Why the IPO Market is not Closed

Thank you for having me. You know, it worked out great. I was in London for some meetings, and I always watch your shows, you know, read your tweets. So great to meet you in person, and thanks for having me.

So I don’t think IPO market is closed. I think the issue is companies don’t want to go public because their expectations are too high. Few things happen. So when 2020 interest rate was very low during COVID and 2021, all these companies raised money at a valuation that didn’t make sense. You look at in public market, you know, outside the big cap names, a lot of those names valuation has corrected. In the private market, that valuation didn’t really correct. And so they want to go public at a valuation that just doesn’t make sense in a public market.

Right? I can buy companies that generating tremendous amount of cash flow at 20 to 25 times earnings. GAAP earnings, not BS non GAAP earnings. GAAP earnings. So why should I pay for a company 50 times revenue multiple? I think a lot of these private companies, their numbers are not there to justify the valuation that they raised the last round. So that’s problem number one. And so they’re not setting resetting their valuation expectations. I think the second problem is more systemic problem in market. You know, I think if you look at allocators, so that’s like universities and pension funds and endowment.

They are allocating a lot of money and now it will change and I think it’s changing slowly. A lot of money in privates. One of the biggest thing that’s a big trend in asset management in my view is that allocators people who are giving monies. These are big pension funds and endowments. They are trying to reduce volatility of their performance. To reduce the volatility, a good way to go is invest money in privates because there is no day to day volatility. And second, give money to this market neutral hedge funds.

So if you look at the of the world, millenniums of the world, they have become so big. Right? Millennium cannot take any more capital because people are chasing this market neutral fund. But the reality is when you avoid the volatility, it also create other problems. Right? If everybody chase the same ideas, it reduce the return. And I think that too many too much money went to private market. And what problem it created, I actually don’t think there are shortage of ideas in the private market, but I think there are shortage of talent to execute those ideas in private market.

So people raise all this money with great views and themes, but they’re not executing the way they should need to.

The valuation is a snapshot of a company’s life. Right? If you’re building a company for a long period of time and you have a good business and you generate cash flow, you will create value. What is your IPO prices? It doesn’t matter. I think if you think about it, all these companies that are public, their stock goes up, goes down every day. Sometimes your stock goes up or goes down for the things that you do. Sometimes your stock goes up or down for the things that you don’t do.

Interest rate goes up, your stock goes down. Interest rate goes down, your stock might go up. That has nothing to do with what you have done. So the reality is, you know, over obsessing about the valuation of your business is not the right thing to do because at the end of the day, a founder job is to create business. What is the value of the business? That’s the job of an investor. So a founder who obsess with valuation, they’re not doing their day job, which is building a business.

If you’re a founder, I think you should go public. I’m a big proponent that companies should go public earlier than later, and we can talk about it.

I would challenge that in that case, the founder failed to build a culture. Because I think if you look at some of the greatest companies has been created in the public market. Look at Amazon. Amazon stock was incredibly volatile in late nineties, early two thousands, but Jeff Bezos retained their great talent. If you look at Facebook, they went through tremendous volatility, and two of them were existential threat for the business. Right? Right after IPO, the whole mobile issues. And then a couple of years ago, their cost structure went completely different directions, but the team’s still there.

I think when you build a business, you need to really ask a question. Are you hiring mercenaries? Are you hiring missionaries? If you’re hiring mercenaries, yeah, you have to care about your stock price, and this mercenary is gonna jump as soon as your stock price goes down. But if you hire missionaries who believe in the company’s missions, who believes in your leadership, I don’t think the stock price make that big of a difference. And, actually, if the stock price goes down and those employees leave, it’s probably a good thing for the companies.

So I think that will change because what happened in last decade, there were a lot of liquidity. In 2021, 2020, there was a lot of liquidity. And by the way, last decade between 2011 to 2021 was great return for private equities. However, I think going forward, it’s gonna be very, very tough for a couple of reasons. Number one, all these institutions who gave money to privates, they are not getting their DPI. So they will be much slower allocating more capital to private. And some of the privates story has not been told yet.

Right? So I think those are bad investment. People didn’t write it down to zero or near zero, and that will happen over time. And then people will realize that it’s not only DPI issue, it’s also permanent loss of capital. I don’t think people are realizing that they have permanent loss of capital in many of their private investment, and that will happen. And third is that we lived in a historically low interest rate environment. So the private was great, but as the interest rate goes up, you can get better return in, you know, a decent return in public securities, you know, or fixed income and things like that.

I actually think even with interest rate going down, we’re not going back to 0% interest rate environment anytime soon. And then the fourth issue is that technology, and I think this is a really important problem. A lot of people forgot about that, and I think people have to realize that why comp as an investor perspective. And we can talk a lot more why from a founders and employee perspective, it’s also important for companies to go public. But why it’s really bad from an investor perspective to encourage companies to stay private very long is this technology landscape shift every fifteen years.

If you look at late seventies, early eighties, it was a microcomputer. Mid sixties was mainframe computer. If you go back in go after in mid nineties was it’s in all about Internet. Fifteen years later, it was all about mobile app. Now we’re talking about AI. You might invest in a business based on a thesis, but fifteen years later, that thesis has completely changed based on the world around you. The key thing with the public market is public market gives you daily feedback. It’s like, you know, having a child.

