10 episodes

The Loup Ventures Liquidity podcast explores all things liquidity in the venture market, particularly late-stage financings, secondaries, exits, and IPOs. As early-stage venture capitalists and former public stock analysts, our experiences meet in the middle, and we share those insights on the Liquidity podcast through discussions between Loup partners and industry guests.

Liquidity Loup Ventures

    • Technology
    • 5.0, 8 Ratings

The Loup Ventures Liquidity podcast explores all things liquidity in the venture market, particularly late-stage financings, secondaries, exits, and IPOs. As early-stage venture capitalists and former public stock analysts, our experiences meet in the middle, and we share those insights on the Liquidity podcast through discussions between Loup partners and industry guests.

    010 – Direct Listings and Predictions for 2020

    010 – Direct Listings and Predictions for 2020

    Doug and Gene look forward to 2020 and talk direct listings, what needs to happen for them to be mainstream, Tesla, and Apple.

    Top 3 Takeaways:



    * Creating a mechanism for companies to raise capital as part of a direct listing is key to their adoption.

    * IPO investors and pre-direct listing investors have different expectations but may serve a similar purpose.

    * Companies in new markets with open-ended growth opportunities are often given a pass when it comes to early fundamentals, and this is likely to continue.













    Show Notes



    * [1:04] What will it take for direct listings to take off in 2020?

    * [3:35] What kind of return will pre-direct listing investors expect?

    * [4:25] Doug thinks of the rounds ahead of a direct listing as a form of extended underwriting.

    * [7:05] Has anything changed about how private companies think about profitability in the wake of Uber, Lyft, and WeWork?

    * [8:00] Gene on the Tesla story.

    * [11:20] When a company is playing in an open-ended market at the very beginning of their growth curve, the market doesn’t want to miss them, and investors will pay up for access to them.

    * [14:08] Why we think Apple will be the top-performing FAANG stock of the year again.



    Disclaimer

    • 18 min
    009 – The 2020 IPO Climate

    009 – The 2020 IPO Climate

    In a live episode recorded in front of a virtual audience on Teooh, Doug and Gene discuss the IPO market, the new focus on profitability, direct listings, and take questions from the audience.

    Top 3 Takeaways:



    * The trajectory of many prominent 2019 IPOs and a new focus of profitability will ultimately result in fewer listings in 2020.

    * As many private companies shift the narrative to focus on the path to profitability, skeptical public market investors will need to see proof that they are serious before buying into that new narrative.

    * Large public investors prefer direct listings, as the float is much higher and they are able to build large positions more efficiently.











    Show Notes



    * [1:30] What the current record year for IPOs means for investor appetite going forward.

    * [3:30] The performance of recent IPOS and how it affects upcoming listings.

    * [7:10] Is the mini-correction we are seeing in the private markets similar to the dot com bubble?

    * [9:15] Fining the path to profitability and how it impacts valuation

    * [16:20] How direct listings work

    * [19:25] Do buy-side investors want direct listings to gain popularity or favor the status quo?

    * [22:45] Questions from the audience



    Disclaimer

    • 28 min
    008 – Debunking Direct Listing Myths

    008 – Debunking Direct Listing Myths

    Doug offers insight into the benefits of direct listings and debunks a recent article written in opposition to them.

    Top 3 Takeaways:



    * This article from Renaissance Capital on why direct listings are bad for public investors contains a lot of false or misleading information. Doug shares some facts and where his opinions differ.

    * Price discovery and transparency are improved in a direct listing due to the market mechanics involved that adapt the price to the number of shares available and the demand for those shares.

    * The lack of a lock-up period in a direct listing, which is said to open the door for management to take advantage of investors and sell stock based on overly optimistic information, is not likely to become an issue based on basic incentives.













    Show Notes



    * [1:05] Why not having a lock-up period does not necessarily create ann opportunity for unfair discrimination between public investors, insiders, and issuers.

    * [4:16] Pricing transparency is not compromised in a direct listing and the supply and demand mechanics create a more efficient price at open.

    * [7:35] Price discovery is actually better in a direct listing than a traditional IPO because market makers are setting a price based on order flow, not a general gauge of interest.

