Imran Khan: Why the IPO Market is Not Closed & Lessons From Taking Snap & Alibaba Public | E1194
27 Aug 2024 (20 days ago)
Intro
- The current perception is that the IPO market is closed because companies have high expectations for their valuations.
- Companies with solid business models and cash flow will generate value in the long term, regardless of their IPO price.
- It is advisable for companies to go public sooner rather than later, as revenue multiples are not a reliable metric for valuation.
Analyzing the Current Closed IPO Window
- Companies are hesitant to go public because their valuation expectations are too high based on past fundraising rounds conducted when interest rates were low.
- Allocators, such as pension funds and endowments, are shifting away from private investments to reduce volatility in their portfolios.
- An influx of capital into the private market has led to a shortage of talent to execute investment ideas effectively.
Should Founders Accept Lower IPO Prices or Stay Private Longer
- A company's valuation at any given time is simply a snapshot of its current state and does not define its long-term potential.
- Founders should prioritize building a strong business that generates cash flow, as this will ultimately lead to value creation regardless of the initial public offering (IPO) price.
- Founders should focus on building a company culture that attracts and retains employees who are passionate about the company's mission, rather than those solely motivated by stock price.
Solving the Illiquidity Problem in Extended Private Markets
- Institutions and endowments are allocating less capital to private markets due to low DPI (distributions to paid-in capital) and the potential for permanent loss of capital.
- The historically low interest rate environment that made private equity attractive is unlikely to return, making public securities and fixed income more appealing.
- Staying private for extended periods can be detrimental to investors as technology landscapes shift every 15 years, potentially rendering initial investment theses obsolete.
- Public markets provide valuable daily feedback and force companies to make better decisions, as evidenced by successful pivots made by public companies like AWS, iPhone, and AI GPU.
Will Revenue Multiples Reinflate or Is This the New Normal?
- Revenue multiples are analyzed in relation to a company's growth rate, gross margins, and profit margins.
- Companies with low gross margins are less likely to receive high revenue multiples, while companies with high gross margins and high profit margins, such as SaaS businesses, are more likely to be evaluated using revenue multiples.
- Going public can benefit companies by forcing them to improve their business operations, focus on margin improvement, and potentially return capital to investors through dividends or buybacks.
Is the M&A Market Stalled Due to Lina Khan's Policies?
- Overregulation is detrimental to the United States because it hinders entrepreneurship and small businesses.
- The current state of the M&A market, particularly the high seller expectations driven by inflated public company valuations, is a more significant factor than regulatory scrutiny in its slowdown.
- While regulatory scrutiny from the FTC impacts large acquisitions, numerous companies with market caps exceeding $2 billion present viable acquisition opportunities with less regulatory hurdles.
Should IPOs Be Priced for a Pop or Perfection?
- It is argued that when a company goes public, it is important to price the IPO in a way that allows for a pop in the stock price.
- This is because it creates goodwill with new investors and allows them to make money, which is important for building long-term relationships.
- Additionally, most investors are only able to buy a small percentage of their desired position in the IPO, so they need to be able to buy more shares in the aftermarket to build their position.
How the IPO Process Works
- The IPO process involves building trust with investors over time by demonstrating performance and transparency.
- The actual IPO process involves filing documents, conducting a roadshow to meet with investors, and setting a price range based on investor demand and market feedback.
- A standard lockup period of 180 days is common after an IPO to manage supply and protect banks, but some venture capitalists may push for shorter lockup periods.
Does Private Market Insight Give an Edge in Public Markets?
- Private market investors may have a better understanding of a company's management and their ability to execute in difficult environments due to their long-term history with the company.
- The ability of a company's founders to pivot and adapt to changing market conditions is a crucial factor in long-term success, but this ability is difficult to quantify financially.
- While private market investors may have an information advantage in the long term (10 years), public market investors are likely to be better at managing short-term risks (1-2 years).
How Would a Harris vs. Trump Administration Impact Market Sentiment?
- Low regulation is generally better for businesses and the economy.
- Taxing unrealized capital gains is problematic and could have unintended consequences, such as impacting average Americans who hold assets like farmland and real estate.
- Targeting a small group of wealthy individuals with unrealized capital gains taxes could set a dangerous precedent and lead to broader application of the tax.
Imran on the Growing Gap Between CapEx Spending and Revenue in AI
- There is a significant and widening gap between capital expenditure by incumbents, supposedly $600 billion, and lagging revenue in AI.
- The most important aspect of technology is not its novelty but its ability to improve productivity, which ultimately drives GDP growth.
- Companies like Google and Amazon are investing heavily in AI, particularly in cloud computing, to protect their market share and cash flow, but there is a risk that the current high demand for AI services may not be sustainable in the long term.
How Imran Landed the Alibaba IPO
- In 2004, a group of investors traveled to China to explore the potential of Chinese internet companies, including Alibaba, due to the large population and growing internet usage.
- In 2010, after becoming bored with his research job, the speaker transitioned to a career in banking at Credit Suisse, where he helped Alibaba buy back 20% of its stake from Yahoo.
- To address investor concerns following Facebook's IPO, Alibaba implemented a creative solution by offering a portion of its shares with no lockup period, allowing investors to sell immediately if desired.
Should We Continue Investing in China Given Current Uncertainty?
- Institutional investors are hesitant to increase their investments in China due to uncertainty surrounding regulations and a lack of predictability in the market.
- Successful CEOs, like Evan Spiegel of Snap, possess a deep understanding of their customer base, unwavering conviction in their product, and a high tolerance for pain and criticism.
- Evan Spiegel's success with Snap can be attributed to his ability to anticipate how users would engage with features like lenses and stories, demonstrating his deep understanding of his customer base.
Biggest Regret from Your Time at Snap
- Snap's revenue grew from nearly zero to over 5 billion dollars in ten years.
- One of the biggest challenges of rapid growth was managing expectations, both internally and externally.
- To handle the rapid growth, the company should have invested in building a small business and direct response business earlier.
Quick-Fire Round
- The most important lesson to learn in life is to focus.
- When making long-term investment decisions, it is important to consider how the context may change over time and be comfortable with the potential outcomes.
- When evaluating businesses, it is important to consider whether they will benefit from or be challenged by AI, and to determine the appropriate context window for assessing the impact of AI.