a liquid currency for M and A was the reason. So those were the main reasons, I guess, back then. Yeah. It makes tons of sense. So those are the reasons motivating most companies to go. Every so Morgan, you have a company where the management team and the founders don't really wanna go and the early investors are let us out now.
Would say that's the 4th reason why companies go sort of Flint march, but generally speaking, you've hit the major reasons. And then just from a kind of obviously, you know, there was a time when perhaps, you know, tech ideas were rarity, but now it seems that these, you know, the so many IPOs or so many spack offerings, like, almost feels like 2000 again.
You know, these companies being founded and then going public in literally a matter of years, a few years which seems very, very different from what it was. What's driving that? Yeah. Well, I wish I could disagree with you about kinda smells like 2000 a little bit, but I what's driving that? A couple of things. 1st and foremost, the markets have been incredibly hot.
Technology stocks, you know, yes, some of them have corrected early 2021, but the last couple of years have just been a bonanza for technology companies. And the markets have shown a great willingness to take incremental risk and invest in in new issues. And so it's been a great market for companies that wanna go public. In the very end of 2020 2021, it went from being rational enthusiasm to a little bit nuts to use the technical term. There are all kinds of investors. There are institutions.
There are very savvy retail investors, and there are speculators. And the speculators jumped in in a big way as they saw IPOs jumping in the back half of twenty twenty and into early 2021. And so there was incremental bit of enthusiasm, but I think the real reason that there have been so many of these IPOs in the last, let's call it, I don't know, 9 months has been because the markets have proven very receptive, and it's very different from the way it was back when you guys went public.
And part of that, your first question was about history. Part of it was a huge change that happened in 2012 with the Jobs Act and the Jobs Act was a brilliantly named bit of led slation that actually did exactly what it was promising not to do prior to 2012 when a company had 500 shareholders, and that included employees it had to file financial documents.
It was something called a Form 10 because the argument was if you got 500 investors, if you got 500 shareholders, they're all entitled to know how you're doing. The early days of its friends and family, it they'll take your word for it. But by the time you've got 500, you have to share your information and many companies, and I would point to Google and Facebook as great went public when they did only because they were going to have to file all their financial information anyway.
And so as long as they were gonna put it out there, they might as well get the benefit of people's frankly, James dropping to see how well they were doing. Said, let's go public off the momentum from those filings. In 2012, led by the NDCA, the jobs act came to be, which said forget that 500 shareholder rule. You can have as many as 2000 investors before you have to share information. And by the way, that doesn't include your employees.
And so that allowed companies to remain private much longer. And it also Pete, I think, part of the thinking was the early investors, again, often led by DC is wanted to say in for more of the ride. Right? They didn't wanna have to frankly share the steepest part of the growth curve or what was often the steepest part of the growth curve. They didn't have to share that with the public.
And so being able to stay private longer seemed like of an end it didn't quite work out that way because what happened is the big public investor said, well, okay. If you're not gonna let us participate at the early stage that has public company, then I guess we'll all get our charters changed, and we'll start investing when the companies are still private.
And so you've seen a huge increase in the mega rounds where new names to the private markets, names like Fidelity and T. Rowe Price and, you know, all the other household public company names started investing privately. But started in 12. I promise I'm almost done with this answer. You know, it sort of started late 2013, 2014. Now some of those companies would like to recognize some of the gains and sell some stock. And again, employees, or founders want to allow their employees some liquidity.
So even though many of these companies have raised amounts of money as private companies, they're now coming to the markets for some of the other reasons. The need to raise capital is probably much less important today than it was 5, 6 years ago in terms of the IPO market. Yeah. Because the, you know, capital is plentiful and then also just private and public capitals available.
And so today, the options of, you know, it feels like there's more than one option right now to become a publicly traded company. What would be wonderful is you could sort of break down the pros and cons of each of those options. The traditional IPO, you know, now we have direct listings, which are more and more frequent, and then the SPAC offering. Can you break down pros and cons for each of those? I certainly can.
I'm gonna throw in a 4th, which is gaining even more popularity is the hybrid auction, to which I am somewhat biased because that's closer to what Google actually did. So let's take a traditional life. Let's take what's the same for all them.
For all of them, the management team needs to get together and put together an s 1 of a prospectus or a document talks about the company's business that talks about the company's risks, that talks about how they calculate their finances, the MD and A which is management's discussion and analysis, basically, of the numbers. All of that's the same.
Whatever process a company chooses to go in a traditional or a conventional IPO, when the company is thinking it's time to go, it'll hire a group of bankers a hiker higher syndicate. And depending on the size of the deal, that can be anywhere from, I don't think I've seen many that are smaller than names recently to. Some of the bigger companies like Uber probably have 20 names on the company.
They'll hire syndicate of bankers, and they're hiring those bankers, one to help them work through some of the regulatory requirements to to help them translate their story from the way management has thought about the business, to the way in will look at the business going forward.
They'll also use those banks to help them, and this is where we're gonna get into some of the differences to help them market the story and market the stock when it's time for the actual transaction to happen to a wide group of investors. And finally, the management team will have to come up with a forecast. Of how they think the business is going to perform over the next, let's call it, eight quarters. Generally speaking, it's actually 8 quarters or 3 years.
