Guest: Phil Haslett is a founder and Chief Revenue Officer of EquityZen, a platform for secondary transactions in private, pre-IPO companies. He helped found the platform in 2013 and they have since completed over 5,000 transactions in over 100 private issuers. Prior to EquityZen, Phil was a Vice President at Pomelo Capital, a NYC-based hedge fund, focusing on capital structure arbitrage, and before that he started out at Barclays Capital in their Proprietary Trading group.
Date Recorded: 4/1/19 | Run-Time: 59:20
Summary: Meb and Phil begin the episode with a chat of the IPO environment so far in 2019, and the recent Lyft IPO. Phil then gets into the cyclicality of IPOs in general, and that IPOs tend to be most successful when the market is not so volatile.
Meb asks Phil about the IPO process. Phil starts with banking and how the banking relationship works, and what some companies have done to avoid the high costs of going through the IPO process. Google was the first to give an alternative approach to the IPO process a shot, and Spotify found huge success through a direct listing.
Next, Phil gets into the changing characteristics of what firms look like in today’s IPO cycle, vs. the past. He discusses that the value of which companies go public is far higher than it used to be, and they are going public much later. This stems from companies raising large amounts of capital as private companies. Eventually, though, they’ll need to go public for a couple of reasons. 1) venture capital investors that invested early, may run out of patience waiting for an exit, 2) the need to address liquidity for other shareholders 3) recognition, and 4) be able to issue stock and raise capital for potential future M&A.
The conversation then shifts back to Lyft, and their S-1 filing. Phil mentions some interesting points he and his team found in the S-1. He discusses Lyft’s $300 million R&D spend, signaling the likelihood it is making major investments, possibly in autonomous driving. They also found that the company has presented itself as a transportation as a service (TaaS) company.
Meb brings up the topic of dilution, and why it is so important in understanding venture capital investing, and Phil walks through the fundamentals of capital raising, and shareholder dilution, and what it really means to early investors. Next, employee wealth, and how to think about managing it is addressed. Phil shares some advice of being diversified to offset the concentration that comes with both owning shares and earning a paycheck from the same company. As the conversation begins to wind down, Phil covers his take on the future of the private investment space.
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Links from the Episode:
- 0:50 – Welcome back to our guest Phil Haslett
- 1:34 – Episode #122: Phil Haslett, “It’s a Place to Connect Interested Buyers and Interested Sellers…in Late-Stage, Pre-IPO Tech Shares”
- 1:44 – Discussing the Lyft IPO
- 3:03 – Exploring the IPO process
- 6:43 – How companies work with banks to make the IPO happen
- 10:30 – An overview of what the companies going public look like today
- 15:31 – Will this next round of IPO’s change how long companies stay private
- 18:28 – Analysis of Lyft’s S1
- 18:34 – Lyft: The Path to a $25B IPO
- 18:59 – Lyft Form S-1 Review
- 23:21 – The concept of dilution when investing in early stage private venture
- 29:15 – The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success (Thorndike)
- 32:36 – How private company investors find liquidity
- 37:01 – Thinking about owning private stock, and buffering concentration risk
- 40:12 – The IPO Millionaires Are Coming!
- 42:35 – Episode #148: Paul Lountzis, “The Qualitative Characteristics Are Becoming Significantly More Meaningful And More Important In Company Analysis”
- 43:13 – How should investors navigate alternative assets
- 49:53 – The future of the private investment space
- 53:27 – Future of EquityZen
- 55:15 – Other asset classes EquityZen is thinking about
- 56:42 – Predictions for 2019
- 58:16 – Connecting with Phil – EquityZen, Knowledge Center
Transcript of Episode 149:
Welcome Message: Welcome to “The Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information visit cambriainvestments.com.
Meb: Welcome podcast listeners we got a great show for you today. We’re recording this on April 1st April Fool’s Day. No jokes for you guys today. I’m sitting back in the office excited because I’ll be travelling to Minneapolis, this weekend. My alma mater finally made the final four after some grave disappointment last year. So I’m doing a brief stop in Niagara, in Buffalo. If anyone’s listening come say hello for a couple of talks and then hitting up Minneapolis. If we’ve got any Minneapolis followers, let me know. Would love to say hey while in town for a few days, hopefully four days because that means they make the finals but yeah, come say hello.
All right, back to our show. We’re having our guest back after our last conversation last fall, episode 122. You should check it out to listen to this as a series. He’s the co-founder, Chief Revenue Officer of EquityZen. Welcome back to the show Phil Haslett.
Phil: Thanks for having me back.
Meb: So Phil, we got to start I don’t know where anywhere else we’ll start but we got to start with the Lyft IPO. You know, this was a big media topic for the past few weeks. It’s been a big speculation for the past few quarters and it finally came to market. Again the timeliness I’ll mention it went public when I was in New York City. Today is the first. By the time this airs this week it could be trading anywhere between $10 and $200 but it’s right around the issue price. Talk to me about it. What’s going on. This is a pretty big event in private investing as well as tech land.
Phil: Yeah, probably the first real big iconic IPO of 2019, within the tech space. You know, they raised over $2 billion, $30 billion valuation kind of like the culmination of a lot of what I think has happened in private markets. It’s going to I’m guessing lead to the door opening for another half dozen companies that are very large in size and both their market cap and kind of like how they’re raising money and spending it. So you know, I wouldn’t be surprised to see Uber come out next. You know, I think there’s a Pinterest S-1 filed which is like the document they put out there before they do their actual initial public offering. So I think it’s gonna be like a big cascade of a lot of tech IPOs coming through.
Med: Well, it feels like these IPO windows as bankers would like to say are pretty cyclical and you look at over time that these tend to be maybe grouping. I don’t know if that’s just an old maiden’s tale or that that’s actually quite a bit of reality. Talk to us a little bit about IPO process, in general. I think a lot of investors get most our information may be about all this through the media and so it may just be a little confusing. But talk to us about first we could talk about from the maybe the company’s standpoint and then also from the investor standpoint.
Phil: So you want to Phil Haslett’s IPO guide for dummies?
Phil: Great. So I think first off you’re right the way that the IPOs kind of get clustered together is not a myth or anything. It’s really has to do with the fact that IPOs tend to be the most successful when the market is not volatile. And Q1 was definitely a big rebound versus Q4 in 2018 with a big rebound for Nasdaq, S&P, Dow Jones kind of all of them climbing back up and like the low teams as far as percentage returns. So if you kind of were to draw a graph of when IPOs are most popular they would be inversely correlated with volatility across the stock market. And so I kind of like to think about a bunch of boats leaving the harbour when the water’s really flat all the boats are gonna go out the same time. When the water’s really choppy all the boats are gonna stay in. So that’s my cheesy analogy of the day.