I know I have a 10 years old and 14 years old. When they live in your home and mom and dad shelter them, it’s great. But when you go to college and you go to real life, you are not that special. You’re like another boy or another girl, and you gotta fight it out in the world. And when you go to a public market, you know, you are not sheltered by three or four venture capitalists. You are in a public market everyday investors saying either you are doing great or you are doing bad.

And that force you to make right decisions. And if you’re a great CEO, you are seeing what’s changing around you. It gives you currency to make acquisitions. It helps you to pivot your business in a public market. And I think some of the greatest success stories in public market is these guys they pivoted. You know, I I always tell people, you know, people always say that, oh, I cannot do great things in private market. And I look at it, okay, let’s look at some of the best thing happened in last twenty five years.

And that was done by the public market companies. AWS was created by a public market company, the entire cloud business. The three biggest cloud providers were public company when they started it. If you look at iPhone that fundamentally changed that was created by a public company. If you’re talking about AI GPU, it was created by a public company. So everybody says that, oh, I need to be a private company to do great thing. That’s I call it a complete BS. I think

business. So great founders bring great team, and great team can execute. Stock goes up, stock goes down, they execute. But the thing is that I think if you talk to all the CEOs that I know who are public market CEOs and historically private market CEOs, if they come to your show, they will say they became a better company for being a public company because public market investors think about the business because there’s so many players. When there’s so many players care about your business, they are looking at your business in so many different ways.

They’re telling you things that you’re not gonna see.

No. Revenue multiple is a BS multiple. Right? Like, why would somebody give a shit about revenue multiple? Why

spend so much time on it then, and why is it a BS multiple? So when I look at a business so let’s say a business does $100 revenue, and they are losing money. If I look at the business and say that, okay, they have a sustainable growth path of, let’s say, 25%. So over a decade, that $100 will become thousand dollars. Because if you grow 25% in a decade, it’s 10 x return. And we think that the incremental margins are 60% of that business. So that business in a decade will do $500,000,000 profit.

Then I know that market trades at 17 times earnings. Let’s say this business trades 17 times earnings or 20 times earnings. So then that business is worth, you know, 500 times 20 is $10,000. So now I have to look at it. What is my required rate of return to invest in that business? And I’m willing to underwrite a revenue multiple based on that. And that’s why we look at revenue multiple. But the challenge is very few businesses. And this is why I think one of the most important thing to look at it.

What is the gross margins of that businesses? Because if a business has 20% gross margins, you know, giving them revenue multiple is a crazy thing to do. You can, but it has to be very, very low revenue multiple because when you start with 20% gross margins, ultimately, gross margins is very hard to control. It is what it is. You know, maybe you can get a 100 basis point, 200 basis point improvement in a cost. But the people cost is very easy to manage. So when a business that starts with a low gross margins, it’s really hard to give high high multiple on a business.

When I was an IPO analyst at Google, I had a buy rating on the stock. Google had a very high incremental margins. So you can look at the business. So what we didn’t know at that time, how big that search business could be, and can them maintain the search market share. Like, was thrown out of. It’s a true story. Google went public, and I had a buy rating, and I went to BlackRock, New Jersey office. And these investors were a big Yahoo shareholders. And I was pitching Google, and they got really mad at me.

They said, you don’t know anything because people will come to Yahoo for content, and they will end up searching. Why do I need to go to a web page that doesn’t have any other content only for search? They’re gonna lose search market share and look at the capex they are doing. They’re spending like a drunken sailor. Why would you so the conversation got really heated, and I was literally thrown out. A year later, Google went up. I don’t know. I forgot 100% or so, and those guys were fired from BlackRock.

But the whole true story is that was the debate that you wouldn’t know how big the market is and why they’re spending so much money on capex. But the reality is the business had a very, very high gross margins, that contribution margins were very, very high. So I think the reason you give revenue margins and I think revenue multiple and I think that’s it’s totally fair to look at SaaS business that way because SaaS business, many of the SaaS business has very high gross margins and they have a very, very high profit margins at a steady state basis.

So you can predict the cash flow based on the contractual revenue. So unless there’s a disruptive software comes out, it makes sense to a revenue multiple. But a delivery company, you know, or a consumer company giving revenue multiple doesn’t make a lot of sense.

So first of all, staying with the theme, I think it was the right thing for those guys to go public. Because number one, I think if you ask them, they will tell the company became stronger because they were public company big, and they adopted their business many way. Like, I think don’t the margins that Box and Dropbox is generating, if they could have generated, if they would just stay private. Because the growth was slowing, they were forced to look at the business and run the business better.

And there is absolutely nothing wrong with a business that’s growing slower. Probably the market size is small. Not everything gonna be Google and Facebook. That’s totally okay. But if you have a business that is growing slower, relatively steady, I think you should focus on improving your margins, be more cautious on cost, drive more efficiency in the businesses, return capital to the investors. If you’re generating profit and you can deploy the capital, you should return capital to the shareholders.

So let let’s going back. You know, you said, Imran, everything you were saying, you’re talking about investor perspective, which is true. I will be the first person tell you in your podcast, my loyalty is to my investors who gave me money. I would never give money to an investors who goes out publicly talk about, oh, no. We stick with the founders. No. Because your fiduciary responsibility legally is to your investors who gave you money, Is the guy who manage money for a firefighters or who manage money for the teachers.

