40 Years of IPOs with Jay Ritter: What the Data Actually Says

0:00In the spring of 1986, Oracle, Sun Microsystems and Microsoft all went public within one month of each other. Apple went public in December of 1980. It was a highly anticipated offering. The stock price jumped up 30 % on the day of trading. And over the next three years, Apple had a negative return. In the internet bubble, there were hundreds of companies going public. The mantra at the time was first mover advantage. Most of the internet bubble companies had a fairly swift demise. You get a very skewed distribution of outcomes. With AI right now, there are enormous upfront costs. Some of the associated hardware, there's a reason that private and public markets are giving valuations of roughly a trillion dollars to open AI, Anthropic.

1:02Is this thing on? Yesterday's price is not today's price.

1:16Hey, are you liking this show right now? Do us a favor and we'll do you a favor. Share a link to the show on Apple or Spotify with your team at work. Drop it in a Slack or God bless you if you have to use Teams, throw it in there too. But send a picture of you dropping the link in to Ben at MostlyMetrics.com. That is Ben at MostlyMetrics.com. Our creative dictator will hook you up with some Run the Numbers swag. Welcome back to Run the Numbers, the show where I interview the world's top CFOs, finance leaders, and subject matter experts. And I've got an expert for you today. I am talking to Jay Ritter, Mr.

1:53IPO. He is the director of the IPO initiative at the University of Florida. Jay may be the only person more passionate about the IPO process than me. This was truly a bucket list interview because I've read his studies for years. He's been studying IPOs for over 40 years and has the largest data set on the topic. We talk about the three major waves of technology that impacted IPOs. the personal computer revolution of the 1980s, the internet in the 1990s, and AI Today. We talk about information asymmetry, as well as the incentives different institutions have during the IPO process. Speaking of that, we touch on day one pops and why boards don't get angrier that they're leaving money on the table.

2:36And we reflect on if markets are truly efficient. If you like S1 Breakdowns and are excited for the upcoming Anthropic and OpenAI IPOs, this podcast is a basis for how the process became what it is today. Please subscribe to our show. It helps us with the algorithmic overlords. Let's get into the interview with Jay. Jay Ritter, Mr. IPO. Thank you so much for gracing my humble podcast. Pleasure to be here. I've been a big fan of your research and teachings for a while now, but for the benefit of listeners, just to give them some context, do you mind telling people what you teach at the University of Florida and what the IPO initiative is?

3:15Director of the IPO initiative was a title and a center that was created after I went into partial retirement. I ended my teaching in 2019 and entered a research-only position, basically a phased retirement part-time. I have largely stopped doing peer-reviewed academic research, but maintain my website and talk to journalists. I love your website. I've gone super deep on it. I've referenced a lot of the different points you have around time it takes to IPO and the like. You've been at this longer than I have. You've studied IPOs for more than 40 years. Jay, what was the original question you were trying to answer back in 1983 when you started to dig into this?

4:07When I was working on my PhD dissertation at the University of Chicago, where I had the good fortune of studying under eight Nobel Prize winners, I had two essays in my dissertation. One was a theoretical signaling model, and the other one wanted to have an empirical paper dealing with a financial market where there's difference in information between buyers and sellers. and the IPO market was a natural thing to look at. This was in 1979 when the IPO market had been dead for six years. At the time, it might have been, who cares about the IPO market? There's nothing going on. But there's a lot of things in life that involve some luck.

4:571980 turned out to be the start of a two-decade boom in IPOs. Sometimes it's better to be lucky than good, but you're both lucky and good. Jay, in the last 50 years, there have been three big technologies that have had a big impact on the IPO market. You have the personal computer revolution in the 1980s, the internet in the 1990s, and then AI today. What are the differences between those three eras? With personal computers, much more competitive market. There were dozens of personal computer hardware companies that went public. In the spring of 1986, Oracle, Sun Microsystems, and Microsoft all went public within one month of each other.

5:42And there were scores of other software and hardware companies going public then, as well as in the years before and after. Most of the companies have faded away. Most of them suffered in terms of profit potential from being a very competitive business. Apple went public in December of 1980. It was a highly anticipated offering. The stock price jumped up 30 % on the day of trading. And over the next three years, Apple had a negative return. Indeed, for its first 22 years as a public company, Apple underperformed. Since 2022, it's been a different story with the iPod, iPad, iPhone, where they've resulted in tremendous success.