But to kind of cover the whole IPO process if we kind of work at what the actual event is and work with maybe a little bit backwards, the actual event of the IPO is the first time that a company stock has traded publicly on an exchange, where your average Joe investor can buy five shares of stock through their Charles Schwab account into their portfolio. It’s usually kind of a badge of honour for a CEO or a founder for their company to finally go public. Meaning that you know, it kind of shows that they’re all grown up you know. They’ve moved out of mom and dad’s basement. And they’re a mature company with real books and records, financial statements, a full board, an audit committee kind of a whole kit and caboodle.
The way that you get there takes quite a bit of work. So if we kind of started the beginning of the IPO process, it probably starts like two years before the company actually lists and starts trading. The company starts to get all its books in order, it probably starts doing investment committee kind of walkthroughs because they’re gonna have to get used to quarterly earnings reports. They’re gonna have to get used to Wall Street analysts kind of grilling them about why did you do this and not that? Why’d you hire this person and not that? Why haven’t you tried for Lyft? Why haven’t you tried teleportation yet? You know, like they’re gonna get a lot of these crazy questions. So you kind of start by getting all your ducks in a row maybe two years before you start hiring you know, your formal CFO that’s gone through this thing before. You start talking to banks, you can start saying, “Hey, I wanna go public. I wanna finally get this thing out in the open. Help me get it ready.”
And the next kind of 12-18 months you know, leading up to the IPO are really gonna be a lot of focus on talking to the banks, talking to potential investors that are gonna participate in your IPO. And so like the big distinction I think that people don’t really connect is like the initial public offering the IPO is when Lyft, as a company, for example, issues a bunch of new shares like $2 billion worth of new shares directly to mostly institutional investors. And then what happens the day of the IPO later is that the stock that’s now in the hands of those institutional traders actually starts trading in you know, Charles Schwab and TD Ameritrade type accounts.
So they’re kind of like two different events that happen like within two hours of each other. One is when you issue a bunch of new shares to the [inaudible 00:06:30] prices and the Wellingtons, and the sovereign wealth funds of the world. And then like a few hours later you actually have the stock start trading usually like a bit of a premium to what that IPO price was. So that’s a kind of a bit of it in a nutshell on how IPOs work.
Meb: And so you know, there was a brief period where some of the companies and some of the banks you know, were trying to disrupt the IPO process. I mean, remember when Google went public there’s been a couple of traditional models that oddly enough don’t seem to have stuck when it comes to the way of a companies’ IPOs. Can you talk a little bit about that, how companies worked with the bankers to actually make the process happen.
Phil: To kind of think about the process [inaudible 00:07:09] banks the reason why companies wanted to disrupt it and avoid it was because going public is super expensive. Not only just from the amount of paper you have to do to file and register but even when you think about what goes on with the banks, like the typical rate that you pay to banks can be anywhere between 5% and 7% of what you raise. So imagine like in Lyft, case you know, they raised over $2 billion that’s like something like 120 million bucks that could be going out of their pocket. Which is a lot of money you know. That’s a lot of software engineers even in Silicon Valley. So it’s something that a couple of companies have tried to think about doing differently. Where they said, “Well, it’s 2019 how can I get my shares in the hands of a bunch of investors that wanna believe in my company, invest in my company without having to use Goldman Sachs or without having to use Morgan Stanley and paying them a hundred million bucks.”
And so kind of the first company to give it a shot was Google, I think in 2003 or 2004. Where they basically kind of ran this auction process and kind of let investors submit what they were willing to pay for Google stock in the amount and size. And they kind of did this reverse Dutch auction where they took all the shares that people reserved and they took the lowest price that would clear everyone and it didn’t really go that well. I’m not really sure why people say it didn’t go well other than the fact that the stock didn’t like kind of react really positively after it went public but I think they did save a ton of money. So that was kind of like the first version. Then if you fast forward like nobody did anything too revolutionary for like 15 years until Spotify came around last year and kind of asked the same question. Which said, “Well, if we know a bunch of people know our product and we think they’re gonna buy our shares anyways why do we need to have a bank get all those people together for us?” And the bank’s you know, of course, defended themselves, “Well, that’s a process you know, you got to make sure that you make all the institutional investors happy. You know, I’ve been drinking martinis with you know, John Doe over a Salomon Smith Barney since we were at Harvard playing lacrosse together.”
And then Spotify said, “Well, no everyone knows our product and also we’ve raised a bunch of money already in the private markets. We actually don’t need more it’s just this is a chance to kind of have a publicly traded version of our stock.” So Spotify did what was called a direct listing which was like very new at the time. In fact, I think like the New York Stock Exchange had to get SEC approval even to run the thing. And they did it through 2018. They basically said, “Okay, starting at this point in time if you have shares of Spotify as an employee or an investor or whatnot it’s basically starting at this point you now have shares that can be publicly traded. You can literally click a button. You can sell them through your Robinhood account, you can buy more if you want. And we’ll use the banks a little bit to help us determine what the fair price is. Rather than that that’s kind of what we’re doing.”
And so New York Stock Exchange like kind of helped embrace it. It was a huge success I think the price of the stock has been pretty stable if not slightly high versus what they kinda went out at over a year ago. And I think that’s the kind of newer version that we might see happen over the next call it six or 12 months which a couple of companies have been considering. I think the rumour was that Airbnb might consider it and Slack might consider it and those are obviously like two pretty big marquee software companies in the pre IPO space.
Meb: It’s funny to me because I’ve always scratched my head and looking at this space as well as, you know, the traditional single-family home real estate fee space. And it’s like two of the largest but still most inefficient fee pots of capital with massive fees that seem just so ripe for disruption. It’s crazy to me that they’re both…it hasn’t gone away yet but who knows maybe we’re in the early days of seeing this happen.
Well, one more just kind of broad question and we’ll dig into some of the Lyft S-1 stuff. You know, the cycle was changed it feels like a bit over the past decade where you had a lot of this talk a company staying private for longer, the characteristics. Maybe talk to us a little bit about the characteristics of the firms you know, in this particular cycle how they may look different than firms that would have gone public you know, in the late ’90s. As far as age, profitability, some of the reasons it’s changed all those ideas there.
Phil: Yes, so I’ll caveat this first with that I started my professional career in 2009, so I actually have [inaudible 00:11:12]. It doesn’t even look like a cycle to me at this point. It just looks like an upward arrow. Which I think will actually be kind of relevant as we talk about this private-public market where like a lot of these employees at Lyft, and Uber and these investors and all these companies like actually haven’t seen a down market. Which is kind of crazy to me but I’ll revisit that in a second. I think the big fundamental change that’s happened over the last 15 years is that like the value at which companies go public now is far, far higher and the age of those companies is far much older than they used to be. So like the best example is I think Amazon, in 19 you know, the mid-90s went publicly like a four hundred million dollar valuation with $20 million in revenue and like three investors. It was Bezos’s parents, like that’s two of them then there was one venture capital investor and I think that was it.