They give their pension money to you. Your responsibility is to help them so that their pension is funded. You going out saying that, oh, I support founders and I don’t care about my LPs. That’s completely BS and that’s not the right thing to do. You are taking money from people who have you have responsibility to them. They’re counting on you. So I have no problem saying that my risk my responsibility, my loyalty is to my investors. And, obviously, I want the founders to do well and I will help them.

But at the end of the day, people who give me money, have fiduciary responsibility to them. So any investor who says that they are either completely clueless or they’re not being honest with themselves. But going back, why it’s right for founders to go public? I wanna say that, listen, if you have a company that doesn’t have any liquidity for their employees, that’s not good for the employees.

Yeah. The question is how long it’ll last. I think years. And maybe you can do it for years. You know, the thing is that that’s a cycle gonna go on, but I think over time, I don’t think it’s a great look when your existing investor marking up that existing deal to give employees the liquidity. I’m surprised that allocators are not asking the hard questions. The reality is, I actually don’t think Stripe needs to go public. But if Stripe is a profitable business and buy back their shareholders stock or return and buy back employees stock, that’s fine.

Listen, there’s a lot of great companies who are private for a long period of time. Cargill is a private company and does a lot of time and there’s nothing wrong. If you’re a private company and you don’t want people’s pay, don’t wanna deal with public market, I think that’s an honorable thing to do if you make your business profitable and pay it back to other people money. But constantly going raising money to give your employee liquidity and to run the business. You know, I hate to say that.

That just doesn’t feel right.

I am not super fan of Lina Khan and fundamentally believe overregulation is bad. I think that America became a great country because it empower entrepreneurship. It empowers small businesses and people do that. At the end of the day, when you give the decision making or capital allocation or the people who are allocating the capital or running the business, taking it away from them and giving it to bunch of people who never built a business, never run a company, but they’re more of a bureaucrat, you know, government officials for a long time.

I only lived in Washington DC. I don’t think that’s a good outcome for the country, and that’s not the way the country was meant to be created. So I’m fundamentally disagree with over regulations and some of the things that Lina Khan has done and the potential, I think is is flawed. But saying that, I actually don’t think the M and A market I think people has a reason to blame everything. And right now there is and I look at it and tweet it all the time.

They like to blame on everything. I think the problem in M and A market is also the same thing. The seller expectation is too high. When a public company is trading 20 to 30 times earnings multiple, they cannot afford to pay out 50 times revenue multiple to buy a company. And then you don’t see private to private mergers because all the valuation is messed up, all the cap table is messed up, so you cannot do that either. So that’s also play a pretty critical role. I get you,

Yeah. But not everything is Figma and Waze. So if you’re selling it to Google, if you’re selling it to Facebook, you’re selling it to Adobe, if you look at the NAS I think The US public market, I think what? There’s 2,000 companies over $2,000,000,000 market cap. Top 20 companies will have a lot of scrutiny. And honestly, in many cases, it probably makes sense to have high scrutiny on the top 20 companies. But other 1,980 companies probably not gonna have a lot of difficulties acquiring deals. So I think blaming everything to Lina Khan is probably not fair either.

The reason I I tweeted about that is I think if you look at, let’s take CrowdStrike. CrowdStrike before the incident was trading at 20 times run rate revenue. And it is a world class company. So the valuation that Google offered and remind me, think was reported number $46,000,000,000. So they have to do 1.2, $1,300,000,000 revenue to achieve and and have to maintain the growth rate to achieve that snapshot value. But, you know, that’s not a sustainable value because something always happen. You know, ultimately SaaS businesses trade seven times revenue multiple.

The thing is that once you go public, know, your growth rate gonna slow. It’s in a multiple gonna compress. And along the road, you’re gonna take dilutions because when you’re growing that fast, you know, you end up raising more money. Listen, when you’re growing really fast, you know, Jack Ma used to say and actually said that when they’re babies, cats and tiger look same, but a cat never become a tiger. So when a business is very small, it’s very easy to look at the business saying that, hey, this is could be a great business.

And and a waste very much could be. I I I don’t know. But the reality is, you know, how many times we have seen that every 50 companies we look at that’s growing and we think that will become a tiger, only five of them become. So if you have to play the probability game, there is a high degree of probability that may not be the right decision.

I have great respect for Bill Gurley. He’s a very, very smart guy. But this one thing, I don’t agree with him. I think he’s over focused on one day stock pricing. Now listen, if the stock doubles, that’s obviously bad. But between 2050% and just over focusing on that, I think it’s misguided. And I’ll tell you why. So number one, my guiding principle is whenever you bring a new investors, you want them to make money. You never do create a situation that they come in and they lose money because you’re building new relationships.

I think any times you’re trying to build a new relationship, my philosophy is give them more because it’s a start of a relationship. When you’re going to a public market, you are building a new relationship with a new group of investors who doesn’t really know you that well and they’re getting to know you. Fine. You give them a little bit more upside, so be it because you’re building goodwill. Because at one day, you know, as in your public life, gonna have a bad day and you want that build that goodwill.

