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Protocol Pipeline
The inside story of the venture capital and startup world by Biz Carson.

All that money on the table

All that money on the table

Hello and welcome to Pipeline. This week: Why you're probably in the Daddy Gang, Kanye West's love for Y Combinator and how an IPO bonanza revived the debate over IPOs.

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Overheard

  • Disney Stripe? 3M Airbnb? The Oracle-TikTok deal could usher in a new era of tech acquisitions, tweeted Susa Ventures' Leo Polovets, and there are a bunch of outlandish predictions of weird combinations. My favorites actually come from the Amazon show "Upload," which featured mergers such as Oscar Mayer Intel and Nokia Taco Bell.
  • Odds are you're part of the "Daddy Gang." The New York Times has a fascinating look into how young people in tech are working together on everything from Product Hunt upvote campaigns to building companies, and there's even a Discord server called Gen Z Mafia — where anyone over the age of 24 is relegated to their own group called the Daddy Gang.
  • "It changed the Silicon Valley game." Kanye West tweeted a lot of things this week, including his love of Y Combinator and Ben Horowitz. He called Horowitz an ally who "embraced me in silicone [sic] valley when no one else did." West also claimed to have talked to Moxxie Ventures' Katie Jacobs Stanton about creating a "Y Combinator for the music industry."
  • "Entrepreneurial CEO: totally uncontrollable, bordering on maniacal." CRV's Justine and Olivia Moore found a '90s guide to venture capital terms that has some amazing definitions, such as strategic investors ("ones who will pay a preposterous valuation") and window of opportunity ("without more money, the company is dead"). Now I know what VCs are talking about when they say they're putting their money to work ("hiring hordes of associates to make six investments a year").

Biz on Biz

The IPO bonanza and the billions 'left behind'

This week's public market deluge stood out for more than just the number of tech IPOs.

Sure, the volume is unavoidable: Not only did we see Snowflake pull off the biggest software IPO ever, there were also two smaller traditional enterprise IPOs in Sumo Logic and JFrog, gaming startup Unity running an auction process similar to Google's IPO, and the announcement that a SPAC will soon take Opendoor public. And if that's not enough excitement, Palantir is expected to do its direct listing on Sept. 29.

But what stands out to me is not just the volume, but all those different paths that companies are taking to go public.

Snowflake had a huge pop when it started trading Wednesday via a pretty traditional IPO.

  • The company had set its expected price range at $75 to $85 a share, before raising it to $100 to $110 this week. Then it priced its IPO at $120, making it the biggest IPO so far in 2020.
  • But the next morning, it opened trading at $245, double where it priced. It's now wrapped its first days of trading at $240.

And that's the rub with the traditional approach. Companies want that pop when they IPO as a marker of success, but there's been pushback in the tech community that the process isn't actually all that great for the companies. Tech IPOs in particular have been popping a lot this year.

  • It's all about the "money left on the table." The argument is that the traditional IPO process of the banks setting the price is helping the first-day investors who can get a quick cash-out, but companies aren't raising as much during the process as a result.
  • In Snowflake's case, if shares had been priced at the broader market's interest level ($245 instead of $120), the company could have raised an additional $3.8 billion in its IPO — the biggest amount left on the table since Visa's 2008 IPO, according to CNBC — and money that could have been reinvested in the business rather than lining investors' pockets.
  • "In many ways, $SNOW is the final proof of how broken this process is," tweeted Bill Gurley, the Benchmark venture capitalist who is one of the loudest critics of the IPO process.

But Snowflake's CEO Frank Slootman doesn't agree with the idea that the company left billions on the table in a broken process. "It's just nonsense talk," Slootman told Forbes on the afternoon of its IPO. "A lot of the direct listing chatter, they're like, 'you left money on the table.' It's complete nonsense."

  • "We could've scraped a few more bucks off the table, but if you think you could have sold this offering at $245, I mean, people are smoking something. That is just ridiculous," Slootman told Forbes.
  • Remember: This is his IPO triple crown, after Data Domain and ServiceNow, so he's as experienced as CEOs get when it comes to the process.
  • He argues that people forget that there's a demand curve. There may be some retail investors who would've been willing to pay higher (and clearly did), but Slootman was looking for a price that institutional investors would be willing to pay. And there's certainly an argument that Warren Buffett's Berkshire Hathaway likely wouldn't have bought in at a frothier, higher price.
  • And don't forget: Investors trading stocks on day one isn't a bad thing and is in fact necessary, argues Andreessen Horowitz's Alex Rampell and Scott Kupor. "In order for there to be a trade, somebody has to sell, and underwriters will in fact intentionally allocate shares to investors who will 'provide liquidity' by selling," they wrote in a blog post, from pre-Snowflake times, defending the IPO.

So the IPO may be imperfect, but having billions left on the table doesn't automatically mean it's broken. And all those different paths to going public that caught my eye might show us if there is a better way.

