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The stay-private orthodoxy is crumbling

Protocol Index

Hello! This week: Public may be the new private, Avalara's CFO loves pivot tables, and get ready for a busy week of earnings.

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  • "Crypto rebranding has been going on as long as there has been crypto, and since DeFi has been hot for about the last 18 months, a lot of crypto have been emphasizing their DeFi aspects." — Crypto sage Aaron Brown explained why DeFi is the hot new thing.
  • "This rise in cash is an extraordinary change. Statistically, this is the largest, fastest change in asset allocation Tiger 21 has seen." — Tiger 21 chairman Michael Sonnenfeldt said wealthy investors are keeping 19% of their portfolio in cash, though SVB Capital president John China said money is still flowing into venture capital.
  • "While economies of scale have definitely kicked in at Opendoor, there are also quite large fixed costs associated with operating the business that require even greater scale to overcome." — Thomvest's Nima Wedlake delved into Opendoor's S-4 filing ahead of its SPAC listing.

The Big Story

The stay-private orthodoxy is crumbling

He's tried being a private equity firm, a venture capitalist and a hedge fund, and now Masa Son is trying something else new: a SPAC. On Monday, SoftBank announced that it's planning to jump on 2020's hottest trend, with the ambition of investing in a company and taking it public at the same time.

Beyond the obvious joke of SoftBank and fads, the sudden popularity of SPACs does feel like an inflection point.

There seems to be a shift in tech company financing happening right now. The "private markets are the new public markets" era, which dominated tech for the last few years, may finally be coming to an end. Founders, it seems, might increasingly be willing to brave public markets.

  • Data backs that up, of course, with IPO activity soaring.

There's also been a change in sentiment. Earlier this week, a June tweet from Shopify's Tobi Lütke caught tech Twitter's eye. "Being public and trusted is the best possible state for a company," Lütke wrote. In response, SPAC-proponent Chamath Palihapitiya said: "There was so much orthodoxy in Silicon Valley about not going public … It is turning out to be really bad advice." Bill Gurley backed that up, saying that "SPL (Stay Private Longer) was the worst advice in Silicon Valley."

  • The anti-SPL attitude isn't anything new among these folk: People like them have been saying this for years. But the way they're now talking about it is. Both Palihapitiya and Gurley used the past tense when talking about the prevalence of SPL advice: It "was" orthodoxy, it "was" bad advice.

That, combined with the flood of listings — even from long-time public market holdouts like Palantir — suggests that SPL is no longer quite the consensus it was.

So what's changed? It's probably best to think about what drove the SPL trend in the first place.

First was the huge availability of private market capital. That's slowing this year: A study in August found that 73% of late-stage VCs are reducing their investment rate this year, with a 39% reduction in investment rate in the first half of the year, and a 21% reduction estimated for the remainder. The capital's not dried up, but it's certainly not flowing as freely as it was.

Second was a sense that private markets would outperform public markets, making it better for a company's valuation to stay private. But public market performance is outstanding this year, even when it comes to listings. "Now that you're having this different performance between private and public markets, I think more companies will choose to go public," Shift co-founder George Arison told me. (A company that, as it happens, went public this week via a SPAC, which brings me to …)

Third was the difficulty of going public via traditional approaches. SPACs are changing that, not necessarily in terms of financial cost but in terms of time, making it much easier for companies of a certain size to list. "SPACs are a fantastic vehicle for high growth companies to raise capital," Arison said, "whereas previously — meaning in the last 10 years or so — at that stage those same companies might have done a big, big round of [private] funding." FirstMark's Amish Jani is explicitly positioning his new SPAC as an alternative to private fundraising for late-stage companies.

In short, the reasons to stay private are less convincing than they have been — and that might be driving companies to go public.

But, as always, it's not quite so black and white. Just as the SPL trend was never the all-encompassing phenomenon some people made it out to be, the "go public sooner" trend likely won't be, either.

  • There are, after all, still significant costs to going public: Arison said, for example, that Shift's directors' and officers' insurance premiums jumped in price by 10x on listing.
  • Public investors might not actually like some tech companies, either. "There's sort of a tension," Shift co-founder Toby Russell said, "between the ... inherently innovative nature of a lot of Silicon Valley companies, and the desire from public markets … for a reliable, predictable delivery of results."
  • And some might just not need to. Counterpoint Global's Michael J. Mauboussin and Dan Callahan recently wrote that pure-play software companies, which have fewer assets and are therefore less capital intensive, often don't need to go public: They just don't need the money.

"There isn't a single cookie cutter approach" to choosing whether to stay private or go public, Russell said. And software, as it happens, might offer the best analogy for the future of financing, Russell added: "In software ... there's customization, there's configuration, and then there's monolith/one size fits all. It tends to be that customization is highly complex [and] monolith/one size fits all doesn't really do the job. So configuration is nice." The middle way, he thinks, offers "enough standardization to make them each efficient [and] enough diversity to make them sufficiently tailored."