    * [10:38] Direct listings do not require a predetermined number of shares to be sold because market mechanics will immediately adjust price based on the quantity available.

    * [11:49] For many companies with the brand and reach of Spotify or Slack do not need a traditional IPO roadshow to build awareness. Further, the lunches and presentations are very similar to the webcast that they often offer as a substitute.



    Relevant Links



    * The article from Renaissance Capital



    Disclaimer

    • 13 min
    007 – Jeff Thomas on the State of the IPO

    007 – Jeff Thomas on the State of the IPO

    Jeff Thomas is a Senior Vice President at Nasdaq and the Head of Western US Listings and Capital Markets.

    Top 3 Takeaways:



    * The IPO window should remain open through the upcoming election cycle as long as volatility levels don’t rise significantly. In 2016, volatility raised in part due to the election but also due to global growth concerns related to China and Brexit. That year, we saw half as many IPOs on the Nasdaq as we’ve seen so far in 2019.

    * Venture-backed companies are interested in direct listings for two reasons: 1) they can provide full liquidity for investors and employees at the time of the listing with no lock-up, 2) therefore, large buy-side investors can build positions faster compared to traditional IPOs with smaller floats.

    * Rule changes will need to happen for companies to raise capital during a direct listing. In a traditional IPO process, the underwriting banks assume a level of liability. It’s unclear who would bear that liability if a direct listing incorporated a capital raise today.













    Show Notes



    * [0:33] Jeff talks about his role at Nasdaq.

    * [1:26] Jeff talks about the health of the IPO markets.

    * [4:19] Direct listings are the number one topic Jeff and his team at Nasdaq are asked about from venture-backed companies.

    * [5:12] When compared to a traditional IPO, direct listings put more work on companies in the process of going public and don’t allow them to raise capital during the process.

    * [7:45] Opportunities for education in the direct listing process.

    * [9:00] Jeff believes the biggest value of a direct listing is in the removal of the lock-up period for all investors.

    * [12:10] The fees for a traditional public offering and a direct listing are relatively similar. Jeff elaborates on the different roles that underwriters and analysts play in each process.

    * [13:55] From the Nasdaq’s perspective, traditional IPOs and direct listings are relatively similar. Nasdaq is paid the same in fees and interacts with the various parties in the same ways.

    * [14:56] Jeff talks about the current challenges that prevent companies from raising money alongside a direct listing.

    * [15:52] Jeff shares his thoughts on companies raising a private round ahead of a direct listing.

    * [18:59] CFOs think about pricing IPOs differently than VCs.

    * [21:22] Nasdaq has now done over $25B in secondary liquidity for pre-IPO companies through Nasdaq Private Market. Jeff believes the demand for liquidity will remain.

    * [25:33] Nasdaq’s role as a provider of liquidity.

    * [26:50] Nasdaq’s efforts in finance reform.



    Disclaimer

    • 30 min
    006 – Expectations vs. Reality

    006 – Expectations vs. Reality

    DoorDash, Honey, and 1Password serve as the backdrop for a conversation about how late-stage investor expectations will shift as direct listings become more popular, why themes matter in investing, and how bootstrapped companies can raise demand for secondary markets.

    Top 3 Takeaways:



    * Traditionally, investors look for an IPO “pop” to compensate for the risk of participating. As direct listings become more popular, the expectations for investors that invest in the round ahead of a direct listing will need to change.

    * Theme matters in investing. Sometimes just being in the right theme at the right time can produce favorable outcomes. Currently, fintech is on fire.

    * If companies can self-fund and become profitable without raising outside money, investor demand to get access will still remain and may increase the popularity of the secondary markets.













    Show Notes



    * [0:50] Is DoorDash a good candidate for a direct listing?

    * [5:30] Companies that opt for direct listings may still need to raise outside capital to sustain their business, especially in the case of DoorDash.

    * [6:09] Traditionally, investors are looking for an IPO “pop,” but expectations will have to change if direct listings become more popular. So, what type of return should late-stage investors expect?

    * [11:30] Companies that approach a direct listing will need to build research support to inform the public markets. More on this in a future episode of Liquidity.

    * [12:25] Paypal buys Honey for $4b. They had 17m MAUs ($235/user), WhatsApp had ~45M users, and Facebook generates $25-$30 per user per year.