6:34And Microsoft and Oracle have certainly been incredibly successful companies as well. In the internet bubble, there were hundreds of companies going public. The mantra at the time was first mover advantage. A lot of people correctly thought various niches would have a winner-take-all aspect to them. Amazon went public in 1997 and has been incredibly successful. Nobody knew that Amazon Web Services would eventually become a major source of profits. And a lot of those companies faded away. In January of 1999, a little hardware company called NVIDIA went public. It was also greeted very positively by the market, jumped 60 % on the first day of trading, to a market cap of almost$600 million.

7:30Now it's close to$5 trillion. Most of the internet bubble companies had a fairly swift demise. Pets.com, one of the more noteworthy rapid collapses. as in venture capital, and for that matter, movie production, songwriting, writing books, you get a very skewed distribution of outcomes, lots of failures, and hopefully an occasional blockbuster. This is where venture capital in the United States has been pretty uniquely successful. Even though venture capitalists invest in all sorts of startups where they know the most likely outcome is going to be total failure. There have been enough 10 baggers, whether it's Facebook or NVIDIA or Google, more recently, Anthropic, OpenAI, that have resulted in the average returns being very attractive, even if the median deal is minus 100%.

8:33And this is where Europe, Most of the rest of the world is envious that they just haven't had enough 10 baggers to offset the many losses. With AI right now, there are enormous upfront costs for developing a large language model, some of the associated hardware. So we're not seeing huge numbers of companies having less money spent on them with a high probability of failure. Some of these companies, they're still following the first mover advantage idea, but it's pretty clear who some of the big winners are going to be right now. There's a reason that private and public markets are giving valuations of roughly a trillion dollars to open AI, Anthropik.

9:26Google's Gemini is certainly one of the reasons why Alphabet's valuation has gone up to$4 trillion as well. Jay, how much of the story comes down to network effects when you reflect on these three eras? Do you think we're increasingly living in a winner-take-most kind of scenario where being number one is disproportionately valuable? This is where tech is indeed different from other industries. The restaurant business is competitive. If you're not making money now, when are you going to? Not all of the verticals, the narrowly defined industries in the tech space have a feature where it is winner take all or where there are really big economies of scale or ecosystem effects as with Apple that result in a handful of companies having a dominant market position.

10:21where even if they spent huge amounts of money up front and went through many years of losses, have then been able to make enormous profits later on without competition eroding those profit margins. That's where tech is different. But with network effects where Google's search engine, Microsoft's software, where you and I can exchange PowerPoint slides and Excel files with anybody all around the world. We do have some areas where there's a network effect or really big economies of scale and expensive, complicated technologies. Building big commercial airplanes is really complicated. Airbus and Boeing have been able to do it.

11:11Nobody else has. Airbus and Boeing aren't especially profitable. They keep fighting for market share. Companies like NVIDIA, where they've got really great technology, as long as they stay a step ahead of the competition, there's a really big addressable market there, and they're capitalizing on it. Hey, thanks for listening. We'll be right back after a word from our sponsors. Hey founders and finance folks, you know how early on everything is fast and scrappy and then suddenly equity gets messy. Spreadsheets break, grant docs pile up, lawyers are sending new forms and collecting fees. It all shows up right about when you're already swamped.

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15:09How much of this do you think is just surviving longer than all the others? NVIDIA actually went public 27 years ago. Oh my goodness. In January of 1999, right at the start of the internet bubble. NVIDIA had some really great technology, but there were a lot of other computer hardware companies with really great technology. Chips turned out to be really good for gaming, and that turned into a pretty big market, and it turned out their gaming chips were really good for AI. You know, when they were developing some of these things 20 years ago, 15 years ago, they had no idea that AI would eventually be this really big market.

15:51And if they didn't have an army of really good engineers, you know, continuing to stay on the cutting edge, they wouldn't have developed into the enormously profitable and successful company that they are today. So well said. Well, speaking of IPOs, one of your most influential papers asked essentially where have all the IPOs gone? And a lot of people blamed regulation. And if I was reading it right, your answer was more, hey, it's the economics behind it. What did everybody get wrong? After the internet bubble of 99 and 2000, when hundreds of companies were going public each year, and indeed throughout the 80s and 90s in the United States, over 300 operating companies went public every year on average.

16:36And then there was this dramatic drop off after the internet bubble burst. After the 1987 stock market crash, there had been a dramatic drop off for a couple of years, but then the IPO market came back and boomed in the 1990s. In the early 2000s, the IPO market wasn't coming back. It was staying very depressed. And after a few years, policymakers, venture capitalists, financial journalists, entrepreneurs were asking, why not? Over-regulation with Sarbanes-Oxley and the global settlement and other things became a popular explanation, especially because London's AIM market, alternative investment market for small companies, was booming.

17:24The Wall Street Journal in particular, their editorial page, focusing on too much regulation. It's difficult for regulators to get the balance right. Should there be no regulation? No. Can there be too much regulation? Yes. IPO activity kept going on year after year, and others began to think, is there something else going on as well? Is it just regulation? I and co-authors came up with the idea, based upon evidence, that even in the 1990s, when the IPO market was booming, a bigger and bigger fraction of successful venture-backed companies weren't going public. They were instead selling out in a trade sale, being acquired by a bigger company in the same industry.

18:16We wrote our article, Where Have All the IPOs Gone, advancing the hypothesis that it's not so much a public versus private market issue. It's more of a big company versus small company issue that in some, not all industries, but in particular in tech, getting big fast and being big is more important than it used to be. That's why a lot of successful young tech companies were selling out rather than going public as an independent company and trying to grow organically. With the benefit of 13 years since that article was published. I think we nailed an important piece of the puzzle right on the head.

19:03What we didn't focus on, which I think is equally important, is the growth of venture capital and private equity and other sources of capital for private companies. One of the arguments had been that a company, as it grows, will want to go public at some point to raise capital and for liquidity, as well as possibly to have a currency for making stock financed acquisitions. I think the growth of venture capital not only provided more money, but also with so much money chasing deals, venture capitalists have been forced to pay up the cost of equity to companies from private markets has dropped. The wedge between the cost of public equity and private equity narrowed.

19:59Maybe it's even down to zero now. It's not only the quantity, but it's the price that matters that has allowed a lot of companies to stay private longer, to grow to very big size. We've seen this with SpaceX, Anthropic, OpenAI, Private, to enormous valuations and have raised enormous amounts of money without needing to tap public capital markets. Public capital markets are still unparalleled in terms of providing liquidity. Hey, thanks for listening. We'll be right back after a word from our sponsors. Listen, I'm no mathematician, although that is what my mother-in-law tells people I do for work.

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23:18Visit rightrev.com slash CJ. That's me. That's rightrev.com slash CJ. And that tees me up nicely because I often think about, well, what are the reasons to go public if you can get financing while you're so private? And today, many of the best companies can raise billions. We saw OpenAI raise more money in a private round than anyone had ever raised in an IPO or a follow on. A lot of these companies don't even need the cash. So, I mean, reading your work, it feels like the IPO has evolved over time from this financing event into, I don't know, maybe I'd call it like a relationship building event where you're choosing shareholders, analysts, and banking partners just as much as you're raising money?

24:01There are various motivations for going public that vary from company to company, partly based upon market conditions. For instance, a company like Facebook, meta platforms now that has hundreds of millions of individual users, going public does raise the company's visibility. There can be some beneficial effects on the operating cash flows from that increased visibility as a publicly traded company. For buyouts, private equity-backed companies, traditionally the argument has been companies that are cash flow positive with relatively stable cash flows are attractive for buyouts. Some have never been bought out but have never gone public.

24:48in Florida. Public Supermarket is an employee-owned company. It's been private, well, ever since it was founded in the 1950s. It's got so many employee shareholders that for decades, it has had to file quarterly financial statements as a SEC reporting company, even though the stock has never been publicly traded. This seems to work perfectly fine. If employees who own stock want some liquidity, well, the company is willing to buy the stock back from them. The company doesn't need external financing. It provides liquidity to the shareholders. And this company seems to be doing fine as a private company.

25:33You know, while the number of publicly traded companies in the U.S. has dropped by 50 percent from its peak in 1997. And by the way, all of that drop occurred from 97 to 2013. Since then, that number of publicly traded operating companies has been pretty constant, although the market cap has gone up by a lot. We did not used to have trillion-dollar market cap companies. There are fewer small companies today. It varies by industry. In the restaurant business, you've got McDonald's and other big chains coexisting with mom and pop restaurants. It's an industry that doesn't have much in the way of economies of scale.