And you know, you were an investor on day one after their initial public offering, you got to buy into shares and now it’s a gazillion dollar business. And you got to…like a lot of the returns were captured in the public markets right? Not the private ones. If you fast-forward today you kind of have the opposite where there’s so much capital sloshing around for these companies to take from private investors. Mainly private equity funds, venture capital firms, family offices, sovereign wealth fund huge like money managers, etc., that the companies are going private way later.
And what I think is kind of not getting captured well in the media especially around something like Lyft on Friday is that they keep talking about how, oh, you know, we’ve never seen a company go public that has lost $800 million dollars you know, before. And my answer was well, Lyft’s doing $2 billion a year in revenue and it’s growing that revenue 105% a year. There are only eight companies listed on the stock exchanges in the U.S. with that kind of profile, eight.” And so all the media likes to talk about, “Oh, my, gosh, this company it’s burning so much cash.” It’s like I don’t think they’re aware of like what’s gonna happen next like, Lyft’s numbers look like peanuts compared to some other companies that are gonna go public as far as losses.
The age of these companies and the capital they’ve been able to raise has basically meant that they’re gonna build…they’re gonna spend tons of money upfront on building this monstrous competitive mode. Whether it’s a network you know, whether it’s proprietary software, whether it’s vendor lock and they’re gonna build this moat and it’s gonna cost a ton of money. And the reason why we’ve never seen these levels of losses before is because no one’s ever been able to raise as much capital while they’re private. Like no one had the money to spend before they were public to like have a billion dollars of losses. I mean, Lyft burned $7 billion before they went public. Like there’s a lot of money sloshing around.
And so I think that’s the biggest change you know, if you were like a retail investor starting in let’s just say 1990 and now it’s you know, 30 years later you before were able to kind of buy single stocks or buy into an ETF that had single stocks that had very high-risk, high-reward technology companies in them, in those ETFs or in your portfolio and now when those companies go public they are enormous. And so all of that data that you’ve been a part of getting return on those kinds of riskier investments is basically gone because now you’re gonna get to Lyft when it’s a 30 billion dollar business.
So I think that’s inherently the biggest thing that’s changed. And the reason why I mentioned that I haven’t seen like a [inaudible 00:14:21] my professional career is because, maybe I say a lot of these things about how you know, Lyft, is actually doing great as a company even though it’s losing a hundred million dollars a year. I could see how somebody that lives through the .com bubble and the financial crisis looking at me and thinking I’m a moron, because you know, there’s a lot of telltale signs they think they’re seeing a bubble happening all over again. So that’s kind of why I have a bit of a disclaimer there that you know, maybe I’m a little more optimistic than others.
Meb: It’s funny because if you look back to the ’90s and it was such a fun time, I love bubbles. I was in college. I was at university but I also remember general complexion of the companies that were going public at the time, there was that yes, they had losses but in their case, they also didn’t really have any revenue.
Phil: Right, they had eyeballs right?
Meb: Which they…
Phil: They had like you know,
Meb: I remember being one of my favourite trading techniques at time to balance out all my idiotic long biotechs was too short all the lockups. Because and we’ll get to that in a minute on some of the workings of how the IPO process works for the investor. But all these guys they were just burning an enormous amount of cash that didn’t have any revenues as well it was like shooting fish in a barrel.
Do you think that’s changed now that Lyft has gone public and you’re probably gonna see this next group come public? Has it changed the way that companies are thinking about staying private for longer? Or do you think it’s just gonna continue the way that it has been where a lot of these early stage companies say, “Screw it there’s too many drawbacks of being public I’m happy to just stay private until later?” Or are they gonna start to get some of the animal spirits and salivate and say, “Okay, wait, this actually looks like pretty cool situation.” Has it changed at all or is it just sort of more the same of what’s the world’s coming to look like recently?
Phil: Well, you know, to put my short-term reaction knee-jerk reaction hat on, on Friday I would have said, “Yeah, it’s changed for the better all these companies are gonna go public. Think about how successful Lyft was.” And then this morning when Lyft was down 10% I feel like maybe things changed a little bit. So what I think will happen is that companies that have raised all this capital in the private markets probably want to stay private for longer and longer. Which is easier, it has less net press they have to deal with, it’s cheaper because they don’t have to go through nearly as many filings.
But there’s two things that are gonna hold them back from doing that forever. One is that they have venture capital investors that are gonna run out of patience at some point right? If you think about DocuSign that went public last year. DocuSign was private for like 13 or 14 years. Which means that probably 10 or 11 years before their IPO some venture capital investor wrote them like a Series A funding round check of you know, a few million bucks. So imagine if you’re that investor that’s got its own limited partners it has to report to saying, “Yeah, we got this huge home run in the portfolio, really excited, the management’s doing a great job it’s growing, it’s expanding.” And they’re like, “Yeah, but dude you’ve been telling us that story for nine years like where are the results like show me the results.” So that’s the one part that’s gonna be hard so that’s kind of reason one why companies can’t stay private forever in my opinion.
Two is that you have to address liquidity for your other shareholders. So there is a growing an active pre-IPO secondary market which is what EquityZen does. And I think you really need to address that piece if you’re gonna wanna stay private for a really long time. And so I think the combination of those two things is probably gonna continue keeping companies to go public at some point.
I would say like the third and fourth reasons to do it are more publicity for your brand right? So like Lyft can only advertise so much or give away so many free rides so getting some additional prominence by being up on the exchange floor.
And then the fourth one is having a currency for acquisitions in the future. So now when Lyft goes and buys I don’t know some autonomous vehicle software company they can now issue you know, they can use their own Lyft stock that’s publicly traded as currency for doing that as well.
So I think we’re gonna continue to see companies coming through but it’s gonna be really important for them to kind of as you said kind of like control this narrative. And like really describe why they look so different than a company might have looked 10 years ago which is like why are you losing $700 million? And the answer is well because we’re also growing top-line 100% a year as a giant company. It’s like, it’s kind of just this new normal to get used to.
Meb: Let’s talk a little bit more about Lyft and then we’ll hop over to some other topics. You know, you guys put out a lot of great material around the IPO whether it was kind of infographics or the various funding rounds that I think was instructive. And there was a couple of things that I wanna use as jumping off points. The first maybe talk to us a little bit about the S-1 and just to the listeners you mentioned already what that doc is. But is there anything in that document that, you know, when they put it out that you guys put out a great review that was man 15 pages probably. Is there anything that stuck out as particularly interesting that you thought was something that was either a surprise or thoughtful or anyway just stuck out in your mind?
Phil: For one like I’m a pretty big like securities and like stock like geek. So reading through an S-1 is super exciting because you know, we can hypothesise on how these companies are performing and where they’re spending their money and everything. But the S-1 is the first time where you get basically 300 pages of like a history lesson of what Lyft has done and what it plans to do in the future and that kinda goes for any other company. And so I get a big kick out of reading them you know. We managed to condense it down to 15 pages. I’m sure the first draft was probably 30 pages. And when we really like boiled it down I think one of the most interesting things for me is that Lyft spent $300 million on research and development in 2018 up from like I think 50 or 60 million dollars two years before that. So I say that because people kind of talk about, “Oh, Lyft this start-up worth $30 billion,” like no, this is a tech company that’s spent $300 million on research and development. Likely a lot going towards autonomous vehicles and driving to probably try to get kind of a first mover advantage in that space.