So that’s how relationship builds and that’s the way I think about life in general. Don’t be over transactional. The second reason is the reason I call it misguided. I think people don’t necessarily understand how public market necessarily. I’m not saying about Bill Gale, but people who get over focused on it, is that when a company go public, they sell a very small percentage of the company. So even with the pop, whatever the money left on a grand scheme of thing, percentage of dilution is pretty low.

The other thing is that when a company go public because they sell a small percentage of the company, most investors cannot buy their full position. So let’s say you are Fidelity and a company is going public and you’re doing a $200,000,000 IPO. Fidelity will get, let’s say, fifteen, one five, 15% of the allocation. That’s gonna be a very high allocation. That’s a $30,000,000. The amount of money that the Fidelity PM manage, that’s not a a lot of stock. So they need to buy the stock aftermarket to build their position.

And so if the stock is, if you give them a discount, they can pay up more so that they can dollar weighted average their price. If they’re buying the stock at the price that it doesn’t go up, only goes up 10%, they can dollar weighted average. So they will not gonna go buy the stock. So even if a supply that demand imbalance, they will probably sell the stock and actually your stock gonna cradle, and that’s gonna create more problem for your company than leaving some money off the table.

Can

At the end of the day, the entire capital market in The United States and globally probably, but in The United States was built on trust. People give you money when they trust you. When they give you money, they give you their trust. No matter what you disclose, they don’t know everything about your business. They don’t understand every risk about their business. At the end of the day, they read all the documents. They believe that you disclose everything and they trust you. That’s why they’re giving you capital.

And that’s why when the trust breaks, it Jamie Dimon, you know, in 2007 when I became JPMorgan managing director, he said, you know, that there was a time the financial crisis was happening. The two bear stern hedge fund went bankrupt. You know? And I was a young MD. I didn’t really understand the consequences of that two hedge fund going bankrupt that ultimately figured a lot of different things. And he said something very good. It takes hundred years to build a trust, but one year one day to destroy all the trust that you built and stays with me.

So the reality is, you know, if you think you’re gonna go public, you should go build relationship, tell your story, show your performance over the years. I said that I did that. That builds trust, And that’s a good business practice. But that has little to do with IPO. The the IPO process is you go through this two you file a document, people read it, and then you go through this two weeks grueling roadshow. You do 60 meetings. After those meetings, people read your prospectus. They may or may not know know you from past.

They do their own analyst call, market research, and then they put indication that they want to buy the stock. And if an IPO is good, usually 90% of the meetings that you have one on one and a good IPO will convert into an order. 9090%. A good IPO. If it’s less than 50, it’s gonna be hard to do an IPO. What sort of percent was Alibaba? What sort of percent was Snap? Both were pretty close to 90%. Wow. Yeah. They’re very high. Have you had one that was incredibly low?

Yeah. As of my banker career, yes. And we had to pull the IPO. And that happens, you know, and it happened because the business is bad or it happens because the market is bad. And then and then they set the price with that bid? So the way the pricing works, you know, there’s three kind of different IPOs. Right? Traditional IPO, auction IPO that Google did, and I think somebody else did, and then direct listing that few companies did. But let’s talk about traditional IPO because that’s the vast majority of it.

So once you file it based on the comps, based on some of the public feedback that you hear, the company with the partnership with the banks set the price range. And then you go to the road show and then based on the demand, either you hopefully raise the price range because of the price range going down, that’s a bad thing. So you start with the price that you have a 98% conviction that you can price it at that range, and then you go off from there.

And that depends on the demand and the feedback you get from the investors. And basically, you ask them what is their price target on that company is. Sometimes they share a price target that’s way too high. Sometimes they share a price target that’s way too low depending on who has the power. But that’s how you come up with a price target based on the demand you see in the market. If the book is 10 times covered by high quality investors, 10 times covered, let’s say you’re selling 100 shares, there’s a thousand, you know, shares demand, high quality investors, you know that you can potentially raise the price.

But you have to look at the what is the price target of this company could be at least a near to midterm and at what price people will continue to buy. So if you set the price at a too high, nobody gonna buy the stock, and then all these people who bought the stock, they’re gonna sell the stock. I remember

Yes. Because the thing is that the concentration comes from if you give Fidelity a million dollar allocation, they will dump the stock. They might disagree with that, but, you know, a million dollar. You know, ultimately, if you have to think about it, if you’re a portfolio managers, you’re owning 30 names, 40 names, 50 names, 60 names, whatever the number is. Right? And you are managing a lot of money. So if you give them a small, very, very small allocation, it doesn’t move the needle. So then either they have to buy more so that it moves the needle or you have to sell it out.

Because there’s so many names you can track and so many names. You don’t wanna own bunch of names that then you’re buying and running an index fund. Right? But if you’re really an active portfolio managers and you’re trying to generate return, you have to size them and you have to have an understanding, okay, is this stocks gonna go x amount and it will generate x and y amount of return for my fund? They have to get a certain amount of size for them to care about that position so that they can add more.

And that’s why the pricing mechanism comes into the play.

different length of lockup period? So the standard lockup is hundred and eighty days. And the reason they do that, they wanna manage the oversupply in the market. Second, it also protects the banks that, hey, insider knows something. You you want market to season out. Right? The company reports two quarter numbers that helps educate the market and things like that. A lot of the VCs, you know, I never like it, but a lot of the VCs push hard to shorter lockup. Hey, if the stock goes up a lot and stays up for a certain period of time, then we can sell.

