--:-- Jeff Jordan: Yeah. And so if when the 180-day lockup expires, all the insiders and all the management team run to the floor of the stock exchange and try to sell all their stock, all the third party, all the owners will disappear too. Because if the insiders don't have any confidence in it, then why should I own it? I mean, just to give a little bit of a counterpoint though, obviously market conditions change. The company hasn't gone public in like 10 years and you have to get some liquidity out. Or you're a founder who has to give up a little bit of shares in the secondary market in order to loosen up your- Oh, we're in support of that. But if they try to get full liquidity on day 181, the stock price is going to be like $2. It's a reality of how the market works. We're talking about the technicals how does that stock get to market? There's another part of this, which is simply, when do you time the IPO? Fundamentally, we encourage people to don't think about the market conditions today. Think about, is this a good public business? Yeah. And you have to answer that question first. And for most companies, you're never going to time the market. You can't time the market because it's clearly a long process. But then why do people talk so much about there being certain windows in which there is an ideal time, you know, like a window can open and shut. And this is on the global scale of 10 years, 15 years, et cetera. This was actually, there's a case on the OpenTable IPO at Stanford Business School now, taught in the formation and new ventures class. Andy Ratcliffe wrote it. And it basically says, should OpenTable go public now? The analysis said there are windows in the IPOs. Yeah, they kind of come and go. And the best companies often open windows that were then previously closed. So the best companies can go out whenever they want. The good companies typically want to wait for till the investors are feeling good. Yeah. The mediocre and bad companies want to get out whenever they can. And what happens when the window opens, the early people to go out typically perform very well as public company stocks. And then as more time goes by and you get towards the end of a window, the companies that then are going out kind of rushing, I got to get out or I'm going to miss it, are typically are not the highest quality companies. And they tend to underperform the market. One of the things that had us go was, OK, we think we're a good company. We think we can perform in the market. We wanted to meet bankers ahead of time. And how far in advance did you do that? We started about a year and a half out or something like that. A year and a half? Just surgically, just every, you know, with the bankers, we, we, we kind of orchestrated into one or two conversations. But before we did the formal bake where you select your lead bank and all due respect to Merrill at the time they were you know they were not the top of the pyramid in terms of tech bankers So we because we were the only IPO we had every bank wanted to do it. Goldman, Morgan, you know, just, we got to know the people at the firm and we put particular value on the capital markets function because that is the function that interacts between the company and the investors. We wanted someone who we thought understood our business well and we thought could represent our business well to investors. And by investors, just for clarity, you mean investors like institutional investors? These are institutional investors who invest in public security. Typically, the largest ones are mutual funds, managing billions and billions of dollars. We were looking for 10 pole investors who would go for a while and we'd meet with them every six months or so. And they got to know the business. They got to know us. We developed a soft track record because they'd say the first meeting, what are you going to do in revenue this year? Oh, we're going to do $70 million. And you come back six months later, what'd you do? Oh, you mean like a soft track record of delivering results? It's almost like quarterly recordings, but they're like informal verbally. Am I the kind of person who over-hypes and under-delivers, or do I under-hype and over-deliver? Do I tell them what's good about the business and what's bad about the business? That is such a golden nugget because it's invisible to the world. When you see the outcome, the process behind the outcome is invisible, which is the whole reason we're doing this. I didn't know that. Why does that relationship that with the capital markets expertise matter so much in the lead up to the IPO? We wanted it to be not a black box. One of the things other CEOs had told me who had done IPOs when I reached out, it's like somehow, you know, you do this roadshow, you get to the pricing meeting, they say, okay, we recommend the prices, this and then the shares just magically disappear. And we really cared about who got the share. So we wanted to have a vote in who got the share. And because it was such a tiny offering, we wanted to concentrate the shares in that shortlist much at a much higher level than what's typical at the pricing meeting. You know, we shared the spreadsheet and we're like, no, no, no, no. We have to give these guys 10 times more. And he's going, no, no, no, no, no. So who voted in the it was like, you know, the bank. Well, typically, to Merrill's credit, typically the bank pretty much decides they engaged in a dialogue with us. And that's probably the biggest thing where we met in the middle of said, OK, I understand your rationale. But so we had this very constructive dialogue around that in many IPOs, that dialogue does not happen. That is such an artful behind the scenes orchestration. It's all a hangover from the 99-2000 period when those allocations were truly a black box. And somebody said to me at one point, is there any innovation in the IPO market? And I said, the biggest change over the last 10 years is that it's become more transparent. And that is more the norm today, that there's a genuine conversation around it. Now, I've seen the other side of it, which is a management team says, no, it's going to be like this. Ultimately, their vote is the vote that matters. But I've seen the scenarios where they make mistakes there, too. What the OpenTable team did well is actually invest in not just the bankers, but actually the investors. The thought process was the better they know our business, these are the people who are going to have skin in the game and really own enough of our stock. and know where the business can go and hold the tent up in a difficult time. And so Jeff essentially invested in that process. And I think it was critical. One of the debates we had was size of IPO. Like the amount of the initial public offering? The proceeds, yeah. And so we spend a lot of time doing analytics for companies on how big does your IPO need to be? What does your market cap need to be? How big do the proceeds need to be? And if you just sort of look, it doesn't pass the common sense test, right? Why does some portfolio manager at Fidelity, who manages billions and billions of dollars invest in the open table IPO when the initial proceeds are only going to be $37 million. Now, ultimately, because it went well, we ended up raising just shy of 70 in the IPO. And then in September, we ended up doing a follow on transaction that was $210 million. But the point was, why is it worth it to Fidelity? Morgan Stanley Investment Management. So why is it? I want to know. