The What, Who, and When with IPOs

0:00We think we're a good company and we think we can perform in the market. We wanted to meet bankers ahead of time. And how far an advantage did you do that? Hey, why do we need to go see all these investors? Can't we just do a $35 million IPO to four or five folks? You can't time the market because it's a clearly long process. Am I the kind of person who over -hipes under -deliverers or do I under -hype and over -deliverer? How big does your IPO need to be? What does your market cap need to be? How big does the proceeds need to be? Tell me the truth. Did you guys have a magic number in your head before you started those pricing discussions?

0:28Now you're just like it's in every newspaper in the business section in America. We're going public today now. We're not going public. We're going to do. Initial public offerings or IPOs are one of the few ways that startups can experience a liquidity event. And looking back on 2022 and 2023, new stock market IPOs felt to decade close with 181 and 154 IPOs respectively. 4. For comparison, the all -time record was established just the year prior in 2021 at 1000 35 IPOs. So as we headed to 2024, with many people speculating whether the IPO window will reopen, we actually wanted to revisit an important conversation with ACCZ General Partner Jeff Jordan and JD Moriarty around the Open Table IPO, which actually happened immediately following what was the worst financial crisis since the Great Depression.

1:24Having led OpenTables IPO as CEO in 2008, as well as being on the board of multiple publicly listed companies since, Jeff has had first -hand experience into the world of IPOs. Meanwhile, JD Moriarty is the former head managing director and head of equity capital markets at Bank of America, Merrill Lynch. Throughout his time at Bank of America, JD worked on numerous IPOs, including open tables, alongside then CEO Jeff. Today, the Paris Conversation from 2017 actually feels as relevant as ever. Together, they go behind the scenes with Sono Chauxy to really unravel the complexity surrounding IPOs, exploring the decisions that can shape the fate of companies, like the gymnastics of setting a price, the mysteries behind allocations, and the elusive pop, and they even go into how boards and company employees should be involved throughout the entire process.

2:15And above all, leading into a surely unpredictable year, they weigh in on whether there really is such a thing as IPO timing. Alright, I hope you enjoyed this episode, and let's see where 2020 Ford takes us. As a reminder, the content here is for informational purposes only. Should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16C fund. Please note that A16Z and its affiliates may also maintain investments in the company's discussed in this podcast. For more details including a link to our investments, please see A16Z .com slash Disclosures.

3:00Hi everyone, welcome to the A16Z Podcast 9 SONAL. Today we're doing one of our war stories podcasts where we have founders, makers and operators share the story behind the story. And joining us for this episode, we have A6NC general partner, Jeff Jordan, who was president of PayPal at eBay before going to online restaurant reservation network, Open Table, whereas the CEO, he oversaw the company going public. We're going to talk about all that in this episode, focusing on everything from the relationship building involved on the road to IPO and the nuances of pricing and allocations to the broader market context and some concrete advice for entrepreneurs.

3:34And last but not least, we have special guest, JD Moriarty, joining this conversation. He's now SVP of Corp. dev at Lundingtree, but was formerly managing director and head of equity capital markets at Bank of America, Merrill Lynch. JD was the lead banker of the capital markets expert from Merrill Lynch on the open table IPO. He and Harry Wagner, Allen and company were the key two keys who basically helped execute a deal in about the worst capital market situation late 2008, early 2009. a venture -back technology firm had not gone public in a couple of years. The concern was that the window was closed, bricked over, and the only exit path for tech companies was going to be M &A from then on.

4:17We ended up pricing at the naiter of the worst financial crisis since the Great Depression. I used to talk about 200 IPOs a year, and the only IPO prior to open table in 2009 was a company called Need Johnson, so a very defensive company, the type of thing that should go out in 2009 in consumer products. They make like the floor wax or something right? Exactly. Very far from this weird thing called open table, which is not even a product you can physically touch. Correct. And so people tend to look at when an IPO prices, and you have to recognize that most companies take six to eight months to get there.

4:50From our org meeting to kick off the process, where the bankers and the management team begin the process of preparation. Our pricing was about eight months. I have to ask a really dumb question. Why do you need a bank? Like, why can't you just directly IPO? Yeah, actually at one point Jeff asked me early in the process, hey, why do we need to go see all these investors? Can't we just do a $35 million IPO to four or five folks? I think the way to think about the IPO process is you're not just doing the IPO. You have to take a two year view towards how do we get this to be a stable public company that can grow and achieve not only the company's goals, but the goals of the of the early investors with our demonstration over a long period of time.

5:28and oftentimes as this deal showed, those goals are different. It is an interesting observation is going public does not create liquidity. All the insiders cannot trade when you go public. Why is that? The war for a standard expectation that the new public investors taking a chance on this new company is a under -made -a -lockup that is kind of a market standard. There are certainly exceptions to that and we can talk about things like the IPO discount, etc. But in order for somebody to take the risk of a newly public company, they expect certain things. Now there are plenty of IPOs that have secondary shares.

6:01Don't misunderstand. But the early investors are walking up for a hundred and eight days. There is a period of time when the right way to think about it is your true monetization is really down the road. Yeah. And so if when the 180 day lock up expires, all the insiders and all the management team run to the four of the stock exchange and try to sell all their stock, all the third party, All the owners will disappear too, because if the insiders don't have any confidence in it, then why should I own it? I mean, just to give a little bit of a counterpoint, obviously market conditions change. The company hasn't gone public in like 10 years and you have to get some liquidity out or you're a founder who has to give up a little bit of shares in the secondary market in order to loosen up your...

6:42Oh, we're supportive of that. But if they try to get full liquidity on day 181, the stock price is going to be like $2. It's a reality of how the market works. We're talking about the technicals of how does that stock get to market. there's another part of this which is simply, when do you time the IPO? Fundamentally, we encourage people to, don't think about the market conditions today, think about, is this a good public business? And you have to answer that question first, and for most companies, you're never gonna time the market. You can't time the market because it's clearly a long process.

7:12But then why do people talk so much about there being certain windows in which there is an ideal time that a window can open and shut, and this is on the global scale of 10 years, 15 years, et cetera. This was actually, there's a case on the open table IPO. It's at Stanford Business School now, taught in information in New Ventures class, Andy Ratcliffe wrote it. And it basically says, should open table go public now. The analysis said there are windows in the IPO's. They kind of come and go and the best companies often open windows that were then previously closed. So the best companies can go out whenever they want.

7:45The good companies typically want to wait for to the investors are feeling good. The mediocre and bad companies want to get out whenever they can. And what happens when the window opens the early people to go out typically perform very well as public company stocks. And then as more time goes by and you get towards the end of a window, the companies that then are going out kind of rushing, I got to get out or I'm going to miss it are typically are not the highest quality companies. And they tend to underperform the market. One of the things that had us go was, okay, we think we're a good company.

8:16We think we can perform in the market. We wanted to meet bankers ahead of time. And how far an advantage did you do that? We started about a year and a half out or something like that. A year and a half. Just surgically, just every, with the bankers, we kind of orchestrated into one or two conversations. But before we did the formal bakeoff, when you select your lead bank and all do respect the Merrill at the time, they were, you know, they were not the top of the pyramid in terms of check bankers. So we, because we were the only IPO, we had every bank wanted to do it. Gold and more again, you know, just to get the list.

8:47We got to know the people at the firm. And we put particular value in the capital markets function because that is the function that inner acts between the company and the investors. We wanted someone who we thought understood our business well and we thought could represent our business well to investors. And by investors, just for clarity, you mean investors like institutional investors? These are institutional investors who invest in public security. Typically the largest ones are mutual funds, managing billions and billions of dollars. We were looking for 10 poll investors who would go for a while and we'd meet with them every six months or so and they got to know the business.

9:21They got to know us. They got that we developed a soft track record because they'd say the first meeting, what are you going to do in revenue this year? Oh, we're going to do $70 million and you come back six months later. What do you do? What do you do? You mean like a soft track record of delivering results? A more mature, more mature, more mature, more mature, more informal, verbally. Am I the kind of person who over hipes under deliverers or do I under hype and over deliver? Do I tell them what's good about the business and what's bad about the business? That is such a golden nugget because it's invisible to the world.

9:51When you see the outcome, the process behind the outcome is invisible, which is a whole reason we're doing this. I didn't know that. Why does that relationship that with the capital markets, expertise matter so much in the lead up to the IPO? We wanted it to be not a black box. One of the things other CEOs had told me who'd done IPOs when I reached out is like, somehow, you know, you do this road show, you get to the pricing meeting. they say, okay, we recommend the prices this and then the shares just magically disappear. And we, we really cared about who got the shares. So we wanted to have a vote in who got it, who got the shares.

10:25And because it was such a tiny offering, we wanted to concentrate the shares in that short list, much at a much higher level than what's typical at the pricing meeting. You know, we, we, JD shared the spreadsheet and we're like, no, no, no, no, no, we have to give these guys 10 times more and he's going, no, no, no, no, no. So who voted in the, in the, it was like the, you know, the bank, you guys. Well, typically to, to, to, to, to, to, to, Merrill's credit, typically the bank pretty much decides they engaged in a dialogue with us. And that's probably the biggest thing where we met in the middle of said, okay, I understand you're rational, but so we had this very constructive dialogue around that in many IPOs that dialogue does not happen.

11:01That is such an artful behind the scenes of orchestration. It's all a hangover from the 99 2000 period when those allocations were truly a black box. And somebody said to me at one point, does there any innovation in the IPO market? And I said, the biggest change over the last 10 years is that it's become more transparent. And that is more the norm today that there's a genuine conversation around it. Now, I've seen the other side of it, which is a management team says, no, it's going to be like this. Ultimately, their vote is the vote that matters. Right. But I've seen the scenarios where they make mistakes there too.

11:35What the open table team did well is actually invest in not just the bankers, but actually the investors. The thought process was the better they know our business, these are the people who are going to have skin in the game and really own enough of our stock. And know where the business can go and hold the tent up in a difficult time. And so Jeff essentially invested in that process. And I think it was critical. One of the debates we had was size of IPO. Like the amount of the initial. The proceeds, yeah. And so we spend a lot of time doing analytics for companies on how big does your IPO need to be?

12:07What does your market cap need to be? How big do the proceeds need to be? And if you appear, if you just sort of look, it doesn't pass the common sense test, right? Why does some portfolio manager have fidelity who manages billions and billions of dollars invest in the open table IPO when the initial proceeds are only going to be $37 million? Now, ultimately because it went well, we ended up raising just shy of 70 in the IPO. and then in September, we ended up doing a follow -on transaction that was $210 million. But the point was, why is it worth it to fidelity? Morgan Stanley investment managed to real price.

12:39So what is it? I want to know. Because if you invest the time to let them see where the business can go over time, they're going to leg into their position over time. If we had been, we were in a lousy market. One expression we always use is in difficult times, our investor clients focus on the things they own, not those things that we want to show them. What do you mean by that? Meaning new ideas. So it's just a risk curve issue. And Jeff made the point about great companies being able to go out in any market. Yeah. Good and okay companies need to pay more attention to the investor risk curve.

13:10Back to the notion of pricing. We had Lawrence Levy who is a former CFO of Pixar on this podcast and he's the one who helped Steve Jobs take Pixar public. And one of the things that he talked about how it was the biggest fight between him and Steve. And the reason was because of course he wanted to go high because he wanted a big ass IPO like Netscape at the time. And he was on the heels of that. Lawrence was like, no, no, you want to deliver some returns for the investors. And there's sort of this sort of dance back and forth. How did you guys do that dance? Yeah, a lot of discussion. That is a euphemism for fighting.

13:40No, no, no. There's a lot of discussion. Our IPO market cap was $450 million, roughly. Raising proceeds of just under 70. The I .P .O. size was 70 million. Now, I'll be the first to admit, did it trade kind of too well? Yes. So what is that? Why is that bad if it trades too well? There's too much of a pop. It means as a company, the company didn't get as much money as they could have if they had a crystal ball and do what? Because the whole point is to get capital to continue growing and building business. Correct. You don't want to leave a lot of money on the table, right? Now to be clear, when you end up floating a small amount of the business, you kind of compound this problem.

14:19What is that? Go back to the point around the Fidelies and T -Ros was meeting larger position sizes. They recognized that the two events that they care about are the distribution of shares at IPO, the allocations, which we went back and forth on, and the first day of trading. And then these stocks become very, very liquid. And - They're in the public market. How did they become a liquid? Because the float is only $70 million. And we convinced people that it was an interesting stock to buy and hold. That meant we had no daily trading volume. So if the stock was trading around $30 a share, there were days when it was trading literally 2 ,000 shares, 2 ,500 shares.

14:55Not many people moving money. Correct. And so you can get these huge gaps. So it did trade too well. Yeah. That's a balance that we're always trying to stress. So from your perspective, Jeff? Yeah, I know. So when we, the original documents had a $12 to $14 price range. I think we updated it to 16 to 18 over the course of the road show, because the road show was going well. The first two investors said, I went a full allocation. So it quickly became a hot IPO. We ended up being over subscribed 20 to 1, 25 to 1, something like that. So we probably could have run it up into the mid 20s easily. But you guys priced it at?

15:29We talked to the market to 22 and we priced it to 20. And most management teams, board CEOs are going to grasp for that last dollar. I think the open table team collectively was very thoughtful about the fact that this is just the IPO. I care about the next two years. Did you guys tell me the truth? Did you guys have like a magic number in your head before you started those pricing discussions? Like, did you think in your head, you know what? When I go to sleep at night, I want $25 when the sink goes on the market. Now, you did. Part of what our strategy was, we're going to do a teeny little IPO, and then if it went while we're going to do a pretty big secondary.

16:04And so the company was much more focused on making the secondary successful. And it was make the IPO successful. Part of making the secondary offer successful is you need a couple deep pocket people in the IPO, even though it was a team of IPO. So one of our leading shareholders ended up being Will Danoff Fideli. And so we say, Will, invest out of your $10 billion, whatever it is, fund $4 million. And he's like, I don't have the time to read your earnings release at that level. But we convinced him to come in because then in the secondary, he was able to back up the truck. And he got what he wanted, which was a large ownership allocation.

16:42His IPO allocation was what 5 % of 70 to $4 million. Some number like that. Yeah, and one of the things that made the add -on so much easier is because everybody knew that we could have priced well above $20. When we priced at 20, that I think built some real good will between the management team and the investors. That you guys are willing to be thoughtful about the long term. We ended up optimizing for who? Not the shares, not the price they got the shares at. Yeah. And I would do that again in a second. and I advise management teams to do it like crazy because as a CEO managing a public company, you don't want people who are in and out on momentum, hot money, because you spend then all your time literally marketing to new investors, please buy my shares.

17:25There are multiple reasons to want a, from my perspective, to want a small handful of 10 pull investors who buy and hold your stock. One is they buy and hold. The other is it just makes your life easier. Could you only like talking to a pull of like four or five people? Yeah, I've got a handful of owners and most of them, I actually said, how do you want me to work with you? You own a lot of my shirt. Do you want me to call you after every earnings call? What did you get? And they're like, no, I'll listen to call. Almost all them were just like, nope, I'll reach out if I need anything. Thank you very much.

17:51In the first year and a half, there was a period where we dealt with the momentum crowd coming into the stock. Late. And it was challenging. That's because we essentially went from, you know, the projected, keep mind when we're going public in 2009, the projected top line growth in the business was 20 % from an analyst perspective, right? Just under. It's under 16 to 20 depending on what the illness. It was always a high margin business and then it was when you went to 40 % top line and 40 % margin, that's when every momentum investor came in. And so that was one of the things that I think became more challenging to manage.

18:25Yeah, I mean, by momentum investors you mean like hedge fund people? Not just hedge funds, but in many cases it is. That's a broad stroke. Ultimately, their investors who just care that you're gonna beat the quarter. Yeah. I mean, it was so interesting because there were a handful of investors Before the IPO, we're tracking the business. So I was told that fidelity will does not do IPO pitch meetings. Will walks into the meeting and spent the whole 60 minutes there. Dennis Lynch at Morgan Stanley does not do IPO meetings. Dennis was early. He was waiting for us when we got there. You've got those who you're like, okay, they've done their homework.