But I think that’s the if I were an operator or a banker, I would push back strongly against it because it sends a very bad message to the investors. Because you’re basically saying that you think the stock gonna go up in a shorter term and it’s not gonna stay there and that’s why your existing investors wanna get out. What’s the rush?

I think they’re both right depending on your duration because they do have you know, if you have a management company that you have ten years of history and you understand how their ability to execute in difficult environment, if you have that understanding, their ability to pivot. Great founders are very good at pivoting. If you think about it, all the great business where they started and where they became is very different business. Google started as an enterprise search business. Netflix started as selling DVDs online, not even rental.

You know, Amazon started as a bookstore business. So now look at all these businesses where they generate most of their money. It’s completely different businesses. So I think the great founders are great at pivoting. And so the the the risk with the business is any businesses is not either obviously you have a near term risk which everybody knows. The asymmetric understanding about the business that helps you to create long term return, that is you cannot quantify financially, is that a group of people’s their ability to navigate difficult environment.

And that’s very powerful, but that’s not gonna pay any dividends in the short term. So so I think Sequoia is right that they have that information and they don’t if they wanna take a ten years view, I think that’s totally fine. But in a one to two years basis, they’re probably as you you’re right. They’re probably not gonna be better than a public market investors who knows how to manage public market risk much better than a private market investor.

There’s

many inputs

I think for businesses and for the economy, low regulation is better. I’m not saying no regulations. I think regulations are good, but we need regulations to be smart. Did the changes to unrealized cap gains actually happen? It makes me laugh that when people talk about unrealized cap gain in the private market context, the entire venture capital world is so small. It doesn’t really matter, but people are not realizing that. Think about it. Like, okay, what happens to the farmland? Are you gonna tax the farmers? What happens to the real estates?

People who own all this real estate, they are illiquid. Are you gonna charge them an unrealized cap gain? So they have to sell the real estate. You’re destroy the real estate market. Honestly, taxing on unrealized cap gain on Amazon is least of our problem. Unrealized cap gain tax on a headline is not a good idea. There’s a vast amount of wealth is owned by average American. So you cannot go to this vast amount of Americans and charge them unrealized cap gain. So then you have to say, okay.

That’s not the intention. We’re gonna exclude all these things. And and then they also ask that, are you setting up a dangerous precedence? Now we are doing that to go after a small group of people. It sounds very popular that we’re going after this 20 people who are ungodly rich. Are we setting up a dangerous precedence? Like, now we’re going after 20. Now next, we’re gonna go 2,000, then we’re gonna go 200,000. Where does it end end start and where does it end? So I think when you have to think about the policy is that what sometimes feel right could set very dangerous precedents, and that’s we need to be very, very careful about.

What is the unintended consequences of those things?

Listen. I think one of the thing that happened with Internet, people always underestimate how big these businesses can be. Not for the companies, but how it will change the economy. I think people get too focused on technology cuteness, you know, how cool this tech is. I think what’s important is not how cool the tech is. What’s important is, is this technology improve productivity or not? Because at the end of the day, what is a GDP? GDP is number of people who are producing inside your map, right, in your country.

So ultimately, the higher productivity will drive higher GDP growth. So if the technology improve productivity, that has incredible an opportunity to unleash value. So US GDP is what? 25,000,000,000,000 or something like that or 30,000,000,000,000. 5% improvement is 1,500,000,000,000 of economic value creation. So the big question to really ask is that, is AI going to create 5%, 10%, 15% productivity improvement in the economy that can unleash so much the value? I would say that’s reasonable because how much productivity was created by Internet? Definitely more than 5%, 10% to the society.

You have to because if you don’t spend, your business goes to zero. So look at Google versus Yahoo situation. So what happened? Google spent the capex, Yahoo didn’t. I I again, I was an analyst at that time. I was Google’s IPO analyst. I covered Yahoo since 2002. It was a heated topic among investors. What Yahoo’s lack of spend versus Google spend? Yeah. People are loving Yahoo because they don’t spend that kind of money. 60% of the EBITDA was translating into cash flow, but Google was spending so much money on capex.

People just couldn’t figure out, like, why is the ROI? But twenty years later, we see the ROI. You know, like, when I worked on Google IPO, we had this analyst meeting as part of this IPO. You go meet them. So there were, like, 20 analysts from different banks. We went to see Larry, Sergei, Eric Schmidt. And I remember one thing that really stood out. Larry said that the most transformative thing Google did was the AOL deal. Because AOL, they gave them 95% revenue share on AOL search box was powered by Google.

AOL search was powered by Google, the sign and all the Google powered the search on the back. And Google gave them 95% of the rev share, and I think 5% of the company’s warrant. And Yahoo walked away from it because saying that this Google gonna never gonna make money. But Larry said that that was the most transformative deal because that put Google on the map. People saw Google name and build Google’s brand, and then people went to google.com.