And that's really difficult particularly for companies that are growing at the rate that so many of these are growing. So, one of the hardest parts is coming up with the 4 because for heaven's sake, most rapidly growing companies have a hard time forecasting out 5 weeks, much less, you know, 3 years or 8 quarters. But anyway, all of the same regardless of what structure you pick. Okay. So where are the differences?
With the traditional IPO, when you hired those banks, each of those banks generally had a a research general and the research analyst was meant to be an expert in the area that your company lives in. So it could be a semiconductor expert. It could be a consumer products bird. It could be a SAS expert. It could be an oil and gas. Whatever.
And those analysts were meant to listen to your story and to reflect back to you, what they heard, what they think will be of interest to public investors, and also what they think of your forward model. Companies very carefully will give their model to research analysts in the traditional IPO. And then the analysts are asked to come up with their own versions of those well, we think you're being overly optimistic here, and we think you're being overly conservative Pete.
It is then the analyst community that will go out to the buy side invest fidelities and the capitals and the black rocks and all those folks and say, hey, this is what we think the company is going to earn. The company itself will not share its forecast. Huge difference. So there's one difference is for a traditional IPO or a hybrid auction, it is analyst community that is sharing its view of the forward forecast. For a direct listing, companies will hire many fewer bankers maybe 2, maybe 3.
Now increasingly they're paying a fleet more to write on them, but that's kind of separate from the listing, frankly. And the company itself will go out with its own forecasts. And when we get to pros and cons, we'll come back to that. And the same is true of a speck, with a speck it is the company's forecast that is used to market the security as opposed to analysts forecast. That's one Second difference is how the stock is actually sold.
In the case of the hybrid auction and the traditional feel, and Pete will remember this. In fact, it'd be fun to hear your memories of this. The management team will go on a roadshow for 10 days and meet with as many investors as they possibly Well, those are in the days when we used to travel. But, presumably, that will happen again, but they will literally go out and meet one on one with all the investors just prior to pricing the stock.
I'm gonna interrupt my monologue here and say, Pete, what do you remember about your roadshow? I remember burning huge amounts of carbon dioxide. Traveling around in a very compressed time period and sleeping for about 4 hours a night for 2 weeks.
So, I mean, it was a lot of repetition speaking and educating public market investors, but, you know, I enjoy fundraising as a founder because you always get lots of insights and helpfulness and perspectives, but enormously repetitive because you needed to speak to a very large number of people and tell the same story, you know, and it takes a bunch of time where Jacob has spent running the business.
Yeah. And meeting with investors, of course, is still no matter what process you choose, it's still incredibly important because you need to convince them to buy your stock instead of, say, putting your money into, you know, Amazon or something tried and true. By traditional transaction, hybrid auction, management does go on this roadshow. Today, it is done over Zoom.
Perhaps it will be done live again, but it's a chance to meet one on one with the biggest institutional investors to tell the story. At the end of the process, those institutional investors will feed their interest level in owning the security back to the investment bankers. And they will feed them general information about what the price is. Gee, the range on the cover is 20 to 24. You know, I'm in for a 1,000,000 shares at the high end of the range.
Or what often happens when an institution likes a company? So say, Pete me in for 10% of the deal at the high end of the range or a buck above the high end. Nobody wants 10% of the deal. What they're signaling there is please give me as much stock as I can possibly have, but everybody knows it will be, you know, way smaller than 10% with a hybrid auction. This is probably the biggest difference Potential investors cannot say putting 10% and they cannot say a buck above the range.
They have to say, I want x number of shares at this price. I want x plus y number of shares at this price. They each investor has to give the management team not the James force of the investment banks, but the management team, their demand curve, how many shares do they want at each price? And the management team, both bankers will help them put together a massive spreadsheet that says, okay. If you price your deal at 50, these are the investors who are in.
And every investor, you can probably price this deal at 85 if you But then you will get a whole bunch of investors you've never heard of who've never met you, and we know that they're just momentum players. Or if you price down at again, 50 for the sake of the conversation, you'll get all the professional institutional investors who probably will come in for your IPO and be there in the Morgan. Afterwards. And you can see if you price at 50, this is who you get.
If you price at 51, this is who drops at. If you price at 52, this is who drops out management teams have just exponentially more information about which kind of investors are interested at which price point, and they have that information prior to choosing at which price they wanna go public. In the case of a direct listing, a couple of things are different. 1, the issuance of the forecast, as I mentioned before, comes straight from the management team.
They will have a big meeting maybe 6 weeks prior to when the actual transaction is gonna place, and it'll be streamed and anybody who wants to can listen to them, tell their story, and put their forecasts out there.
It's a little more challenging because one of the reasons that companies don't put their own forecasts out when they're doing a traditional or hybrid auction is because they have legal liability for anything that they say during the sales process of an Pete once the company's public, it operates under something called safe harbor rules where you can make a forecast. And if you're wrong, oops, me, at Copa, this is what we thought but it didn't turn out that way.
But when you are selling stock, it's quite different. If you say SG and A is gonna be 22,000,000 next Currier, and SG and A turns out to be 22,500,000 next quarter, you can sued for that. So that's why they have the investment banks put out the forecasts rather than the companies themselves. So, anyway, direct listing is the company itself that puts those numbers there. And then it will still do a virtual roadshow of talking with investors, but it won't collect interest.