18:55They get it, network effects, everything else. Dennis can tell you what three private companies he wants an IPO allocation and today for five years. They've been spending it. the other guys who you've just blown away six quarters and said, oh my God, I need to latch onto that sucker. Yeah, get me into that. There were you when it was 20. You're buying it 110 now. They're the guy that will jump in, but they also jump out. That's when stocks refault. Tell me about any behind the scenes fights or discussions that you had with your team. Like, were there disagreements? I mean, you might, you're saying this, but were there parts where you guys were like, we can't agree on the pricing that these guys are discussing with us.

19:32We can't agree on the timing. Not a ton. The board gets involved in a few steps along the way. One is I involved them in the selection of bankers. They were there. Is that a best practice that you advise that people actually involved in? We did a week or two bake off. We had like six people and we tried to do wisdoms or crowds. No one was allowed to say who they liked and didn't like. And we got a ranking one to six. And it was unanimous. We did a subgroup that got when deeper than the rest of the board, the BIO committee. Then the board also gets involved in things like, okay, do you launch the road show?

20:03So, and what's the price? Almost all of the decisions, the process is being run by the management team. And so in our case, it was CFO, Matt Roberts and myself, and we insulated the entire rest of the company from it. Wait, so you did not involve the rest of the company? No, they're out there back in San Francisco building a business. We're spending two and a half weeks running around the country. Is that typical? Is it the CEO and the CFO that you typically want in the room? And in fact, one of the mistakes that we see companies make periodically is one building employee expectations towards an IPO too early and two involving too many people.

20:38If you think about it, one of the things that larger companies, private equity backed companies tend to do well is they value that, they value the option value. They get themselves ready to go. But guess what? They've also got more resources at the company to do that. Can you break down what you mean by option value? That's a very loaded, those are two very that's the preparation, the preparation phase. Yeah. And with venture back companies, I think you have to be mindful and the boards are mindful of the fact of the distraction that you can create through the IPO process. Right. And so what Jeff and Matt did was say, you know what, this is gonna be born by us.

21:10Everybody else do their job. Everybody else was focused on doing their job and managing the business. Go back to when we were talking about the odds of it being a lousy market that we might say, you know what, this is not our year to go. We're there. So it would have been a huge distraction. One of the things we haven't talked about is that, you know, in a lot of cases, the IPO has involved novel technologies that are not familiar to the market. And you're essentially selling a new way of doing things. Now, it's very familiar to us. So actually book our reservations online. But how do you think about involving other key, like, technical people to help sort of educate, or is that the CEO or the CFO?

21:40Don't you feel frustrated as a founder that my CFO can't represent this that well? I had a very good CFO. The Matt Roberts did a fantastic job. He actually was the money work that was traded almost all the IPO till the road show. But if your CFO can't tell the story. You need a new CFO. Well, that's why I'm asking because honestly, when I think of a CFO, no offense, all the CFOs out there, I think of numbered people who are just sitting there with like spreadsheet. Different CFOs can have different styles. They just had the investor has to trust them. And then that's what the investor is looking at.

22:06So CFO telling me the truth, know what's going on in the business and how does that play? There's one thing that you're like, I want every CFO to have this from both of your perspectives. Integrity. Attention to detail. That's true. Well, we have to. My mom would do like 15 Snapchat I'm not sure his puns are too. We all want that. We often rain into management teams that wanted to have too many people on the road. Three people, sort of the outer number and you can't. So tier two, your point about it depends on the business. Two -year point around technology, periodically, if it's a highly technical business, you might suggest you have that person there for Q &A, but you don't want to have the distraction.

22:42You want to have dialogue. Most investors expect CEO, CFO dialogue. So when you get to the CFO question, and we can tell which teams are gonna need a lot of preparation. And it's seldom both CEO and CFO. And then we just, we hit him with questions. These are the types of questions you're gonna have. It was a CEO in my case. He just said, well, he doesn't wanna say it out there. You're in a different city every night. You're doing like seven meetings a day, hour -long meetings a day. And the thing they stress more than anything is give exactly the same presentation and answer every question exactly the same because regulation, FD, fair disclosure, literally.