So if you look at AI, current cash cow is obviously cloud because all these guys are using the cloud businesses. And by the way, they’re making great money. If you’re Amazon, if you’re Google, if I were running those businesses, my biggest concern would be now, I know the demand is not a problem, so I should be building it. But the risk I’m taking is that this demand is not sustainable. Five years later, this demand gonna diminish dramatically, and then I’m gonna get stuck with all this capacity I built.

You know? And look, that happened with Amazon in 2020. They built massive capacity thinking that the COVID buying patterns is the patterns gonna sustain post COVID. It didn’t. And they had huge margins pressure. So there is more than reasonable chance that this could happen that we are seeing pretty significant demand and at some point demand gonna stabilize or flatten. I don’t know if it will or not. Only time will say. But that’s the risk they are taking and that’s the risk you have to analyze that all my customers who are asking for this demand, do they have the power to pay me in a long term?

On Meta’s case, I look at AI. I think people focus too much on LLM. But I think, okay, what are the areas that AI going to unleash value at least? You know, I’m not the smartest guy. I’m the finance guy. I see humanoid robots. I see self driving car. I create better recommendation engines. Defense. I think AI gonna play a significant role defense. So there’s a lot of categories that work. The LLM is just the browser. It’s the entry point to what you wanna do. And what Facebook’s case, you know, the opportunity or Snap case and others, the opportunity is is this AI can help you drive better engagement, better content, better recommendation.

You can show less ad and make more money. So that obviously has value.

You know, I’m an immigrant. I came to this country as an immigrant, and I came from Bangladesh. And I saw this Internet thing is not a US thing. Ultimately, you know, it’s gonna empower everybody. And so to me, at that point was number of people and what’s the revenue per person you can generate on the Internet transaction that gonna create your Internet economy. So I was really interested about the global opportunities of these Internet companies. So in 2004, I go to China because they have a billion p plus people and Internet is very nascent.

So I took a group of investors to my clients, public market investors to go visit all these Chinese companies. And Alibaba was one of the company, but that was private at that time. The only reason we wanted to meet with them because Yahoo made that investment and all of my clients were interested in Yahoo. So I met Joe Tsai, who’s the co founder and now chairman of Alibaba in Shanghai. And we really hit it off and over time we became friends. And in 2010, I became very bored with my research job.

You know, it was the same day you cover the same companies, talk to the same clients. I’m like, I need something more to do with my life. And I was like, hey, should I go to move to China? Seems like a lot happening. My wife was working for L’Oreal. And Joe’s like, no, why don’t you go become a banker and help these companies? Three days later, he called me and said, hey, can I introduce you to some banks? And that’s how I end up going to Credit Suisse to run the Internet banking.

So Joe not only made the introductions, but then also, you know, when I became a banker, he hired me to help buy back 20% of his stake from Yahoo, help finance the What was that process like? That was a pretty wild M and A. I think it’s the day Carol Bartz got fired. You know, Carol Bartz was the Yahoo CEO, she got fired. So the new CEO came in. That time we approached Yahoo said that, hey, listen, we’re going to buy back 20% of our stake.

We’re going to pay $14.40, which is I think valued at $40,000,000,000. So you’re to get $8,000,000,000 or so cash. So that’s great for Yahoo. You can return the capital to your shareholders. At first, they didn’t. But after a lot of negotiation, we had to come up with the price. And at that time, Yahoo went through a lot of problems, you know, themselves. So we bought back the share and then we had to go raise the money, raise the $8,000,000,000 to buy back that 20% stake. Was it an easy process?

It was difficult in a sense like, you know, getting Yahoo to do anything was tough. And then raising capital was tough in a sense there are a couple of issues. In 2012, Facebook went public and the stock literally just went down 40%. It tightened. Yeah. And so when we decided to go raise money from the private market, investors were not interested. And I look at Facebook that went down 40%. I don’t wanna put Alibaba, you know. And then also some of the investors were concerned about the whole whole ant financial issue with the corporate governance.

So the way we solve it, this was the most one of the most creative transactions and I I’m very proud of it because all all bankers were against me doing that. Basically, Joe and I talked about it and and he agreed on it. Obviously, I cannot do it. I said the whole issue is the lockup. Right? Because all these investors were concerned that, hey, we bought the Facebook shares. Facebook went public. I have six months lockup and the stock went down 40%. I don’t want that situation.

We looked at Alibaba and said that, listen, this is gonna be a $25,000,000,000 transactions. And the amount we are raising, right, is the $8,000,000,000 transaction, 4,000,000,000 is dead. So that’s not a problem. You know, $2,500,000,000 is a common stock that came from the Chinese investors. So that was not a problem. But the really issue is we’re raising $1,750,000,000 from global investors who are not who are concerned because of the Facebook situation. So we looked at it and said, look, and it’s gonna be a $25,000,000,000 public IPO.

Who cares if we sell 9% of that offering to a group of investors who we know will have to buy more at the IPO and give them no lockup. Because we know we can go to Fidelity saying, hey, I’m gonna give you $200,000,000. But by the way, this company gonna go public at a $25,000,000,000 offering. The offering size is 25,000,000,000. The market cap gonna be much higher based on the trajectory. You probably wanna buy $2,500,000,000, and there’s no way you’re gonna get $2,500,000,000 allocation. So this is your way to get 2,000,000,000 200,000,000.