I think that’s probably one of the most interesting parts that came out in the S-1. And then I would say the second part of the S-1 that was a bit more of like a recurring theme was Lyft has positioned itself as a transportation as a service company right? TaaS, transportation as a service company where they want to handle end-to-end transportation for any individual human being on the planet. Which means they want you, Meb, to get on a scooter somewhere go from your house to another location. Hop into a car with a couple of other people that’s driven by a robot eventually, get to another destination and then from that and hop on another scooter and get to work.
They wanna handle like that whole end-to-end piece and they’re focused exclusively on the transportation piece. And I say that because they’re trying to create some space away from what Uber’s kind of description is gonna be of themselves when they go public and who knows maybe a month or two. Uber is gonna talk about how they are a global logistics and transportation company right? How they are handling moving any item of any size from any point A to any point B.
And so I think those are the kind of two things that I really found interesting about an S-1 is how much money Lyft is spending on kind of the future which is why they’re probably burning so much money? And also how they’re really like how they found a really kind of I think nice clean way to isolate how they look as a company versus Uber. Because actually when you think about it like Lyft is you know, it’s a start-up, you know, it’s high-growth. But it’s also like it’s probably one of the most interesting pure-play transportation investments you could have out of public companies, right? Could you build a portfolio of General Motors and other car companies? Sure, but you’re gonna have to pay for a lot of inventory that’s built on there like a very capital-intensive business. But if you wanna kind of make an investment on how transportation might work five, 10, 15 years from now, Lyft is kind of a is…it is a really interesting way to get that kind of exposure or to express that kind of view as an investor.
Meb: You know, it’s funny to look back because LA is really the perfect test market for something like a Lyft. Because public transportation is so terrible here but everyone has to get around. It’s such a huge city. And it’s just funny to look back I mean, there was a local app called Taxi Magic. It was really kind of one of the first variations because it used to cost $150 across the city. And so you would often hear people if they were gonna go to a dinner downtown or to Silver Lake or somewhere that would take an hour to get to this LA traffic. Half the time people say, “Look I’m just gonna drive and get a hotel room.” You know, and so that was probably one of the origins of HotelTonight now Airbnb as well. And so this massive disruption to taxi magic happened and then I guess you know, the Ubers and Lyfts came along. And I remember taking my first Lyft, and this kid picked me up in a just dumpiest station wagon and he drove us to pick up some beer and then just go. Yeah, I mean, it was just like the most ridiculous I’m like this business you know, it…that was back when everyone’s assumed everyone was gonna get murdered in their Uber.
And so I’m rambling a bit but you know, it’s funny to walk forward and see it now as this major corporation where they’re doing scooters. Which probably for a lot of people seemed like a dumb idea at the time too but now they’re all over. It’ll be really fun to watch kind of evolve over the next few years. One of the things that I think it’s really instructive that a lot of investors don’t understand well is the concept of dilution. And so Lyft has gone through I don’t know how many series of the alphabet. They were probably halfway through the alphabet before they went public. And so listeners if you’re not familiar with venture capital you know, the way that private investing works, is every round has a different letter and they keep going. And you know, we saw some reporting recently where on the Carl Icahn, I think he got in around a two billion dollar valuation. And then and this was originally there’s Lyft’s gonna go public at $20 billion and everyone’s like, “Oh, my god, Carl, made 10 times his money,” but lost in that was this topic of dilution. Could you tell…could you like describe that a little bit for the audience because I feel like it’s not a well-understood topic for a lot of people.
Phil: Totally. So I think you know, as a bit of background as kind of doing the venture capital for dummies piece, you know, a company will go through multiple rounds of funding over their life cycle before they become a public company hopefully. And you know, the first investments are usually smaller in size and give you a certain percentage of the company. And the ones that are later in the state are usually much larger checks for smaller percentage pieces of the company. But the way the kind of dilution works is that even when you talk about when Lyft went public you know, it raised to two and a half billion dollars of cash and in exchange had to give up you know, a meaningful piece of their company. What that means is that as companies grow in valuation your percentage ownership of the company is gonna get diluted over time. So if we give an example let’s just say Meb, you and I start a company together and we each get 50 shares out of a hundred total shares. So you own half of it and I own half of it.
So when we go and we raise some money from another investor and they give us cash in exchange for let’s just say a 20% ownership stake what actually is gonna happen is that we’re gonna issue that investor 25 new shares. And the reason why it’s 25 new shares is that now that investor is 25 new shares over the 125 total shares is a 20% ownership stake. So you and I used to have 50% of this business but now each only have 40% and that’s basically because of the diluted effects of that new investor coming in.
So think about that happening not just once but as you mentioned through the first nine letters of the alphabet series A, B, C, D, E, F, G, H, I which is…I just pulled it up is what Lyft had. And think about some really large rounds where instead of just giving up 10% or 15% of the business you might have given up 25% or 30% of the business. As you do that over time your ownership stake [inaudible 00:25:48] can get drastically reduced.
I think like the best example of this was in the Box IPO where Aaron Levie, was like a sole founder maybe a few years ago. Everyone was really excited and said you know, all these journals already know like, “Oh, my, gosh, Box is gonna be worth billions of dollars. Let’s do a piece on how rich Aaron Levie is.” And they looked at it and they said, “Well, yeah, he’s pretty wealthy but he only owns like 4.8% of his business.” And everyone said like, “Well, how is that possible what did he…was he just you know, handing out shares to people just for fun?” And the answer is no like you own a hundred percent of the business, you give away 20% of it a bunch of times. You can be left with a meaningfully smaller piece than you started with. And we’ve actually kind of seen that with Lyft as well, you know, the two co-founders own… I don’t have it in front of me but I guess probably each own like less than 10% of the business and just because of the way they’ve had to raise capital.
So I think that is also like another consequence or yeah, I guess consequence is the right word of how companies are raising capital now. Is that they are hoping that they’re gonna have a five…you know, founders are hoping they’re gonna have a 5% or 10% stake of a $10 billion business as opposed to going public having a 50% stake of a $400 million or $500 million business. Which is an important calculation to make as a founder of the company you know, like even so I’m you know, the founder of our company like I think about these things a lot. Is it you know, there’s a lot of risk-reward of building out of business that’s gonna become billions of dollars potentially in size. Knowing that the risk-reward you know, the things you got to go through to succeed to get there are really hard. But obviously, the size of the pie is gonna be so huge versus what if we build kind of like a stable, steady, recurring business model that never becomes a bajillion dollar business but we keep a lot of control and ownership. Like those are kind of the types of topics that you have late nights over a couple of scotches with your co-founders to talk about you know, what’s most important to you?