26:16Small companies can coexist with big companies. Other industries like building big commercial airplanes have enormous economies of scale. And there are no small players in the industry. Well, over the last 20 years, public investors have accepted governance structures they probably wouldn't have tolerated before. Things like dual class shares, founder control, sunset provisions that are sometimes decades long. Is that because founders have gained bargaining power or because the scarcity of great growth companies has changed what investors are willing to accept? The bargaining position of successful founders has improved with all the venture capital money flowing around.

27:01But the dual class companies that have gone public, it's not a random sample of companies. They're disproportionately tech companies. And almost all tech companies going public have employees with a lot of equity-based compensation. are a few stock options. And I think this is an underappreciated reason for why management control has worked well with many of these companies. Historically, if we go back 50 years, what were the companies with dual class stock? Media companies, newspapers, casinos, where founders of the company or controlling shareholders might have had agendas other than merely profit maximization.

27:53They also did not have many employees with stock. The employees got a salary, maybe a bonus if things went well. Basically, a lot of the times were companies being operated for the private benefit of the controlling shareholder. In situations like that, public market shareholders are going to demand a discount. But what we've seen with Facebook, Google, when they went public with dual-class stock, these have been very successful companies. If there hadn't been big successes, and on average, the dual-class tech stocks have actually outperformed other IPOs and other tech stocks. A crucial feature is that the management needs to keep employees happy.

28:47And if the stock price doesn't do well when you've got lots of stock options and employee stock ownership, the employees are going to walk out the door or be disgruntled. The conflict of interest between management and shareholders is minimized in these situations. And that's why this has worked well for these companies and why it won't necessarily work well for most companies. I didn't know that the dual class structure originated with media and casino businesses and some of the other industries. I never thought about it as a way to kind of guard the main shareholders' interest if it wasn't for profit maximization.

29:31Mark Zuckerberg has voting control. Five years ago, he got all excited about the metaverse. The company started to spend tens of billions of dollars on what turned out not to be the next big thing. He had voting control. He could have kept pushing this. But as the stock price underperformed, look at the actions, he basically said, well, maybe the strategy wasn't so great. And the stock price bottomed out at$90 a share in November of 22 and is up over 600 now. Not only does he have a lot of skin in the game, but he wants to and needs to keep the army of employees who are creating the value happy.

30:15Jay, I had a really fun time reading through your work chronologically the other day, and it feels like your thinking has evolved over time. Early on, a lot of the discussion is about information asymmetry, and later it feels much more like your focus on incentives and institutions. Does that mean you're reading too much into it, or did your mental model kind of shift over the years? My thinking has evolved over time, and I've benefited a lot not only talking with other academics, but talking with practitioners, venture capitalists, financial journalists, regulators, company executives. A lot of my thinking and a lot of my most influential academic publications have come out of talking with non-academics.

30:59I have greatly benefited from a lot of those interactions. I can point to some specific articles that were motivated by discussions with a hedge fund manager or financial journalists or venture capitalists, ideas that I or others might have come up with several years later by talking with the right people and listening to what they were saying. I have greatly benefited from that. I want to go down the incentive path for a bit because you've spent decades measuring money left on the table as a result of IPO day one pops. Why don't boards seem angry about it? Tim Loughran and I published an article about that in 2002 titled, Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs?

31:48The severe underpricing where the company and its shareholders wound up getting diluted more than they needed to be. They could have sold a smaller number of shares at a higher price to raise the same amount of money if they had gotten a higher offer price. Finally, as the internet bubble was beginning to start, a lot of companies were going public and the prices were rocketing up and the issuers weren't complaining about this. It dawned on me that an idea in the cognitive psychology literature applied. Kahneman and Werski had developed something called prospect theory rather than standard economic utility maximization.

32:35where they were saying people focus on changes in their wealth, changes in happiness. What Tim Loughran and I did in our article is we applied that cognitive psychology idea to look at which IPOs had the biggest price jumps. The company hires underwriters and they've discussed some valuation. Executives, in many cases, company founders, anchor on some price per share. And they know how many shares they own. If you own 2 million shares and you're talking about$15 per share, you're thinking, well, I'm worth$30 million. The IPO process goes on and you might wind up being disappointed. Maybe the market isn't willing to buy the stock at$15 a share.

33:26Maybe it's out of your control. well, the stock market as a whole went down. Or maybe people aren't as enthusiastic about your company as you are. Or maybe you get good news and you go out on the roadshow and your underwriters tell you there's really strong demand. We think the market price is going to be$25. And we're recommending instead of$15 per share that you sell the stock at$18 per share. Paper wealth has gone from$30 million to$36 million in two weeks. How many people are going to be disappointed and sad about a$6 million increase in their paper wealth in two weeks? So we argued that what goes on is underwriters take advantage of this psychological situation.