It won't know which accounts won how many shares at which price, it will just do its best to convince them that whatever range they put on the cover of the s one is, you know, reasonably viable. Although, of course, it hasn't actually worked out that way in any direct listings yet, but they'll put out something called the reference price that, again, don't mean to get too long into it.
So I apologize that this is a very long but in the case of a regular deal, the bankers will help you determine the price, and they'll help determine who's going to get the shares and the allocation Although management teams have the ability to do that themselves. In the case of a hybrid auction, management has much more data about which accounts are interested in In the case of a direct listing, management goes out and does the best it can to convince investors to take part.
And then they throw the cards up in the air, and they wait for the day of the deal Pete who's gonna buy it and at what price. They have no control over either the price or who gets the shares. And those are kind of the biggest differences on those 3 types of deals. Just quickly on a stack, it's kind of completely different. With a stack, a company's gone public. Spack has gone public. It's raised $300,000,000. For instance, and it doesn't have any operating business at all.
So then its job is to go out and find one and have that operating business merge into it. So its initial entree as a public company happens because you merged into a public already trading entity. So, anyway, that's sort of the short version. This answer has gone on way too long. So It's complicated. You could see why these big institutions have lasted. So to kind of clarification.
In some ways, the hybrid auction is doing the price discovery piece and investor selection piece that was typically, you know, shielded from management teams by the investment banks. And so, ultimately, they can get, you know, using technology, frankly, as opposed to using the knowledge and and relationships of a bank. Would that be fair? That would be fair.
There is some nuance there, but in a nutshell, hybrid auction gives management the most information ahead, direct Flint, and gives them the least information. And so, specs, I mean, this is, like, they've been around for a while, but they seem like over the last year have become, you know, just a sort of a very important or seemingly important part of the landscape for tech companies go public. Like, in the simplest terms, how would you describe a spec?
A spec is a shell company that raised money for the sole purpose. Right? SPAC, special purpose acquisition company. That's what it stands for. It's a shell that raised money to buy an operated company. And historically, because you're right. They've been around for a long time. Historically, it was companies that probably couldn't get public the regular way. Maybe they were in gambling. Maybe all the cannabis companies went public via spec.
It was for those that where there was some legitimate fear that they wouldn't be able to get public any other way. Over the past year, that has sort of changed sort of. And then what I mean by that is you still don't see the best of the best going public bias back, but it's certainly the promise of a spec. If you're Pete Flint and you're running truly in back's gonna come to you and say, here's why you wanna do a spec instead of an IPO.
It's quicker, and we will guarantee you the price of up front So you don't need to wait to see what the market's gonna pay for your stock. I'm telling you your company is worth $5,600,000,000. We can shake hands on them right now and go on our merry way. And that's part of the pitch. And is there any of them the types of companies that's suitable for each option out of these 4 options? You know, I know open door fences went public. Fire us back. Virgin Galactic went public virus back.
You know, they seem to be reasonably successful examples. Like, out of the other in coinbase, I think, was a direct listing. Like, are there any, you know, particular models that are more appropriate for one type of company over another? Yes. At the end of the day, it all is up to management, but let's look at Virgin Galactic. Let's look at the electric car or flying car businesses that are going public by a What do they have in common? There's no revenue yet.
And so they are much more difficult to value by traditional public investors because there's so much left to be proven. So it is the company's even open door just beginning to prove its model, frankly. And so companies that are earlier in Frankly building out the business can go public sooner if they choose a spat.
Now, there's the going public And there's the beating public, and those are very different things that we'll come back to, but they can probably get public sooner than would otherwise be the case. In the case of, oh, let's look at Spotify because it was the first direct listing. That was a great example of a company to go do a direct listing because the people who owned the stock pry when it was still public were the record labels. The record labels are not institutional investors.
They're interested in music. They didn't want to be portfolio manager. So the direct listing allowed them to sell out relatively quickly what they own to get liquidity for the company and to frankly Pete big hogs and liquid dollars in their own bank accounts and to move along. Didn't really matter to them who owned the stock afterwards. As long as it wasn't them. And the price, you know, a dollar or $5 here or there, sure. Everybody wants Morgan, but again, it wasn't critical for them.
So that was a great of a company where the early investors had totally reasonable reasons to wanna get at. Another type of a company that wisely chose a direct listing is Asana, where the largest shareholder, he's also involved on a day to day basis. He's right. And he's the opposite of Spotify. He's not trying to get out. He's just trying to create a liquid market for his employees.
And again, since he's the biggest shareholder, if the stock goes out with a great price good, if the stock goes out with a slightly less price he doesn't care. And if anything, Tory had happened that he could be right there to buy shares back. It was another smart way to go public, but those are the unusual companies there are certainly others, but those are sort of unusual direct listings.
The less well known a business is the more it probably might want to take a more traditional route because to your point Currier, Pete, the regular IPO route does get you more a And if part of the purpose is to build the brand, you might wanna take a more traditional group. And they're just thinking through the specs, the number of preps companies, we have longer operating history and sort of more traditional types of companies with good revenue that are choosing the spec path.
What might be some examples there?
Yes. I think on this background, it is companies that just want to get the dollars in hand that are attracted to the high valuation that they agreed to with the sponsor of this back, the folks who took the shell company public, and are just in a hurry to get out there, but I'm I wanna step on my own toes by I mean, one example would be Hippo, the insurance company, which Esaf, who we had in the podcast, is taking Hippo Public virus back with Reed Hoffman and Mark Pincus.