Meb: Well, let’s say…and the example by the way real quick was that we’re thinking about with the Carl Icahn you know where all the media was saying, “Hey, he made like he made like, 10, 20 times his money,” or something. But because the dilution ended up being I don’t know three or five times his money which is still cool, by the way, uncle Carl put $200 million in you know, it’s nothing to shake a stick at but also not totally accurate. And the public market equivalent that we’ve talked you know, to the moon about here is this concept of buybacks and share issuance. Where a lot of investors whether or not they understand that and most of the media doesn’t and politicians in the same category you know, buybacks have the ability to increase your stake if you’re not selling. But the benefit of using that in a screen which we call shareholder yield is that you’re also avoiding companies that are issuing a ton of stock largely in the public markets that’s through options but also through fundraising. And it’s not to say again issuance is neither here nor there. It just changes the equation and people need to be aware of it and a lot of people aren’t.
Phil: That’s actually really interesting thinking about it like coming in both directions right? You’ve got new companies like coming out of the woodwork going public that are like heavily dilutive and kind of continue to dilute it, right? Like Lyft’s probably gonna raise more money in some new offering like six months from now. And the other end of the spectrum you’ve got the incumbents you know, you got a car company here. So you’ve got another company that’s saying like, “Oh, actually instead of us issuing stock to grow we are doing the opposite. We are like kind of retracting into our shell a little bit and we’re gonna go buy out a bunch of the shares to make the…to make your ownership stake go up right?” It’s kind of interesting to like see boats under the spectrum kind of conversion.
Meb: Yeah, and we talk a lot about this. The best book that I think people can read on the topic is “The Outsiders.” And it talks about a lot about the importance of a CEO’s role of public companies in particular. I mean, it’s for all but public companies’ capital allocation. And so what they do with their cash because there’s only five things they can do with it. They can reinvest in the business, they can pay down debt, they can go acquire another company. And then two, ways they return it to shareholders through dividends and buybacks and that’s it. You know, those are the only choices available. And so when you get to a certain size like an Apple, there’s a lot of these companies that just simply can’t invest enough or don’t have enough projects that have a good return of capital.
And the thing that trips people up in public markets is they confuse dividends and buybacks which are essentially the same thing borrowing taxes. Buybacks being a lot more flexible but the thing that almost everyone misses is the opposite side of buybacks which is share issuance. So you could have a company, for example, with a 4% dividend yield but happens to be issuing 5% shares each year to management through options essentially has a negative yield. And so anyway it’s something that I think the whole takeaway is to look at it holistically whether just looking at one lever it doesn’t make a whole lot of sense. But we could go on about that for hours.
Phil: Well, actually one thing about that I think it’s helpful to know is when you ask somebody like, “Oh, how does a market cap get calculated for a company?” Like I found that like even when you talk to very like senior equity analysts at banks and other folks and venture capitalists like no one has like one true north of how this market cap gets calculated. Meaning that like as you kind of said…as alluded to you like a company with a 4% dividend yield and a 5% issuance record in like you know, 2018. It’s very easy to kind of like throw in and issue a couple of shares here and there like left and right throughout the year to executives, for promotion, for warrants, for other things. And so yeah, I think that’s like a really good point to highlight for listeners is that like it’s annoying because it’s happening and it’s actually hard to track you know. A dividend yield is very easy to calculate. Like I feel like the number of shares being issued in a given year is actually kind of hard and the way that they calculate market cap is pretty hard too.
Meb: The simplest way I think investors can visualise it there’s a great piece of software called YCharts. Obviously Bloomberg does it and others but those are not widely available. And if you simply look at a shares outstanding field over time and you can chart it on YCharts it’s pretty cool to visualise because you have these companies. You wanna see, in general, the historical record shows you what companies that are as Charlie Munger says, “You want the cannibals so reducing share count because you own more.” But that also correlates very highly to companies that have cash in the first place to be utilising it so usually, they have to make money or high-quality businesses reducing share count which has been a great place to be. But you can visualise how the shares outstanding changes over time because a lot of different companies some will do it in one big starburst you know, or they buy a bunch and just stop. Others will reduce at X amount every quarter. Yeah, and so it’s a…and others again on the flip side will be issuing.
So it’s one of the reasons people struggle with this metric factor in public markets is because you can’t usually just look up buyback yield or shareholder yield on Yahoo Finance because it’s not as stable as dividend yield. It gets a little confusing people. Anyway, that’s why we wrote a book on the topic but oh, well. All right, so a few more things I wanna dive into one is you know, so the, let’s say an investor who’s been around whether it’s Carl or someone else. Talk about how they eventually get liquidity because most there’s a lock-up period. Am I right?
Phil: Yeah, that’s right. So yeah, you know, we kind of talked a little bit earlier about how the IPO is kind of the issuance of these new shares to investors. Like you know, let’s just assume that it’s like a fidelity mutual fund that buys many shares of the Lyft IPO. So you know, the next question would kind of be like well what happens to all the people that already own shares in Lyft like what are they able to do? And a way to make sure there isn’t absolute and utter chaos on the first day of trading is to require each of the existing shareholders of Lyft. So that’s basically the founders, their early investor anybody that bought shares in the secondary market, their current employees, their ex-employees. That whole group basically has to sign on to agree to not sell their shares in the public market for the first 180 days. That’s kind of a typical standard. I think I’ve seen some that were a little bit longer but almost all are basically 180-day lock-up.
So what that means is that if you are Carl Icahn, and the IPO for Lyft happened on March 29th on Friday, you saw that shares were worth somewhere around 80 bucks, $79 and you got to mark your position there. But rather than saying, “You know, what I think it’s a fair price for Lyft I’m gonna get out of my position.” You can’t you have to sit and hold and wait and pray and keep your fingers crossed until, what is it? September 29th. So that is kind of the six-month lock-up period and what that may lead to and I think maybe you’re kind of alluding to this in like you know, in the late nineties is that in companies where a lot of those shares are locked up and for like Lyft’s example, it’s gonna be like 90% of the shares outstanding? That means that like on September 29th on that’s six months like anniversary you may see like a ton of downward pressure on the stock because of all these people saying, “Oh, thank God, I can take some chips off the table.” And sometimes that can lead to a retreat of stock price right around that extreme going away. And so that’s kind of what we’ve seen.
And then to kind of extrapolate on that one of the things that frustrates me a little bit on how these IPOs happen and how trades happen after it goes public is that everyone’s talking about how Lyft’s stock is performing you know, even just two days in right? So we’re on Monday, April 1st right now and you know, it’s only the second day of trading and people are saying, “Oh, my gosh, it’s down a lot. It’s below its IPO price. What’s going on? Why are people dumping their shares?” The funny thing is this is like a thirty billion dollar company where only 10% of the stock is actually tradable like in anybody’s hands because all the other shares are locked up. So you’ve got a thirty billion dollar company where only $3 billion worth of shares are actually exchanging hands. And all those people who were given it or were issued the shares on Friday morning. So like it’s not an accurate reflection of what people really think about stock because you basically have like an amplifier of stock movements right? Like only one-tenth of the shares are dictating what all 100% of shares are gonna be worth. So that really means that if there’s bad news rather than a hundred percent of the shares exchanging hands in any given point there’s only 10% that are able to do it. You gonna have some really wild swings.
