Finding the Next IPO Unicorn? | Brandon Averill, Justin Dyer | AWM Insights #26
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Episode Notes
With an estimated $44 billion worth of startups like Snowflake, Unity Software, JFrog, Sumo Logic and Amwell going from private to public right now, is it time to try and strike it rich by investing in the next unicorn company during its initial public investment (IPO) phase? If you only got your investment advice from the mainstream media, you might assume that this is the best way to create massive wealth, but as you might have guessed, it’s not quite that simple.
The private to public or - IPO - step in the lifecycle of a business is incredibly important. And when companies go public, they often garner massive media coverage. However, is this the best time to invest in a company across the board? The data might surprise you.
In this week’s episode of AWM Insights, Brandon Averill, Managing Partner at AWM Capital, is joined by Justin Dyer, our Chief Investment Officer, to discuss how and when companies typically create the most value. Topics and questions covered include:
Do IPOs favor the investor? Are they a good investment on their own?
Why do companies decide to go public?
·What exactly is a unicorn company, and what stage in a company’s lifecycle is generally considered to be the ideal time to invest?
·When does most of the value creation for a company occur?
What is a direct listing and how is it different from a traditional IPO?
Are direct listings similar to SPACs? (For more on SPACs see our previous episode HERE)
Resources
Brandon mentioned a Bill Gurley article on going public in 2020, which you can find HERE
+ Read the Transcript
Brandon Averill (00:00):
Hey everybody. Welcome to AWM Insights. This is a quick hit each week on timely investment topics. I'm Brandon Averill, partner with AWM capital, and today we're joined by cohost Justin Dyer, a chartered financial analyst and AWM's chief investment officer. With that, we're going to jump into a conversation to help you maximize your net worth. Justin, welcome to the show.
Justin Dyer (00:21):
Thanks Brandon. It's an honor to be a part of this podcast. I'll do my best not to go too deep into the nerdy esoteric as it were that charter financial analysts like to live in.
Brandon Averill (00:33):
Awesome. Well, today we're not going to make that easy on you. We're going to jump into actually a pretty complicated topic. We're going to talk a little bit today about what it's like to take a company from private to public. There's been a lot in the news recently about SPACs, and we've talked about that in the past AWM Insights, but we just got some news on direct listings. And then there's always the ever present IPOs that the media just loves to blow out of proportion. So, I think today will be good to break some of that down.
Brandon Averill (01:02):
For those that you don't know, IPO is an initial public offering, and it's been the most traditional way to take companies from private to public. But we also know when we really dig into that CFA, that charter financial analyst side, that most of the value for companies isn't actually created at IPO or when they go public. Most of that value is actually created in private markets. And so, Justin, I know this is an area you've looked a lot into. I mean, we've seen a lot of companies go public. Can you just touch on a little bit the data behind this and talk a little bit about where that value creation is actually made?
Justin Dyer (01:34):
Certainly. Like Brandon said, the IPO or private to public step in the lifecycle is super important within investing in the capital markets. And in general, those IPOs get a ton of headlines and coverage in the media. But when you look at the data in general, participating in IPOs right out of the gate generally haven't favored the investor over the ensuing six to 12 months. Most of the time, there's some under-performance relative to the market. Like as an example, looking at a period from 2001 to 2008, IPOs underperformed by a little over 2% versus the market as a whole. So in general, they haven't been great investments on their own.
Justin Dyer (02:19):
Now there are some unicorns, as the phrase is bantered about, which are the very, very popular private companies of the world. Spotify was one. There's a recent company called Palantir coming up to go public is another. And these are the headline grabbers for sure, but net on average IPO participation generally doesn't bode well, because most of that value creation as Brandon alluded to happens in the private marketplace where venture capitalists are reaping the vast majority of the reward, and they're going public to liquidate their investments and reap that reward. And so again, kind of keeping most of the gains to themselves.
Brandon Averill (02:59):
That is really interesting. You mentioned Palantir, and they're going to take a little bit of a different direction in going from private to public is what I was reading. I mean that we still have some companies. I think it's an interesting time right now. We've got five companies that I know have taken that traditional IPO route, Snowflake, Unity Software, Jay Frog, Sumo Logic, and Amwell. But we're going to see a couple of companies take a different approach between a sauna and Palantir that are going after this kind of direct listing and be able to raise capital in a new way. I know Bill Gurley, the former benchmark capital partner has been outspoken about the support of this and being able to create or raise money through this direct listing. Have you read much about that? What's your take on direct listings?
Justin Dyer (03:46):
Yeah. In general, I like the concept, and the concept or motivation behind direct listings is super similar to the SPACs or special purpose acquisition companies that you guys have touched on in the past. Essentially you're trying to cut out the middleman, right? Where in the past, maybe one could argue that part of the reason IPOs haven't performed is because there is a middleman that is somewhat taking a piece of the pie.
Justin Dyer (04:09):
The direct listing is more of a direct to market type approach to getting your company traded on a public exchange. And in general, if you can do that within an industry or a marketplace, you're generally going to reap some rewards from that activity. So I really like the idea of direct listings. Now, will it improve the performance of public listings going forward? Who knows. We'll have to wait and see, but it certainly is a more efficient way of companies getting access to the public markets.
Justin Dyer (04:39):
Now, one quick comment, traditionally companies haven't gone that route because it's not a way to raise additional capital. It's just the way to put your company out on the public market as is if you will. But recently the SEC just passed last week actually the abilities for companies to raise additional capital through a direct listing platform. And that certainly is probably going to peak the attraction of that method going forward.
Brandon Averill (05:04):
I think that's great to know, and as these rules change, obviously, it's important to kind of keep in mind all the new avenues that you can hit on investing. I think the big message here is just that it's no different than what we've hit on in the past. The public markets are super efficient. IPOs are certainly not withstanding. The information now becomes public, and so the information advantage is somewhat gone. I'm sure that indirectly has led to some of these IPOs not performing as well as they probably should have.
Brandon Averill (05:36):
And I think kind of going back to, if you have the ability and you have the desire to try to find out performance, all of this just hits so much more on trying to find your way into that private side. And we've hit the private investing side quite a bit, but remember there that the reason why all this value creation is made there is because it's also a place where a lot can go wrong. So you want to make sure you're investing with the right people on that side.
Brandon Averill (06:00):
So Justin, great debut here in your first AWM Insights. Hopefully this has been a big value for everybody. It's a complicated topic. We definitely encourage you to reach out if you have more questions. I mean, we got $44 billion worth of startups going from private to public right now, I think is the estimate. So welcome everybody to visit AWMinsights.com to learn more about this topic and to listen to other episodes. And certainly if you want to be the first to hear the next episode, so please go on and sign up for our newsletter. And with that, we're going to sign off here. Just remind everybody, stay hungry, stay humble, and always be a pro.