So that's, you know, following the footsteps, perhaps, of lemonade, which it went through, I think, a traditional Pete process. So, you know, maybe touching on that, like, you know, with a lot of, perhaps, famous technology investors and operators like Reid Hoffman, Kevin Hartz. Like, you know, these people could do a lot of thing. Why do you think they pursue in the Puff. Yeah. 2 answers.
First of all, at least when this started in its most robust form a couple of months ago, and there weren't quite as many of them. It was just a money faucet for the founders. Right? Founders will put up some money in the beginning at least. They were going to get 20% for for some small investment. When you say founders, these are the founders of the speck. Oh, the speck. Yes. The people who were the sponsors, the speck sponsors, it was almost free money. They raise the money.
They get to own it for the most part, not only, but 20% of the company they're going to acquire to say it nicely. It was a lovely way to generate a lot of cash for the sponsors of this back in a hurry. You mentioned Reid Hoffman. He's an example of somebody who's probably a terrific spec sponsor because one of the enticements for a operating company to merge was back is, hey. You'll be public right away. And the problem is most companies aren't ready to be public right away.
You remember all that Trulia had to go through. I think fully was even Pete Sarbanes Oxley, but to be ready to operate in the public spotlight because you don't get to make a and there's a lot of systems that need to be upgraded, and there's a lot of effort that needs to go into closing the quarter improving your numbers.
And frankly, many of the companies choosing this back route are ready for that and are gonna have to lean very heavily on their new owners in the form of the SPAC sponsors to help them through that process. Read is obviously somebody who will be terrific at that because one can presume he'll hang around and he will help his companies achieve success even after their public. On the other hand, maybe Currier B is also fabulous at helping companies make that transition.
I'm unaware of that skill Pete. And so some of the companies choosing specs that are founded by high profile names that perhaps don't have the financial track record are somewhat more dubious combinations. But why does it redo it? Why does anybody do it? Because it just poured money into the specs sponsors pockets. Which is why you saw so many. I think a read or a mark, again, probably wanna run something too.
Unfortunately, they're in the, you know, top 10% of people who should be doing this in my opinion. Yeah. It does feel like there's definitely explosion and unnecessary explosion, which is feels like it's cooling off now or has caught off a little bit. The SEC is getting involved. Okay. So tell us what's going on there.
Well, I mentioned before the bit about the forecasts and how companies going public the old fashioned way or the I shouldn't say, well, fashion, but either via an auction type model Morgan, we'll call it auction, even though it's not purely an auction, but for the sake of this conversation or the traditional way, Again, the forecasts are put out there by the investment analysts of the bank. So the company does not have liability unless, you know, real malfeasance can be proven.
And specs have been going public saying, no. We're merging into public companies, so our forecasts are covered by, again, those safe harbor and SCC is saying, yeah, no. We're looking into that, but we think if you put out 5 years worth of forecast, you're gonna have to take some liability on those numbers in case they turn out to be pie in the sky.
So within the last just 2 weeks, the liability issues, and frankly, the background paperwork for lack of a better term on specs has been ramping up dramatically, and my personal belief is that we'll ultimately save people a lot of heartburn. I mean, a lot of this innovation in the going public process is the narrative has been, like, sticking it to Wall Street and, like, helping founders and helping employees and helping kinda early stage investors and sticking it to Wall Street.
Would you agree with that behind the scenes and what's going on really? The plaintiff's phrase that comes to mind is absolute utter nonsense. Let's look at direct listings for a minute. Right? Direct listings. One of the appeals of a direct listing is that there's no lockup So the early investors can sell immediately. Historically, with a conventional deal, the early investors had to hang on a 180 days.
That is no longer true, like to become much more flexible, which is a benefit of all that's happened in the last couple of years. So let's look at it again. The early investors, the folks who already, theoretically, have made quite a bit of money because if the company hadn't done well, it would not be going public. They get to sell at the top 10 and most of the direct listings have been at least initially traded down after that.
So when they say sticking it to Wall Street, Let's think about who Wall Street is when there is an Pete, and and we should go back to the fact at some point that it is impossible to price a listing perfectly at the onset.
There's math involved, which you can absolutely do down to the 5th decimal point, but there's a motion involved, and there's different perspectives on what the longer term opportunity is for a company, and that's why we have a stock market because somebody wants to sell and somebody else wants to buy. But there's no way of knowing exactly where stock is gonna trade. And that means that often on the 1st day, there is a pricing and initial price that is not the price that holds.
So if the stock goes up, you'll find people going, oh, there was money left on the table. And if the stock goes down, it'll be, oh, well, at least, you know, the Beller, because right now, management teams can't sell in direct listings. Only early investors will at least they got to take every dollar off the table. So to your original question of stick it to Wall Street. Let's look at who Wall Street is.
Who are the biggest investors in IPOs, BlackRock, and Capitol, and Wellington, and Hero and Fidelity, and whose money is it? It's the pension funds. It's the union funds. It's all the people who were able to put $1500 into a full fund account. You know, it's someone hoping to spend send their kid to college. It is the aggregation of the investment capital of all the little guys out there. There is no mister Fidelity.