And so what I would imagine is gonna happen is like on Lyft’s first earnings report and this goes with really any tech company that goes through this. Like Lyft’s first earnings report is gonna have a very big piece of news that says how the company’s performing. And then one-tenth of the shares outstanding that are actually able to exchange hands are going to exchange hands based on people’s interpretation of those earnings. And so if the earnings are really good you’re gonna see that thing skyrocket because there’s such a limited quantity of shares to buy. There’s more shares like that you know, just kind of supply-demand economics or dynamics.
And then the opposite’s gonna happen too where if the company has a not-so-great report there are gonna be so many people looking to sell but there’s only so many shares that you can use to sell. And so one of the kind of interesting almost like technical disadvantages I think of how these lock-up periods work is that you’ve got this like six month period of just like what I think is a lot of like embedded in unnecessary volatility and stuff.
Meb: Yeah, I mean, it’s an important topic talking about float and how much I laughed about how, you know, it used to be shooting fish in a barrel but on the flipside one of my…back when I was a discretionary trader a million years ago. One of the biggest trading losses I ever had was shorting a lock-up to where no one sold and all the insiders were long-term investors and then instead of it crashing it ran. So I’ve got a lot of scars from both sides. When do options start getting involved? Can you know, let’s say you’re one of the Lyft founders who has no liquidity. I’m sure they’ve diversified and are totally fine. But I wanna talk a little bit about how investors think about if they own a lot of private stock. Two is once the IPO happens is there anything they do. And any other ways to buffer potential concentration risks all those sorts of topics.
Phil: What I would imagine has happened from you know, early-stage investors and Lyft, for example, like some of their venture capital investors, etc. is that over periods of time they probably sought to sell some of their shares before the company’s even gone public for like a pre-IPO secondary transaction. Where let’s some series A investor that put in cash into Lyft you know, eight years ago has found buyer and purchaser off their shares is being able to take some chips off the table. So that’s kind of like one thing that I would expect to see.
And then a post-lock-up I would expect that a lot of these investors are going to sell their shares kind of systematically into the market. You know, not all in one fell swoop but over some period of time pay some fees to do that, return a lot of the capital to their ending limited partners, right? So each venture capital firm. If we kind of think of the VC industry each venture capital firm is basically funded by a bunch of limited partners. So the investor has its own investors and has an obligation over time to return money to those limited partners. So you know, if you’re in Lyft and your let’s just say Andreessen Horowitz that’s making something like $1.2 billion off of their $60 million investment in Lyft. You’re gonna return that money you know, six-12 months from now. You’re gonna return to those limited partners. And you’re probably gonna time it where you’re gonna return that money just at the same time you’re gonna let them know that you’re raising a new fund, right? A new venture capital fund. You know, Andreessen is gonna go, “Here’s your 1.2 billion. We’re gonna keep our performance. Also I did wanna let you know, we have to be back in the market, we see some really interesting opportunities and would love to manage your money again.”
So that’s what I think is gonna happen on kind of the institutional side. On the founder’s side and on the early employee’s side you know, they still are gonna have to wait until that six months is up. You know, what I would advocate for you know, disclaimer that this isn’t a financial advice and you should talk to your professional RIA, etc. Is if you’re a Lyft employee and you’re holding a bunch of stock and let’s just say six months later the stocks perform really well and Lyft’s at 100 or 120 or 140 you may be kind of tempted to say, “You know, what I’m gonna kind of let this ride for a little bit.” I would suggest you don’t because if you’re still working there you basically have your net worth and your source of income tied to the same place. Which is probably both exciting but also financially not the most prudent thing to do.
So you know, I’m a normal advocate of you know, particularly younger people as well kind of getting their money into equities in a very diversified way that cost them very little money. Holding a bunch of shares of Lyft, and working at Lyft is a very concentrated way of having equity exposure. So that would be my advice to anybody if they would asked me.
Meb: Yeah, and on top of that you have obviously the considerations of taxes. And you know, there’s a lot of ruminations at this point. The cycle about all of the spill-over wealth effects you may see. And you know, I was thinking about this morning over coffee where there was an article in the journal talking about how you know, if all these companies go public in the Bay Area or LA or New York or whatever its gonna create this just large pool of young millionaires that part of the concept was they would turn around and many of them become angel investors also buying homes and things like that and the implications. And so part of me was like all right, you know, that this is some signs of tops. But also part of me I like to try to be balanced thought about how what sort of like renaissance of young early investors would look like if all of a sudden you armed you know, thousands of investors with seven-figure portfolios, eight-figure portfolios of wealth? And what depending on how they planned on using it maybe they’ll just consume it and buy jets but maybe they’ll turn into angel investors. Anyway, what the implications that might be?
Phil: So I have one very funny story about this that you’ll find probably kind of entertaining. So you know, EquityZen, so what we do is we help you know, these employees and ex-employees at private tech companies with liquidity while the companies are still private. And so we got reached out to by a…this is a random partnership opportunity. We got reached out to you by a very nice real estate developer in San Francisco, that had built a flashy beautiful condo building. And was planning to sell one to eight million dollar price units to the future of millionaires of San Francisco. And they had built the building with the hopeful timing that it would coincide with a bunch of these big unicorns going public and all these employees getting a bunch of cash and then buying their apartments. And it turns out it was now 2019, they built the building, they were not selling units as fast they were hoping to. And so they actually called us and said, “Hey, could you give a talk to a bunch of these employees of pre-IPO companies and tell them you know, if there’s…if they’re able to sell their shares now they can.”
And to me, it was just kind of remarkable that like I had found a way for our business or somebody had found a way to partner up with us because they had built a multi-hundred million dollar property in San Francisco banking on all this liquidity to come through. So you know, it’s like you said it’s kind of maybe it’s a sign at the top but it’s no joke right? Like I mean, people are putting they’re really believing in it but I just thought it was kind of a crazy story that a real estate developer wanted to talk to me for some reason.
Meb: It’s easier today at least you know, and you guys helped facilitate that where companies and we talked a little bit about this on the last podcast. And individuals at least can hopefully find liquidity on the way so that they’re not just 100% stuck with this investment that represents 99.9% of their net worth they can’t do anything with. And it’s interesting once you do have a public investment that is a large concentration and trying to avoid the taxes is tough. But for a long time, financial advisors have been marketing these exchange funds and I know people are trying to build something like that in the ETF structure to help avoid taxes. But often as we all know the IRS will not be denied when it comes to these topics.