34:16A founder, the company executors are going to be happy with this increase in their paper wealth. they're not going to get bent out of shape about you could have done even better. I love how you brought real numbers to that because often from the outside, we just look at whatever the final price was, but we don't think about the entire process and the spectrum of events that led up to that. Jay, one thing I keep coming back to is that the issuer hires the investment bank, but we often forget that the investment bank's real long-term relationship is with the institutional investors who they make trading fees off of.

34:48Does the IPO market make more sense if we stop thinking about it as a one-sided transaction or in a point in time start thinking about it as more of like a living two-sided market? Absolutely. Underwriters have buy-side clients that they're going to repeatedly. Profits from selling securities, whether it's a bond offering, fixed income IPOs. But normally when people talk about IPOs, we're only talking about equity IPOs. In comparison, bonds are really boring. Equity IPOs in the U.S., the fees, commissions that the investment bankers get tend to be higher than in other countries. SpaceX just negotiated a very low percentage fee, the lowest ever in the U.S.

35:37For moderate-sized deals,$30 million to$200 million. Almost all the time, the gross spread, as it's known, is 7%. that underwriters also get extra compensation indirectly. If they've got underpriced shares to hand out, offerings are typically oversubscribed. And with book building, the most common procedure for selling IPOs, the underwriters then have some discretion. If there's excess demand, who do we give the shares to? If an offering is oversubscribed by three times, It doesn't mean that they've got to give one third of the shares requested to everybody who asks for shares. And that discretion can be used for good or bad.

36:24If they want to favor buy and hold investors, it might be good. If they want to favor investors who are very sophisticated and have done a lot of analysis of the company and are willing to tell them, You know, I think this company really is worth$18 a share rather than the$15 or the$20 that you were talking about. It can also be valuable and rewarding those investors who have thought deeply about the valuation can be useful. But it's also the case that if you've got a hedge fund that's a very profitable customer, why are they profitable? Because they're paying high commissions on a lot of trading.

37:07Jay, you brought up book building, which allows underwriters to, like you said, reward their best institutional clients with allocations and potentially underpriced deals. If companies are aware of those incentives, why don't you think direct listings have become the dominant model? That's a very good question. 25 years ago, a number of companies used auctions to go public. Morningstar went public with an auction. Most famously, Google in 2004 went public with an auction. But then auctions kind of died out. And then starting with Spotify in 2018, some companies have used direct listings. Who have been the companies that have tended to do this?

37:48It has tended to be companies where, first of all, the founders had a lot of skin in the game. They didn't want to leave their money on the table. And it also tends to be the case that founders tend to be somewhat iconoclastic, thinking outside the box, people who are willing to thumb their nose at the conventional wisdom. Spotify, Coinbase, Palantir did direct listings, and I think they kind of fit this category. There haven't been companies that have been raising capital while doing them. For instance, biotech companies, where they do have a voracious demand for capital because of the high cash burn rates, they haven't been prone to use direct listings.

38:35This year, there have been a fair number of direct listings, but of tiny companies. not the prominent companies like Palantir and Coinbase that had been doing direct listings. While I'm a fan of direct listings and auctions, I can't ignore the fact that prominent companies aren't using them. Is it structurally harder to raise primary capital in a direct listing, but maybe easier for secondaries? It's entirely possible for a company to go public with a direct listing, have the stock start trading. Now you've got a market price to benchmark and then have the company do a follow-on offering. This has been done in the UK for many decades.

39:18Much of Europe has become kind of an afterthought when it comes to IPOs in recent years. I would not be surprised if some prominent tech companies do direct listings and then do a follow-on offering after that to raise capital. The SEC has been concerned about allowing companies to raise capital in indirect listings where it might be a bit of a backdoor way of getting around some investor protection issues. And the SEC has correctly been concerned about this. I want to just pop back over to underwriters for a second because you've been studying and ranking them for decades. And I'm always so curious about the brand equity and the reputation of these banks.