Is no mist of what there was, Mister Tiro, but he hasn't been with us for a very long time. So when they're sticking it to Wall Street, what they're doing is sticking it to the general public investor. And so the narrative is just totally Beller at words. Those who are invested in the venture funds, and again, increasingly, there are some endowment funds in those venture funds, but it's also a lot of, you know, high net work folks Morgan indenture funds. The narrative is nonsense.
There will be some winners and some losers, but when you say you don't want Wall Street, to make any money on an initial public offering. What you're saying is I don't want the little guy to get Jack. I mean, the most startling thing is that just the benefit of options and innovation. And it seems that, I mean, you had early innovator trying to innovate it. I'm sure it was an uphill struggle. And as a founder, you're presented with 1 kind of clunky option.
I guess you know, this area will evolve, but the options that are available now are just I mean, that can only be a good thing for founders and investors to kinda make their own choices opposed a single choice. If you're enjoying this episode, feel free to rate and review our channel and share this conversation with someone you think would benefit from these insights. Follow us on social, nfx, and visit nfx.com for more content. And now back to the show.
I guess to kind of look into your crystal ball and, like, look out for 2 years, perhaps when this sort of innovation stabilizes and perhaps the SEC kind of, you know, navigate it, I guess, what do you see as the outlook for the options that are available? And do you think one of these options will perhaps disappear or change dramatically? No. I think the beauty of it is what you just said that every team, every founder, and every management team can make its own choices now.
Direct listings are absolutely right for some and not others. Spacks are right for some and not others. Auctions are right for some and not others. And for stories that are perhaps complicated and just don't Flint introduce any incremental stress into the process. You know, the traditional or conventional IPO also works really well. So that's the beautiful thing out of all of this is management teams and founders now get the choice depending on for what they're trying to optimize.
And some of the things that we're kind of broken about the IPO process like the guaranteed 180 day lockup, that's gone away. That's never coming back. And that's great. It's a stock trades up. Why shouldn't employees be able to sell early? Why shouldn't early investors be able to sell early? So the innovation is a fabulous thing for investors and, importantly, for founders and James. But there's no one right, and there is no one wrong.
And I know there are zealots out there who say you must do it my way, and that's just definitely wrong because different companies are trying to optimize for different outcomes. So will something go away? I think the spec frenzy is gonna take a bit of a powder here while people figure out what the new regulations are, what the live abilities are. And I think we're gonna see something fascinating.
When those shell companies are raised initially, they promise the investors that they will find a company to merge with within, generally speaking, 24 Morgan, some of them are 18, most of them are 24 months. And a lot of those specs were raised in the same week. I think there's a number of, like, 464 specs right now looking for something to buy. And they have to get it done in now the next 20 months. So that's gonna be a lot of fun to watch. Isn't that the last dance or the high school disco?
Yes. You know, everyone's gonna be hooking up. Exactly right. So I think that the spec frenzy will cool, but I think all 4 of these structures will remain. And who knows? Maybe we'll see something else too. Yeah. So, you know, maybe let's take a hypothetical. So let's say I'm running a startup $100,000,000 in revenue, software startup, 150 people, and, you know, I know these companies, and they're getting 7 spec inbound inquiries a week. Right now.
And, you know, the the Beller to take this back or engage is a fundamental question that these CEOs are trying to figure out, and they're trying to ask some stuff like, am I ready to go public? You know, what would you advise these founders? What do you think that they should be thinking about? Couple of things. 1, it's not am I ready to go public? It's am I ready to be public? Can I forecast my numbers at least three quarters out?
Because you go public and you suggest to people you're gonna make 10¢ In your first quarter out of the gate, you make 9¢. Investors are furious, and that James lives with you, stays with you. Saves with you for at least the next year or so. They even took Facebook 18 months to return to its IPO price. And what happens when the stock falls? And what happens when the stock falls the morale of your employees plummets right along with it.
So Flint 1, can you close the quarter in the requisite period of time, which is you know, ideal is 10 days. Many companies going public can't do that. Can you close it in 25 days? 2, can you forecast your earning out quarter by quarter for the next at least year with a reasonable comfort level and reasonable comfort level translates to, you're not gonna miss barring some COVID scale disaster. That's super important.
Do you have all the right people in all the right seats for better or being public requires, you know, lots of systems and lots of filing things. And what about a board? You need a board with enough independent members to have an audit committee and comp committee. So all of those are things worth thinking about because you're right. Everybody's being approached by specs.
And as I just mentioned, there are so many of them you're getting approached by 7 a week, it's gonna go up to 14 a week, but that doesn't mean it's the right thing for your company after the deal. And the other thing to think about is this back sponsor may say to you you're worth $5,000,000,000, but that's words. After you close the DSPAC transaction, it's the market that's gonna value you, and it may or may not have any correlation to what the initial sponsor said, and you're still locked up.
You didn't get to sell all your stock. You didn't get to realize the 5,000,000,000 So it's worth recognizing that there may be unicorns and rainbows out there. And I mean, unicorn and the old, you know, but most importantly, can you forecast? Do you have the structural wherewithal to operate in the glare of the public light. And do you have all the right people in all the right seats?
I think a lot of just because there were more kind of spec sponsors in their own investment banks, companies are getting approached by so many sponsors right now. How would you advise founders to kind of think through what is the right path when they're getting wooed Yep. By so many of these spec sponsors. 2 things.