    * [15:00] Themes matter in investing, and fintech is currently on fire.

    * [16:09] 1Password took outside money ($200M from Accel) after being self-funded for 14 years.



    Disclaimer

    • 19 min
    005 – Comparing Direct Listings and IPOs

    005 – Comparing Direct Listings and IPOs

    There has been a lot of discussion lately in the venture community about the favorability of direct listings over the IPO process. The chief complaint of IPOs is that securities are underpriced at issue. To better understand the comparison between the two methods, we took a look at 25 of the top tech IPOs in the last two years.

    Before we look at the underpricing argument, it’s helpful to look at the cost of IPOs and direct listings. At the most basic level, the cost of a direct listing and traditional IPO are relatively similar in our sample. We found that the average company paid between $29.6M and $34M in underwriting fees based on the level of exercise. It’s important to note that this doesn’t include any fees incurred by sellers. Total underwriting fees in deals where sellers sold shares as part of the IPO process ranged slightly higher, an average between $32M to $37M. The two direct listings to date, Spotify and Slack, paid financial advisory fees of $35M and $22M respectively.

    An appeal of the IPO process is that it allows companies to raise additional capital, which companies aren’t currently able to do during a direct listing. In our sample, the average company raised between $794M and $913M during the IPO process. This translates to ~$26M raised for every $1M in fees. If we look at the fees that Spotify and Slack paid for a direct listing, the companies could have raised an estimated $937M and $590M respectively.

    This brings us to the main point of the debate: the underpricing of IPOs. When comparing the issue price to the opening price on the first day of trading, our sample found an average underpricing of 38%. Of the 25 companies we looked at, only two, Peloton and Uber, opened below their issue price. If we add the underwriting fees and underpricing costs together, the true cost of an IPO is between $333M to $382M with only 10% of the cost from underwriting fees. The vast majority of this amount is value transferred to those who are allocated underpriced shares at issue.

    If Spotify and Slack had raised capital in their listings via a traditional IPO at the levels described above and their shares were underpriced at the average 38% level, it would have represented $346M and $217M in underpricing respectively.

    As we noted, there is currently no mechanism for companies using a direct listing to raise capital at the listing. One potential solution that’s been mentioned is doing a private capital raise 3-6 months ahead of the direct listing. Given the amount of private capital in the market, this should be easily achievable. Another potential option is to do a follow-on offering after the direct listing establishes a fair market price for shares. Follow-on offerings typically have a discount to the most recent public price (an average of 7.3% in 2018).

    Investors in follow-on offerings demand a discount. Private investors ahead of a planned direct listing are likely to do the same. The discount is necessary because if an investor wants to take a position in a public company, or one soon to be so, there’s no incentive for them to do so as part of a structured capital raise at the market price. They can just buy shares on the open market. Companies looking for the liquidity of the public markets plus capital should be able to get it cheaper than current IPOs, but they won’t get it for free.

    Top 3 Takeaways:



    * At the most basic level, the cost of a direct listing and traditional IPO are relatively similar. We found that the average company paid between $29.6M and $34M in underwriting fees. The two direct listings to date, Spotify and Slack, paid financial advisory fees of $35M and $22M respectively.

    * When comparing the issue price to the opening price of recent tech IPOs on the first day of trading, we found an average underpricing of 38%. Of the 25 companies we looked at, only two, Peloton and

    • 10 min

Customer Reviews

5.0 out of 5
8 Ratings

8 Ratings

Silky J. ,

30,000 ft view assassins

Gene and Doug are next level thinkers that are absolute assassins when it comes to conveying complex ideas into actionable insights. So many gold star good questions and answers!

Billasaservice ,

Hacker

These guys are experts and the topic of liquidity is going to be super important in the coming years. They're way ahead of a massive shift in the markets. The conversation is topical, but they tie current events to big ideas. Can't wait for more.

MikeAtTCG ,

Mean Gene does it again!

From being the top Apple analyst on the street (sorry Toni Sacconaghi) to crushing it at Loup, Gene is still my favorite listen in the industry. Love the way Gene and Doug are able to boil down complex issues into easy to follow info. Keep it up Loup team!

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