40:08In your opinion, what is Goldman Sachs really selling? Partly it is reputation, that certification. They turn down some deals from companies where they don't think the business model is good enough. In the 1990s, analyst coverage was considered important, especially for growth companies. And underwriters that had an all-star analyst in a given industry used that to compete for business. And it was perfectly rational for a lot of issuers to say, look, I want to use Morgan Stanley because they've got the number one analyst in my industry. And if I don't hire Morgan Stanley, the number one analyst isn't going to cover my company.

40:53Analyst coverage, while it's still important, isn't as important as it was then. Part of what goes on now and why Goldman Sachs and Morgan Stanley have such big market positions when it comes to IPOs is also being able to offer private wealth management accounts to the executives of companies going public. It's hard for smaller investment banks without a big market share to compete in terms of the private wealth management accounts in terms of what kind of deals they can offer access to. This is part of the bundle of services that are offered. Morgan Stanley and Goldman Sachs do have quality people, but they also charge for it, you know, both in terms of direct fees and in terms of leaving more money on the table than, for instance, William Blair would typically offer.

41:56I want to touch on long-term performance because you've looked at how companies perform on IPO day versus the longer term. And you actually showed that IPOs issued during the hottest markets tend to have weaker long-term returns. Reflecting back, do you think that paper was really about IPOs or more about investor sentiment? In 1991, when I published my first paper on the long-run performance of IPOs, I think investor sentiment was more important than now. Partly because in the 80s and 90s, retail investors were a bigger part of the IPO market. It's knowledgeable institutional investors that are setting the prices.

42:36That doesn't mean investor sentiment is irrelevant. We're seeing this year with all the enthusiasm about AI, that's clearly a factor. What's always difficult is separating out inefficiencies, excessive investor sentiment, either too much optimism or too much pessimism from rational revaluations. There's a reason to be really excited about AI right now. Whether there's too much excitement is a much more difficult issue to figure out. Jay, one data set that you've maintained for years is the founding date of every IPO company. it tells me that you think company age matters. So is staying private longer actually better for society, or is it really just better for founders and the existing shareholders?

43:24I don't think there's a simple answer to that. And it's not the same answer for every company. Venture capitalists provide money, but they also provide advice. There's a reason that a lot of tech companies are willing to accept worse terms from Sequoia Capital than from some other venture capital company that doesn't have the track record of offering really good advice. The evidence is that companies that go public at too early a stage, and my preferred measure is actually revenue rather than age, on average underperform. There's not the same rule of thumb for every industry. Biotech, most companies going public are venture capital backed.

44:12They're going public with no revenue from product sales. They have no prospect of revenue from product sales for many years, if not ever. You know, it takes a long time to develop a drug, go through all the phase one, phase two, phase three trials. While many other industries have become more vertically integrated, the pharmaceutical industry actually has become less vertically integrated over the decades. In the 80s and 90s, the big pharmaceutical firms, Merck, Pfizer, Lilly, et cetera, realized we're spending billions of dollars a year on R &D, and we're not earning a very good return on this investment.

44:56And so they laid off a lot of their scientists. They still needed new drums. And it's an industry where combination of university-based biomedical research and then some spinoffs where venture capitalists step in and finance them. And if things are going not according to plan, the venture capitalists cut them off rather than throwing good money after bad. If things look promising. There might be a couple of rounds of venture capital financing. And then in many cases, an IPO followed, if things are going well, by some follow-on offerings. Very frequently, Big Pharma steps in and makes an acquisition.

45:42Big Pharma, first of all, has deep pockets for really expensive phase three clinical trials. And Big Pharma has lots of experience with regulatory approval and production and marketing rather than an independent biotech firm being at the beginning of the learning curve on each of those steps. A lot of the successful independent companies go public, then if they are successful, eventually they're going to sell out. It is the case, however, if you look at follow-on offerings in the last decade, that there have been a lot of biotech companies that aren't successful, that are doing dilutive follow-on offerings at 80 cents per share, rather than throwing in the towel and saying, you know, things just aren't working.

46:29I think what I often wrestle with is if Amazon took the same amount of time to go public as, say, like OpenAI or someone else, maybe that's not the best example because they've grown so fast. If it took, say, five or 10 years longer for them to go public, they stayed private, and the rest of the public weren't able to buy up shares and ride that wave up in their retirement accounts. And personally, it would be very different. And it seems like now with companies staying private longer, the private market investors get to kind of hoover up all that value creation while the private market doesn't have access to it.