Worth having a conversation with the spec sponsors just to see what they have to say and how they value you then in your own mind, you might wanna tone it down a little bit and assume that that number may or may not be re secondly, a lot of banks will come around and say, let us help do a dispatch process for you. And they're charging astronomical fees. So I might love to say via hard ask. VA, be pretty tough on negotiating fees with any bank that's gonna represent you.
Because we've seen cases where bank will come in and say, I'll take care of this for you for 70,000,000 bucks, and we can negotiate them down to 15, which, you know, is still a lot of money, but it's not 70. So Go ahead. Have a couple of meetings. Don't sign anything. Don't make any deals, but see how they're viewing you and ask them questions. But just be skeptical of that valuation. I guess the second piece is if you do like what you're hearing, do you like the people who run this back?
And be tough with them about how are you going to help me transition to becoming a public company and then in the early quarters to operate as a public company. Are you here just for the transaction, or are you really gonna stick around to help me make the transition? Cause when I talk to the Pete Flint of the world, I understand that, you know, it's a big deal to go from being private to public.
She was I saw it some data the other day around the share of investment, share of stocks Beller by retail investors versus institutional investors. And how that has changed. And feels like we're in this Robin Hood generation right now. I'm curious to get your take on if phenomenos real and just how you see that potentially playing out in some of these offerings? Any perspectives there?
It was definitely real back half of Pete 20, early 2021, and it is absolutely what accounted for some of the crazy first day jumps on some of the IPOs is investors, I will say, Pete somewhat less discriminating. Just get me in because I know it's gonna pop in the last month or so. Not all IPOs have actually jumped up, and just in talking with the investment bankers, the wildly enthusiastic participation of the retail investor day 1 has already cooled.
So when the market's hot, they're gonna be in going back to the beginning of this conversation, that's just like 2000. And when the market cools, the retail investor backs off. But, you know, you get a little nervous as happened to me this week when you walk into the grocery store, and the guy behind the counter is talking about how he's betting on this one because he thinks in the first hour a half, he can double his Okay. Go ahead.
Speculate, because sometimes speculators win, but understand that you're speculating, not investing, and understand that that may or may not last. And, again, when stocks come down 1st and foremost is how do you keep the morale of your employee base? Well, at least to me, again, Pete, you Flint it. What do you think? I think it can be incredibly demoralizing to have a stock going down.
It's one of those things that when founders and executives and employees are inside the company, there is often a very big disconnect. What's happening in stock versus what's happening on the company. And so it's incredibly distracting. Again, like you said, if you have very limited ability to predict the business, then you're inherently gonna have very high volatility in the stock, and that could be whipsawing for an organization.
And however much you try of, like, saying, don't look at the share price we're building for long term, people will look at the share price because it means the difference between them and their wife, her husband, buying the first house, or sending their kids to school. This stuff is very material. You can't ignore it. So it is absolutely critical. Yeah. So retail's been very active.
They'll be active from time to time, but everybody just need to stand back and try to recognize that not all short term explosions in the stock prices are sustaining. So taking an aggregate, this explosion in specs what do you think it means to have a bunch of those back sponsors being around at the same time?
You mentioned this 24 month window and kind of what does this, you know, perhaps so that implications of the tech community or any trickle down effects that we might see as a result of all this. I think the founders on this call should know that the ball is in their court. Do not agree to merge with us back unless you like the valuation. You think they can justify the valuation and that you believe that the sponsor of this back will truly be there to help you because it is a seller's market.
Many more people are looking to buy operating companies frankly, then there are operating companies ready to be bought. So that's thing 1. Thing 2 is in the event of the companies, the specs don't find a target They have to give the money back. So it wouldn't surprise me if some of them end up giving the money back. For most of us, it'll turn out just to be a blip. For some founders, the SPAC exit will turn out to be absolutely the right thing.
For many, I don't think so, but there's no generalization to be made. It's a one off. I think companies that frankly can pursue a more traditional IPO path may find the both the length of time that it takes to get there helps them build the infrastructure they're gonna need.
And I should toss in just in case anyone's wondering if I am a consultant, the company's listing for the first time doesn't make any difference to me, whether you choose a stack of direct listing, an auction, or a traditional I I have no hound in the hunt. It's just really wanna see what is in the best long term interest of the founder and the team because too often they ended up on the shorter end of the stick. So from a another aspect is around trading volume.
And, you know, I recall when we're looking at truly going public, the question around volume Morgan not having a volume can be problematic. You need the sort of scale and liquidity. Like, what are your thoughts on that and just how can companies prevent this? Yes. Here's why it matters. The big funds are running, you know, 100 of 1,000,000,000 of Beller.
And so if they're able to invest in you, many of them have rule say they can't own more than 10% of a company, and owning 10% of a company gets them a $1,000,000 investment, and they're running 100 of 1,000,000,000 that investment can never pay off for them enough to move the needle on their performance. So that's why you have to have enough liquid float for institutional investors to be able to if they invest up to if they own up to 10% of your company, which is a lot. That's more than most do.
But if they own that much, they need to be able to see that if your stock doubles for them, that will help them offer better performance to their investors. So that's why scale matters. Companies that are too small, and these days, you know, anything I'll be generous. Anything under half a $1,000,000,000 is getting pretty small. You still have all the expenses of being a public company and you still have to get all those filings in and but you will appeal to a or number of investors.
And, of course, more investors generally can equal better price. So scale matters.