Thinking about the private landscape, so we’ve talked a lot about the process, we’ve talked a lot about the way IPOs happen and concentration and concentration risks. Think about Alton General. You know, there’s a lot of platforms out there today, there’s real estate, there’s crowdfunding, there’s all sorts of different stuff. What do you guys kind of think about as you think about the lay of the land, access to Alton investments? You know, how should investors be approaching and navigating this? I don’t know if you want to call it an asset class, do you wanna call it a space? And what sort of opportunities are available? Any ideas?
Phil: Yeah. So I’ve given this a lot of thought. I think first off you got…you almost gotta identify yourself as an investor and kind of which route you are. So when I think of kind of individual investors getting into alternative assets right? Not institutions but individual investors getting into alternative assets. One big part that will determine which path to go is if you have your own wealth manager or not right? So if you’re your own self-directed investor you’re putting together your portfolio yourself consider yourself this we’re go down the self-directed path and maybe I can talk about that. If you have a wealth manager things are gonna be a little bit different.
If you have a wealth manager that works at Morgan Stanley, you may get access to offerings to Morgan Stanley. They give you exposure to hedge funds, private equity funds etc. Maybe at like relatively large clips at a time but you might have some more exposure to managers that way. If you don’t go through a wealth manager and you’re kind of doing this a la carte as I’d say, right? You’re kind of like choosing your own adventure and how you’re gonna do things, then I think it’s super exciting really. Because 10 years ago if you wanted to invest in like a hedge fund and you needed a quarter million to a million dollars and you needed to know the manager, right? Like you needed to know the manager that’s managing the fund. You had to contact them. You had to say, “Hey, you don’t know me but I have a quarter million dollars and I think what you’re doing is super exciting.” It’s kind of hard to do when you have like a full-time job and you know, I don’t know a whole life with kids and a dog and everything.
So what’s happened now is that now you have like this kind of this full spread, right? This like kind of buffet of real estate offerings, you’ve got hedge fund offerings, you’ve got pre-IPO or private tech offerings, a lot of different things. I guess the part I would say is, one you wanna look into the fee structures involved because I think fees can add up really quickly. So I think that’s super important. Two is you wanna diversify as much as you can.
And it’s actually that’s easier said than done across a lot of these alternative platforms because the minimums that they have on transactions relative to what used to be available to you right? Are great you know, we’ve made very big leaps and bounds on offering something that you used to require a $250,000 check down to a $10,000 check that’s great. But let’s just say that you’ve got $500,000 of assets to invest with and you wanna allocate 20% of that towards or let’s just say 10% of that to alternative assets. Because that’s what seems appropriate and what you can kind of stomach as far as kind of risk-reward goes. Well, that leaves you like 50 grand to invest across different assets. If you’re putting 10,000 of it or 20,000 of it into one single crowdfunding company that makes I don’t know you know, artisan dog socks or something. That’s not gonna pay out for like many years and that’s really like a low hit rate but it’s really hard to get a lot of diversification.
So I guess what I would say is the advice I would give is try to build as diversified a portfolio as you can across multiple investment offerings and across multiple platforms as you can. And also kind of a targeted percentage of your portfolio that you’re gonna allocate towards and probably try to stick to it. And then lastly is having a real conversation with those that are closest to you on when you might need the money that you’re putting into these investments back. Because I think the one thing that I…we might see coming you know, once this 10-year bull run ends is I think there’s gonna be kind of a day of reckoning. Where a lot of people got into these alternative investments and did not think through the fact that investing in a private equity fund even at only 10 grand or investing in an angel investor or like kind of making an angel investment. I think a lot of people are gonna underestimate how illiquid these things really are. And that’s gonna be an interesting part. So that’s kind of the one thing I would say is kind of a self-directed investor is the money that you put into alternative platforms online you should think about when you’re gonna get that money back reasonably. Think about if you’re okay with that period of time and then kind of make a decision if you wanna go forward.
Meb: I imagine particularly in booming times investors probably overestimate their timeframe and ability to really have the wherewithal to sit. I mean, meaning like a lot of people say, “Oh, yeah, I could probably put 10 grand in XYZ startup or on a private fund.” And then you know, three years from now you have a health issue or you lose your job or you go through a divorce whatever it may be or you just you know, or wanna buy a house. You don’t really have too many choices a lot of times with private investments, you’re kind of stuck. And that’s one in many ways I think a benefit and a feature because people tend to do really dumb stuff with the public investments. But I think people probably overestimate how stuck they really are if they invest in a private company.
Phil: When we…when I talk to like some wealth managers and talk to their end clients, I have a conversation with them about you know, I ask the wealth manager I say, “So how do you think about these alternative platforms and these angel investments, etc., for your client?” And the usual response is…and the recurring one I’ve heard which makes a lot of senses is, “Every year I have a conversation with that client. We determine what percentage of his portfolio is gonna go towards that strategy and we agree that if that part goes to zero they’re okay with it.” Right, like we put that into a very risky bucket.
It’s kind of like we’re gonna put that into the bucket of like when your son says that he has an indie film that he wants to produce and you give him 50 grand like you’re gonna put it in that bucket right? And they put the money there and like they have the agreement and that way the wealth manager doesn’t say, “I don’t think it’s a good idea, I don’t think it’s a bad idea.” They don’t say anything. They just say, “All right, cool you got 50 grand over in that bucket. Have fun. Put it on EquityZen, put it on AngelList, put it on YieldStreet, put it on RealtyMogul, etc. Like, go do what you want with it so long as you and I both know that it’s not gonna be a material impact to your financial picture if that thing goes to zero tomorrow. And I think that’s kind of like the right approach you have to make to some of these alternative platforms.
Meb: Except the client never actually believes that it’ll go to zero. They say, “I’m cool with that,” but wait till it happens.
Phil: What are the odds right?
Meb: What are the odds?
Phil: [inaudible 00:49:52] yeah.
Meb: Talk to me a little bit to the extent you can about the future of the private investing space. And I don’t mean as much the future of venture capital but you can talk about that if you want. I mean, SoftBank is a particularly recent major you know, gravitational force. But what I’m really thinking about is you know, you’ve seen the development of these platforms you mentioned AngelList which is a little more early-stage traditionally. You guys traditionally focused more on, on a later stage private. But as the world changes, as new legislation happens I would love to hear about how you kind of see this space evolving over the next five to 10 years. Will we see more private exchanges? Is there something like that that is feasible? Any other ideas I would love to hear you ruminate on.
Phil: I think it’s gonna be a delicate balance that will eventually get towards more of like quasi-public private stock exchanges. Where shares can exchange hands but the burden on the companies isn’t nearly as high as being a public company. And I think where the balance comes from is that on the one hand, you’ve got companies that want stay private longer and longer and raise capital from the SoftBanks of the world etc. And you may wanna make those investments actually available to everyday investors more and more. But you’ve got regulatory pressure where the SEC and FINRA where these governing bodies want to ensure that your everyday investor doesn’t get hosed right? Doesn’t get sold snake oil.