  • For financing, IPOs, SPACs, direct listings and private fundraising offer a few configurable tools. It's just up to companies to choose the right one for them.



Strengthening healthcare interoperability and cybersecurity in the Covid era

A stronger healthcare system means connecting people, data and technology for a frictionless experience across care settings. At Philips, we're developing interoperable solutions that seamlessly transfer data so clinicians can stay focused on what matters most: the patient.

Learn more.

Up to Speed

  • Monday: Twilio bought Segment for $3.2B. Huya and DouYu merged. Allegro shares soared on listing. Roblox said it confidentially filed for an IPO. Triller was reported to be raising $250M at a $1.25B valuation, and considering a SPAC listing. N26 was reported to be planning to raise at a $3.5B+ valuation.
  • Tuesday: Ant's IPO was reported to be delayed by a Chinese investigation. Kahoot raised $215M from SoftBank at a $2.2B valuation. Wealthsimple raised $87M at a $1B+ valuation. McAfee said it wants to raise up to $814M in its IPO. DoubleVerify was reported to be planning an IPO at a $5B valuation. E2open was reported to be planning to go public via a SPAC, at a $2.5B+ valuation. Calm was reported to be planning a $150M raise at a $2.2B valuation.
  • Wednesday: ASML earnings beat expectations, but guidance worried investors. Khosla Ventures filed for a $1.1B new fund. Huawei was reported to be considering a $3.7B sale of parts of its smartphone business. Tata was reported to be in talks to buy Big Basket.
  • Thursday: TSMC earnings beat expectations. Fastly shares plunged after poor revenue estimates. Array Technologies shares soared on listing. Shift shares fell on listing. Stripe bought Paystack for $200M+. ZoomInfo bought Clickagy. Masa Son was reported to be pushing Gojek and Grab to agree a deal. Tata was reported to be in talks to buy IndiaMart InterMesh.
  • Today: Ant reportedly raised its IPO valuation target to $280B.

Money Talks

Ross Tennenbaum, Avalara CFO

What's your favorite Excel trick?

As you mature in your career it is less about building Excel models and more about how to get insights out of the data. As a result, much of our team's time today is spent on leveraging Excel data to feed various visualization and dashboarding tools. But I still find the classic Excel Pivot Table to be among the most powerful tools to see, understand, and gain insights from data.

Has COVID-19 been net good or bad for the tech industry?

Net good! COVID-19 is forcing businesses across all industries to adopt new and more flexible work environments. Businesses will need to refactor their technology capabilities to support and secure these new environments. From a sales perspective, businesses are having to accelerate their move to ecommerce and the Cloud, which also requires new technologies and workflows.

What tech stock do you have your eye on?

In my 10 years as an investment banker, I was prohibited from investing in any of the great tech companies that I worked with. I was eager to invest in many companies when I left banking. I have sold most, but keep my eye on three software companies that I believe are the "new guard" in software: Salesforce (for the front office), Workday (for the back office), and ServiceNow (for everything in between).

What's been your worst financial decision?

Ha! This is where even I laugh at myself. I am very contrarian when it comes to the economy, markets and investments. So, as the stock market has continued to climb over the last, say 10 years, I have increasingly sold down and out. This goes against everything I learned in school about investing for the long term to realize 8-10% compound annual growth rates. I would have been much better off if I had just invested in indexes and technology and never looked or touched.

What piece of financial advice should a founder ignore?

The venture capital model would lead founders to raise a lot of money (diluting the founder and employees) because "it is better to have a smaller piece of something really large than a bigger piece of something small." This is true and has worked well for many. That said, if you look at all of the great success stories, some founders have been able to better time capital raises at higher valuations and some have been able to build a big business more efficiently, requiring less capital and therefore lower dilution. So, raise and spend for growth to create value, but be mindful there is a real cost and there are timing and operational decisions that can be made to optimize the outcome.

Coming Up

  • It's earnings season! IBM and Logitech kick us off on Monday, followed by Snap, Netflix and Texas Instruments on Tuesday. Wednesday brings Tesla, Verizon, Ericsson, Xilinx and Lam Research, while Intel, AT&T, Citrix and Seagate report Thursday.
  • Also on Thursday: McAfee is expected to list.



Strengthening healthcare interoperability and cybersecurity in the Covid era

A stronger healthcare system means connecting people, data and technology for a frictionless experience across care settings. At Philips, we're developing interoperable solutions that seamlessly transfer data so clinicians can stay focused on what matters most: the patient.

Learn more.

Thoughts/feedback/tips? Email me — shakeel@protocol.com — or tips@protocol.com. And subscribe to get Index in your inbox every week. Thanks for reading — have a great weekend, and see you next week.

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