47:06This has been a popular statement and behind the Trump administration's push to allow 401k plans to invest in private equity. I am not at all a fan of that. In any given period, venture capital, private equity may or may not outperform public markets. I don't see a free lunch sitting there. It's absolutely true that I wish I had been a private market investor in SpaceX or Anthropic or OpenAI five years ago. Venture capitalists also invest in a lot of startups that wind up as total write-offs. Ilya Strabilaev at Stanford and Blake Jackson at Ohio State have just put out a working paper ranking venture capital firms where a lot of them have underperformed public markets.

48:04In general, I would expect any asset class, capital is going to flow into it until the risk-adjusted expected returns are no different than other asset classes. And I don't see any reason for private equity or venture capital or private credit to be an exception to that. Venture capitalists today have a lot of money chasing deals. They have to pay up. Buying high reduces the expected returns. I just don't see a free lunch sitting there even before individual investors wind up paying fees on fees to get into diversified deals. And they're going to suffer from adverse selection as well. Sequoia Capital is not looking for retail investor money.

48:56They're turning away institutions, even though they charge premium fees. It's hard to get into the best private deals. And even there, there's academic evidence that just because a firm like Sequoia Capital has a good track record in the past, that doesn't mean that LPs are necessarily going to be getting great returns in the future. Look at the 1990s when Sequoia and Kleiner Perkins had phenomenal returns. The last 25 years, Kleiner Perkins has faded. What we're going to do next is hop over to a segment that I like to call asking better questions. And this is brought to you by our friends at EY.

49:43I'm glad you brought us to efficient markets here because I spent a lot of time in our IPO database. And what struck me more than just the numbers were the choices, because every variable that you've spent 40 years collecting reflects something that you believe matters. If someone looked at your database as a map of how markets actually work, what's the variable they'd be most surprised to find is predictive. There was one thing I was going to look at. It would be the revenue of the company when it goes public, the trailing 12-month revenue. Some of my tables categorize companies based upon their revenue when they went public.

50:21The underperformance is really strong for companies that go public when they've got revenue from product or service sales of less than 50 million. And this is true whether or not we include biotech companies with zero revenue. For those with at least$100 million in revenue, on average, after the first day jump, they come very close on average to matching the market. These are the companies that institutional investors are putting money into. On average, the market gets it right. Some companies are obviously going to outperform like NVIDIA. If there was one thing I would look at, it would be the revenue.

51:07Profitability for tech companies doesn't matter too much. For other companies in other industries, if you're not profitable, the odds are against you. I've looked at the float. With SpaceX going public with a low float, there's a lot of interest in that. Is that a good predictor of future returns? Turns out the answer is mainly no. Not everything is being held constant. You know, if SpaceX was not at a$1.8 trillion valuation, they wouldn't have been able to raise$75 billion by selling only a tiny percentage of the company. Float doesn't matter too much. Price to sales does. Obviously, if you've got very little revenue, you're going to have a high price to sales ratio.

51:53So I limited the analysis to companies with at least$100 million in sales. If you're starting out at a really high valuation relative to sales, the odds are against you. A lot of things have to go right to justify that high valuation. Last question I've got for you. Has studying IPOs for 40 years made you more of a believer in efficient markets or less? For the smaller companies going public, the evidence continues to be that many of the times retail investors are too optimistic. Almost all my tables exclude penny stock IPOs, companies with an offer price of less than$5. These are sold almost exclusively to retail investors by non-brand name underwriters.

52:42Almost all of them collapse. The average is a collapse. I would not be comfortable saying that the market price is efficient. But for the bigger companies going public with quality underwriters like William Blair, Goldman Sachs, etc., I think overall that the market gets it right. That doesn't mean that sometimes, such as in 2021, there was too much enthusiasm for growth companies. In general, the market gets a lot of the little things right. That doesn't mean it always gets the big things right. All we have to do is look at housing prices in 2007 to realize that sometimes there's a big mistake that occurs.

53:27Jay, thank you so much for joining me on the podcast. This is truly a bucket list interview. My pleasure. Run the Numbers is a mostly media production. Yelling an intro by Fat Joe. Artwork by Meg D 'Alessandro. Show is executive produced by Ben Hillman. Nothing said on this podcast is intended to be business or investment advice. It's the sole opinion of me, a guy who feeds his dog way too much ice cream and has a history of net operating losses, LOL. If you like this podcast, hit subscribe and give us five stars. It will take like two seconds and our algorithm overlords love it. Drink water, call your mom and have a great day.

54:00Peace.