Now My comments apply more to technology companies than they do to biotech companies, which have several whole different set of rules, but for regular technology companies, really, if the bankers tell you they can take you public with a $200,000,000 valuation, if you have the opportunity to raise funds some other way and go public some time in the future, you'll see a better return on your just investment in being public, paying for an
industrial relations person, again, paying for all the SEC file paying for your outside corporate counsel Beller a bargain. Obviously, they have, but never a bargain. So I don't hope that answered your question. And then just thinking about the CEO and the board, I guess, perhaps where have you seen real challenges, you know, other than the sort of checklist you laid out in terms of filling the right sea predictability.
Are there any other advice or kind of red flags you see when companies are thinking about going public that they need to watch out for avoid? Yeah. There's a couple things to think about. It just takes companies a long time to get there. Once you go measure you by your Pete and L, your balance sheet, and also your KPIs or your non GAAP metrics, or what else do you as a management team look at on a quarterly basis generally could be annual on a regular basis to see how the business is doing.
And then of those things that you watch internally, what would you be willing to share to the public that both would help people understand how the business is doing and wouldn't be overly sharing with your competitors. And, of course, understandably, companies don't usually think about that, but The earlier you start thinking about what other numbers are, you know, number of customers, number of customers over a $100,000 cohort analysis. I don't know. It's all kinds of things.
Churn, whatever it is, the sooner you start thinking about what you do wanna share and what you don't wanna share, the sooner you can start collecting data, pardon me, internally on that which important to you and what you're gonna wanna share, and that'll save you angst later. Another thing to think about before you go public is do you have any policies in terms of secondary share James? The more you can know where your shares are, the better off you will be, if in way it's time to go.
Another thing is a social media policy. Like, lots of folks published on social media, it's all well and good to have a official Twitter account. You don't want employees posting random things about the business. They can post random things about anything else, but, yeah, landed a huge client this week. It was a happy day. You don't want that out there. So putting social media policies in place early are helpful.
And the other thing that's kind of a pain in the neck is when too many people know how you're doing during the quarter, they become insiders. And insiders have restrictions on how often they can trade the stock once you're public. So, you know, Silicon Valley Companies are wonderfully trans parent with their employees. But at some point, you have to make a decision of do you want to continue to be incredibly transparent about all the numbers on a monthly basis, which is great.
But then your employees won't be able to trade the stock, or do you wanna begin pulling some of those numbers into just the people who need them to do their jobs thus allowing everybody else to have more flexibility trading if you're Flint the company's public. So that might have been more detailed than you wanted.
But No. I'm getting reminiscence from going through the process myself, and the balance between transparency to be attractive as a investment in the eyes of shareholders versus sort of disclosures that might be at, you know, create competitive challenges.
And, you know, the internal cultural thing I think is navigable, but it requires kind of thought for management teams to be able to maintain that culture of sort of transparency and focus on the metrics, but kind of like, you know, limiting the ability for employees to, you know, Beller their store, you know, to have some liquidity can be changing. Yeah. It's really hard, right, because culture is so important in so many companies, and you don't wanna lose it when you go public.
And Pete, there are certain things to which you need to conform in order to be a public stock that sometimes fly in the face of those cultures. So maybe if we could just finally just go full circle and we talked early, you worked on the Google IPO and some newer founders may not remember what happened. Like, if you have a few minutes, be wonderful if you could just share the story about kind of what happened. What did you try to do and what actually happened? I had talked to Circular.
Who didn't care for the traditional Pete infrastructure, and they made a couple of observations. 1 was Google sold ads via auctions. Recognized that we did more auctions on a daily basis than anyone ever in the history of mankind. We were an auction company. So if we could sell our ads via auction, why couldn't we sell our stock via auction?
The second thing that they felt incredibly strongly about was it was a lot of individual tapping on our ads that blew the company to the size and scale that it was. And so rather than just letting institutional investors participate in the IPO. Even though many of those institutional investors, as we just talked about, were made up of, you know, the aggregation of a lot of individuals. Why couldn't the individual also participate. So that was the mandate they gave us.
Find us a system that will let us go public that will treat individuals the same way Pete institutions and that we use the auction to find the correct pricing. And so we set about building an auction structure, and it had been done internationally before some of the com companies, but it had certainly never been done with a technology Gigi. And it was incredibly stressful, and a lot of rocks were thrown at us.
Among other things, we did a video of our road show And that caused a huge because no one shared the roadshow video with all investors, even though technically all companies were supposed to share information, but we got a lot of rocks thrown at us. Now you can't find a company that won't do a video of its roadshow that anybody can watch, but that took a lot of stress. And we had to design a process that would let the individual participate.
And one of the things we were worried about because we were a very high profile company is that you get a lot of people who didn't have a lot of investing experience just say, buy me a 100 shares. I don't care what prices.
And we didn't want that to happen because there was something in auction methodology called the winner's Currier, and what we didn't want to have and was all the professional and often more disciplined investors saying, we will pay x and all the individuals saying, Just get me in. I'll pay 2 x. Don't care.
And then the next morning, the headlines would be, oh, the smart money stayed home, and the stock we fear could plummet, and that would hurt our investor that would hurt the little guy, and we didn't want that to happen. So we had to try to figure out a structure that would prevent that. And the investment banks were Horified most of them at the thought of doing an auction because they didn't get to allocate the shares at the end.