It’s kind of like what you saw with cryptocurrency is like the second it became really popular, two things happened. A bunch of really crappy ICOs and initial coin offerings came out that were complete frauds. And the SEC decided that they were gonna take a very serious look on how these things were being done and whether they could be you know, the governing body or the right regulating body over the things.
So I think a slower version of that because nothing moves as fast as crypto does up or down, is that what you’ll see is individual investors are going to clamour for access to the Lyfts of the world, the DocuSigns of the world, the Ubers of the world because they want to participate in these things that do pretty well and perform well. And the companies are gonna eventually want to stay private longer so they’re gonna have to kind of accept that that’s kind of the new normal. And then you’re gonna have a regulating body that says, “Well, we got to make sure that this whole new system doesn’t get abused.”
What I think that ends up looking like is like five 10 years from now you’re gonna have kind of this quasi-public-private exchange where there is a more robust marketplace that’s active, that has like bids and asks where people can buy and sell shares of private companies. The disclosures required from the companies on how they’re doing is gonna be relatively limited compared to what they do for a public company. But far in excess that what you get available now from private companies. And there’s gonna be a real close watch on it from the SEC and FINRA and probably from Congress on how those things work. It’s gonna kind of be like maybe a grown-up version of the JOBS Act that was what was an attempt for kind of crowdfunding to become available.
So that’s kind of where I see things evolving towards but I think it’s kind of a mutual benefit to the investors because you’re actually gonna get some of those returns back. Like I get a little pressure on how like venture capital as a whole works where like 20 or 30 funds are kind of in my opinion kind of like sucking all of the alpha out of you know, the entire tech industry away from like your individuals. So anything that can kind of reverse that trend I’m a big fan of. And so that’s what I think we’re gonna kind of end up at.
Meb: For you guys specifically putting on your equities in a hat. I’ve seen some announcements of some potential new offerings you may or may not be able to talk about them. But what does the future look like for you guys? Is this a situation where we’re starting to bounce around some other ideas about the future of private investing? What are your thoughts?
Phil: Yeah, so you know, at EquityZen, we’re able to make these investment offerings available in late stage companies. We’ve worked with about 140 different private tech companies. A lot of which have you know, gone on to go public and we’ve been able to kind of deliver these public shares to these investors. But right now for one, we’re limited to just offering this to accredited investors which means that you have to have $200,000 of annual income or a million dollars of net worth. Which obviously is kind of a small sub-sector of you know, the overall population. And so we’d like to continue exploring how we can make this available to the masses.
And I think the second part is you know, we talked about some of these minimum investment sizes you might see on platforms right? Ten thousand dollars at a time, $20,000 at a time. The more and more we work on our products, our technology, our platform the more we automate things away in the transaction process. The more efficient we can be and therefore the smaller the investment sizes we can offer. And so I think the two focuses we have on our side or really the three are longer term can we make this investment offering available to investors that aren’t just accredited? That’s one. Two is can we lower the minimum investment size you know, using technology and standardisation of the transactions? And then I think three is continuing to make available an investment product that is diversified. So that means not just offering investment in, you know, one private technology company. We’re making available an investment where you kind of almost have like a mutual fund type offering where you can invest in 15 or 20 or 25 companies. So those are kind of the three things we’re working on right now.
Meb: Did I see mention you’re also thinking about potentially other asset classes and ideas as well? I know your main focus to date has been late-stage private companies. Are there any other things you’re thinking about?
Phil: Yes, so you know we’ve looked at I don’t wanna give away too much on what our next kind of iteration might be. But what we have learned is that we built kind of this infrastructure for liquidity right? For very illiquid assets and we started with pre-IPO secondary stock and it’s gone really well. You know, we’ve been able to provide a lot of value to somebody that wanted to sell shares in a private tech company and connect them with someone who wants to buy. Turns out there’s like an analogy for that in a lot of different asset classes that hasn’t really been addressed yet. We actually even with market sizes that are probably in excess of what we’re doing on the pre-IPO side. So the answer would be kind of stay tuned there but our plan is that you know, we may launch a couple of new offerings in different asset classes that investors may feel very boxed out of right now. And that shareholders may feel like there’s no means of liquidity for it and try to kind of connect the dots which is what we’re getting known for.
Meb: Well, if the long-time listeners the last 150 episodes know this well and dear because I have a farmland in Western Kansas. It is 95% plus individual or privately owned. There’s almost no public way to access that asset class which is probably good over the last five years because it hasn’t done a whole lot. That’s a big interest for me so fingers crossed there.
Phil, last couple questions. I’ve already kept you over an hour. You got any predictions for us for the rest of 2019 who’s gonna be the biggest splash? And you mentioned, you alluded to earlier something about Lyft losing a lot of money but you ain’t seen nothing yet. What were you talking about and what are your predictions for the rest of the year?
Phil: So I kind of get two predictions for our space, you know, meaning like I kind of this late stage pre-IPO space. The first one is that I think we’ll see another direct listing kind of [inaudible 00:57:13] Spotify by the end of the year. So we’re gonna see a company that says, “I’m not gonna pay that 5% fee or 6% fee for the initial public offering. I’m gonna just list my shares directly on the exchange.” So I think we are gonna see one of those.
And then again, yeah, my not so bold prediction. I think is that we are gonna see probably two or three companies go public by the end of the year in the tech space…in the tech industry with over a billion dollars in you know, trailing 12-month losses. And so I think it’s going to really highlight how some companies in the private markets have raised literally billions of dollars and are spending it very, very aggressively for the sake of top-line growth and capturing an entire market. So like I wouldn’t be surprised to see WeWork, for example, go public with a huge top-line valuation while having burned multi-billions of dollars in the previous year. So those are my two kinds of bold but not so bold predictions for 2019.
Meb: Well, we’ll just have to keep having you on as these events transpire. I think we mentioned what’s the best place for people to find you if they wanna keep up with all of the goings on in your world and with your firm.
Phil: Yeah, absolutely so if you go to equityzen.com you can kind of take a look at everything we have there. We also have a knowledge centre so if you just do equityzen.com/knowledge-centre we kind of keep track of IPOs, pre-IPO research trends, performance of different VCs, etc. So kind of a one-stop shop for those that are trying to learn a little bit more about the pre-IPO space.
Meb: Great, we’ll add a link. You guys are a fun follow on Twitter as well so we’ll put all these on the show notes. Phil thanks for joining us today.
Phil: Thanks for having me Meb. That was fun.
Meb: Everybody you can go find links to this episode, a lot of the show notes we talked about today mebfabershow.com/podcast. Shoot us an e-mail email@example.com. If you wanna hang out in Minneapolis or you got some suggestions, complaints you can always find us on iTunes, Overcast, Stitcher, RadioPublic anyplace good podcasts are sold. Thanks for listening friends. Good investing.