  • If there's anything that Silicon Valley entrepreneurs are good at, it's tackling hairy problems and finding better solutions to them. Going public is no exception.
  • IPOs like Unity's are a good example: Approaches like its auction-like pricing could be a way for companies to try to regain a little more control over the pricing (although it still jumped over 30% at open.) "We had 100% visibility into the demand curve of what investors were willing to pay," Unity's CFO Kim Jabal told Protocol's Shakeel Hashim. "We just had such better information in this process, such better visibility."
  • Unity is also giving its employees a chance to sell as much as 15% of their shares on day one, compared to the normal six-month lockup period, in a move that lets employees benefit from that pop and potential upside, as well.
  • Regulatory changes coming down the pike also mean that companies will soon be able to raise money via a direct listing, too, so expect to see some folks trying that.
  • Plus, there's the option of an entirely new stock exchange to list on: the Long-Term Stock Exchange, backed by some of Silicon Valley's biggest firms.

There will be some experimentation, but if the results aren't so great, don't be surprised if the traditional IPO sticks around for a little while longer — however much Gurley complains.

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Inside Track

  • What is it actually like to take a company public? Okta's Todd McKinnon had a good Twitter thread on the upsides (he gained more control) and the changes (more time on investor relations).
  • Product managers aren't in the first 10 hires of startups, and rarely in the first 20. Growth expert Lenny Rachitsky broke down when companies are typically hiring their first PMs. The full list is paywalled, but he tweeted a snapshot.
  • Zoox CEO Aicha Evans makes six different types of calls to board members, and Threshold Ventures' Heidi Rozen explained why it makes Evans a master at interacting with her board.

Chart of the week

Investors are reporting a drop in using contractual terms like liquidation preferences and ratchets in a sign that the funding environment is actually more founder-friendly than five years ago.

Image: Printed with permission

Investors expected the pandemic to usher in more investor-friendly terms as the deal pace slowed and valuations dropped. Instead, deal terms have actually become more founder-friendly than five years ago, and venture capitalists are using tools like 2x liquidation preferences and redemption rights less than before, according to research out of Harvard and Stanford on the impact of COVID-19 on the venture capital industry.

Need to Know

  • Tick tock on TikTok. Oracle won the deal, which is still awaiting Trump's approval, but the Commerce Department isn't done yet. On Friday, it released new rules and ordered TikTok and WeChat to be removed from app stores on Sunday in the latest escalation.
  • Greylock added a special kind of new LPs, specifically focused on diversity and inclusion initiatives, as part of its new $1 billion fund.
  • Stripe is paying employees $20K to leave San Francisco, New York and Seattle. It's a payday that also comes with a pay cut of as much as 10%, as tech companies grapple with whether they should adjust salaries for their new legions of remote workers.
  • Switch to Azure and get customers? That's the new pitch that Microsoft is making to startups: It's going to market their companies to large enterprise customers if they sign up for its cloud.
  • The Chainsmokers have a fund. It's 2020 so investors have moved onto SPACs and musicians are raising funds. This time it's the electronic DJ duo The Chainsmokers who raised a $30 million debut fund called Mantis.
  • From Protocol: Roam may be the note-taking app du jour, but Evernote still has a plan to reboot itself.
  • And your weekend reading: There are billionaires who pledge to give away their money and have a hard time doing it (looking at you, Larry Ellison). Then there's Chuck Feeney. The General Atlantic founder wanted to die broke — and now he will. Having given away his billions, he's now closed down his charity, according to Forbes.

Five questions with... 

Lerer Hippeau's Graham Brown

What's one startup or product that failed or was shut down that you wish was still here today?

Without a doubt it would be Turntable.fm, a social music service that was tragically ahead of its time. For those who weren't music-obsessed and living online in 2011, the site allowed you to join/create custom themed rooms where you could listen to music shared by others, share your own music as a virtual DJ, feel good about yourself when others liked your song choice, complain when someone played something lame, chat with friends, etc. It was peak summer 2011 and would have been so good in the current environment.

What's a secret obsession of yours that most people don't know about?

My parents took us to Scotland as kids, and I came back with a scone obsession. Don't have a great explanation other than scones are clearly the best pastry when done well. More nuanced than your ordinary muffin, but less fussy than a croissant. If I had more time, I'd probably start a scone blog or learn to bake.

What's your favorite piece of advice to give to first-time founders?

Focus. Too many startups fail because they try to do too much. Also, be a good human.

What's one problem you wish an entrepreneur would solve?

The growing medical debt crisis in America. There is clear inequality in the system and the number of accounts going into collection have accelerated during the pandemic while prices continue to rise. There isn't going to be a single fix here, but there needs to be more innovation around solutions that increase access to quality care while finding ways to reduce costs.

What recent shift or innovation do you think will change the VC industry the most in the next year?

Other than the impact of going fully remote for a year, I think there's a general perception that the risk/reward is more attractive right now at earlier stages. As a result, downstream capital is moving earlier and there's a bit of a cascade effect taking place. I expect seed investing to be particularly crowded over the coming months.

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