And if you’re worried that stock gonna go down like Facebook, there’s no lockup. You can sell the same day. But we’re comfortable because we knew that a company that size, they will have to buy it or at the post market even with the IPO allocation. So that lockup, while it was incredibly valuable to investors who bought that security, had zero cost to in company. So those are very creative transactions. What were the biggest lessons for you from being part of that? The biggest lesson is simplify the story.

So one of the things that Jack and Joe did is simplify the stories. Right? Because, you know, the challenge for the global investors is they don’t use Alibaba. They don’t know Alibaba. Like, what is Taobao, Tmall, all this thing is. Right? But, you know, the story was positioned very simply. It’s the China consumer play, and they are the eBay plus Amazon plus PayPal of China. You know, the one of the biggest thing that a lot of the founders makes or CEOs makes, they use a lot of jargon.

If it takes a portfolio manager more than thirty seconds to understand the story, they will never gonna work do work on that. They gotta keep it story simple so that it gets you interested, and then they will do the work.

Yeah. Then you understand. Then you can do the work. Right? Nobody does the work based on that narrative. You know, I don’t think anybody bought the stock because it’s a China consumer player and things like that. But it got people interested to do the work. So I think the simplifying story is important.

what would you say? The challenge in China is, again, what drive valuation? Consistency and predictability. So right now, there is no predictability on regulations. So it’s hard to invest. This is why I think that regulations could be very challenging, primarily when there is no predictability. So I think it’s hard, you know, till we have more visibility what’s gonna happen with the regulations, what’s gonna happen, and that those things will be more of a consistent pattern. Moving to Snap.

He has deep understanding about his customers. Very, very deep understanding of his customers. And that makes him so special. And then the second and third thing, I think this is actually true for every great CEOs. One, they understand their customers. Number two, they have deep conviction. Because the reality is return is a function of, quote unquote, risk. That everybody thinks it’s risky, but you don’t because you have the conviction. And that’s why you can underwrite that. And the most people don’t do it makes you special.

So Evan from a day one had a very deep conviction on his product and, you know, like the Lenses acquisitions that we acquired, you know, Evan looked at the product and he knew exactly how people are gonna use the product. We finance guys, I’m like, why are we paying so much money for this deal? But he had a very good hack or with maps or with stories. Everybody was like, why even creating stories? Isn’t that the like anti you are trying to do? But he had a deep understanding how his consumers, how his customers use the product and he was able to build a product and he has a very deep conviction on it.

And the other third thing I think what makes great founder is your pain tolerance. It’s true for founders. It’s true for investors. It’s true for a lot of people because the reality is, you know, rarely gonna be right overnight. Right? When you take and make a bet primarily when you’re running a business, you know, it takes time your thesis to play out. And during that time, you take a lot of pain because everybody talks negative about you. You’re you’re doing wrong things. But he’s a wonderful human being, you know, he’s a great friend, and I’m very grateful that he took a chance on me.

One of the things I think we grew too fast too quickly. I think, you know, if you look at in January 1, we did zero revenue 2015. Q four of two thousand eighteen, so four years later, our annualized revenue was 1,600,000,000. Today, Snap will do what? 5,000,000,000 plus minus revenue. So in ’14, they had almost no revenue. So in ten years, their revenue went from zero to 5,000,000,000 plus. So the challenge is and this is actually a good lesson for all the CEOs. And again, I think I I don’t think I wish or wish, but that it created a lot of stress.

But the thing is that when you grow really fast, couple of things happen. Expectation goes out of hand. Everybody always expect you to grow that well. Second is it’s like when you run really fast, at some point, you know, it it start hurting. Right? So when you grow a little bit more deliberately, you can control those pains.

I think the decision where I probably contributed is hiring sales team and ramping and good people and ramping them quickly and empowering our sales team to go take those meetings that everybody who wanted to meet Snap and educate them. So that was the first part. Right? Educate people because most people didn’t even know how Snap works. They saw their children use Snap. They didn’t know how Snap works, you know. Just educating the world because when you’re not telling your story, somebody else is telling your story.

And so there’s a lot of misinformation. There’s a lot of misunderstanding. So we had to build a team who went and educate the world. So that was the first two years. And that probably took us from zero to 400. 2014, I think we did two or 3,000,000. 2015, we did 50. And 2016, we did 400,000,000 annualized revenue. And from there, we need to automate the business. And this is where we need to build self-service advertising platform. This is when it to build attribution. This is when and a lot of the things that’s still happening.

That’s just, you know, it takes time. So the one of the challenge was, you know, hindsight because I went from zero to fifty, fifty to 400, it was so intoxicating that if I were to go back, I would do the exact same thing but probably start investing in bringing small businesses, building Doctor business much earlier, you know, so that it would smooth out the growth rate.

I would have done it a little bit earlier.

Yeah. Or you ignore things because you feel like things are working. Because the reality is when you’re growing that fast, you’re driving that expectation higher. So you constantly have to think about it that how I’m going to maintain that growth. So one of the thing that zero to 400, 400 to a billion, we should have planned that in 2015 to get to 400 to a billion, a billion to 3,000,000,000. Right? So that’s something, you know, but you’re growing so fast and you’re distracted, you know, you didn’t get time to plan all these things.