The market was gonna allocate the shares and that took away some of their power. And so we certainly had some of the banks calling us some unpleasant names. So there were a whole bunch of little structural things that we did. Nobody had done a dual class stock on a tech company before. It's certainly in the media land, the newspapers had to keep a separation between editorial and content nobody done it in the tech world before, and so we got a lot of rocks thrown at us there.
And and the ISS, some of the proxy services gave us the lowest score for corporate governance that they had ever given out anywhere. But, you know, these are the things you'll learn along the way. We made some mistakes. We definitely made some mistakes and did some stupid things. Nobody had broken the lock up the way we did. But we also got a lot right. Part of what happened. Again, this is it makes me smile in that respect is, you know, Google was an engineering first.
Company. And so Sargam Larry decreed that the engineers should do the math and figure out what price we should put on the front cover of the s 1. And so they did a perfectly logical and they did. But all companies are valued in part based on their own numbers and in part based on what investors are paying for companies that kinda look similar and right before we went out, our closest comparable company was Yahoo, and it just totally whifed its Currier because y'all fell apart.
And so the valuation, what people were willing to pay for Yahoo came way down, and so suddenly the numbers we had on the cover weren't quite as in line with the market's preferences of the day. And so we went out with this high range on the Currier, and the market said, uh-uh, not doing it. So we had to pull it down. And so we did pull it down.
Once we did pull it down from that point forward, we got great information from really all the institutions who were known to be long term thoughtful holders. It was like the who's who of who you would want to have invest. Retail investors were not as able to participate as we had hoped because of the banking regulations the time, but some of that's been changed. And so on the day we went public, the shareholders who came in were literally exactly who you would have wanted.
We could see the order book. That point, the founders kinda wanted to thank the investors who'd put up with the extra work that we made them do because frankly having to put in a number of shares for price required a lot more work and saying Pete me in a 10%. And so they wanted to thank them.
So we looked at where we could have sold all of our shares and said, let's pull the price down 15% from that as a, frankly, way to say we wanna be your partners, institutional investors, and we wanna start out on the right foot, and so we ended up pricing the deal at 85 when we knew we could have crossed it at a 100.
And in fact, that day, the stock opened at a 100, and it closed at And it broke a 100 very briefly on the Friday before Labor Day, the company went public in late August, and then it was gently up into the right ever after. So those of us who involved in it. Again, there were things we could have done Beller, but the model worked perfectly. We saw where investor interest was.
We were able to both reward those investors who were taking the incremental risk by investing in us and still generate meaningful money for the treasury. And, you know, 6 months later, they were able to do a secondary hiring at a much higher price where we're able to put much more money in the treasury in part because we had treated our investors, our new investors, right, from the gift It's amazing. You know, now Google is or alphabet is 1 and a half $1,000,000,000,000 company.
Wow. And it's like such a early level of innovation. And, you know, like, with a lot of early innovation. You don't get a 100% right, but directionally, it was, like, in retrospect it's spot on. So good luck to you. One more quick comment, which was right afterward. The Sergei Larry and Eric said, look. We're a search engine company. Let's go back to talking about that. Let's not talk about the auctions.
We're actually pretty quiet about the processed immediately afterwards, and that allowed those who didn't like what we had done predominantly the investment banks to put out a narrative that said, oh, see, don't ever do anything interesting and different. Because it won't work. And so we continue to battle that, but if you actually look at the stock performance from that moment on, you will see it actually worked from our perspective.
Again, there were little things we could have done better, but it worked pretty darn brilliantly. And so for me, personally, it's been a battle ever since to get other companies to consider doing some sort auction and a tip of the hat to Unity Technologies, which was one of the first recently just last September to say, okay. We won't do a complete like Google did, but we'll use some of the learnings from that transaction and end up being the IPO of the year in 2020. Amazing.
So just final question. Like, you've been your career in this world likes, you know, into the intricacies of public markets and IPO. Like, I guess from a personal perspective, why have you made this your life's work? What's so interesting to you about it? Great question. I thought you're gonna say, why have you not gotten a life?
You know, the real answer is, and I don't mean to throw an entire industry under the bus because there are many good people in this industry, but I was an investment banker for a while, and I didn't like the way our clients were treated because companies and founders believe they are the clients and too often they are the product.
When I was working at T. Rowe Price, I was the client of the bank because I was, if you will, shopping at that store every week, whereas each issuer was only going public once. And so I thought there were ways to improve the way that founders and management teams could be treated during the process. And as I'd like to joke, I started my business literally to make up for the sins of my youth when I wasn't banking.
So that's a little win, but, you know, I've always been entranced by entrepreneurs because all of you had, like, fifty people say to you, what a dumb idea? You can't build that business, and you all did it anyway. And that's so wicked cool. So anything I can do to help them, not to sound too bad, but throw them the dream I'm all over it. Oh, yeah. Pete. Here. I think that you've got a lot of supporters and nodding heads. So with that, Liz, thank you so much for joining us. On the NFX podcast.
It's such a terrific conversation, fascinating history lesson, and master class on kind of all things IPO public companies back and everything else. So thanks again for joining us. It was such a privilege to be here. Thank you. At an effect, we believe creating something of true significance starts with seeing what others do not. Send this episode to any friends that may need these insights and frameworks and feel free to rate and review us on your favorite podcast platform.
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