Right? Do you think that’s fairly valued today? I think Evan is one of a generation founder and the user their mass is incredible. So I think people continues to misunderstand him. What do they misunderstand about him? There’s a very few people who know how to build great product, and he’s one of them. And he has the scale to that sometimes when you build a great product, you don’t have that installed base. He has the installed base. So I think with Evan, you’re getting that installed base and a track record of building great product.

So that’s why I think it’s a mistake to underestimate Evan. How did the 200,000,000 Alibaba investment come to be? So Joe was a big fan of Alibaba from day one. Of Snap. Oh, so Snap. Sorry. Big fan of Snap from day one. And when Evan offered me the job, you know, I went to Joe for his advice that, hey, should I take that job? He said, absolutely, you should take that job. Evan is a great founder. And he said something that is very humbling. He said, listen, if the company works, you’re gonna look great.

If it doesn’t work, all the blame will go to Evan because it’s his company. So what what are you upset or worried about? I’m like, okay. When you say it that way

that. But stop with him.

So once I invest joined, you know, I told him that I joined. He said, listen. We would love to invest.

It’s relatively easy. It’s because number one, you know, we had developed relationship with public market investors in advance. They were in our cap table. So Fidelity invested, Tiro invested. So they knew the story. They knew our numbers. They saw the ramping. So it’s not like they were not familiar with that. So that’s one thing. And second thing with Snap, you know, while many of them didn’t use the product, their children used it. 100% of the children used it. You know, the true story is when the day I got the call to go meet Evan for the job, I was not a Snap user.

True story. I was 35, I think, at that time. How was the interview? It was great. He’s a incredibly talented guy. We went for a walk. My only struggling was he walks really fast and I’m a little heavier and walks slowly, so I had to keep up with him.

Somebody who’s you know? That was that was the toughest part. But, yeah, Evan is an people who knows him knows that he’s he’s one of the nicest person in the world.

I’m a big believer that market likes to make fool of fool of the greatest number of people. So everything that everybody believes, take account at least question that belief. And that’s the right thing to do. You know, sometimes, you know, people are right, but in general, market likes to make fool of the greatest number of people.

I think it’s a mistake. I think public market investors should not go deep into private investment. I’ve been in the business for now twenty four years. Early days, nobody would do it. And then, like in 2007, the first deal I saw crossover was MercadoLibre IPO. Believe it or not, I I was the IPO analyst. I took MercadoLibre public. No way. I didn’t know that.

Great dude. $800,000,000 IPO that says $90,000,000,000 market cap. And phenomenal CEO. And another example, great business built in public market. That was in 2007, August 2007. And General Atlantic, which is not public market, but Tiger came in. They wrote they were anchor investors on the deal. They wrote a check and I think they signed a lockup. And that’s totally fine. I think that’s a really really smart thing to do. Encourage other public market investors should do it. If I had the means, I would do it.

I think that’s a good strategy because, know, you are really leveraging your core skill. Then, you know, people start going into the companies that would go public within twelve months. Somewhat fine because you can analyze the business. But then all these guys start doing series a, series b, series c. And I think this is why it’s bad because everybody has their core strength. Somebody who’s good at real estate investment is not good at technology investment. Somebody who’s good at technology investment is not very good at investing in industrial or biotech.

Somebody who is seed investors are not the greatest public market investors. And so that’s I think thinking that you are a great public market investor makes you a good private market investors is is wrong thing. Second is the model is different because if you think about what makes a great private investment and investor is access, judgment, and conviction. You need to have a lot of access to a lot of deals. Public market investors don’t have time for that. So then you’re not managing your own book.

Right? So then you’re hiring people who doesn’t may be good, may not be good. So that’s I just don’t think that works either. To me, if you’re truly a good public market investors, you know, guys like Steve Quinn or Ken Griffin or those guys, you know, they do private as a hobby, but they don’t build a private business.

Focus matters.

The one biggest lesson I learned in life from some of my biggest mistakes is lack of focus. What was your biggest mistake? Gosh. There were times I overestimated myself, and I had probably the same situation that sometimes things look good in a context, and you have to think about that same context not gonna look is consist constant. Right? Context is changing all the time. So when you have to make a decision, and this is going back to the capex decisions, you understand the decision at this context, it makes sense.

But you also have to think about the two years, three years, five years, ten years later, that context will change. So when you’re making a long term investment decision, you gotta be and that and you know that you’re gonna get stuck with that decision. You have to be very comfortable that you are okay with that as the context change at different variables. What have you changed your mind on in the last twelve months? I’m a big believer in AI and really looking at each businesses, you know, are they beneficial of AI or they’re they will be challenged by AI.

And that’s probably one way of changing. And then I’m also the companies that will be beneficial of AI, I also need to trying to get this context window right. Right? Because some companies might be beneficiaries of AI, but that may not be in two years, in four years. So you have to think about those businesses differently than the companies that will be benefited immediately. So you gotta get that context window right. I think AI is as important as Internet. What question are you not asked that you should be asked more?

So in my business, you know, everybody focus on return, but nobody really ask about after tax return. This is going back, you know, I look at so many funds, you know, that, you know, they’re just constantly in and out and, you know, after tax return is terrible. It blows my mind if I do a 100 meetings, probably one or two meetings I get where clients ask you about what’s your after tax return.

Thank you. I appreciate it.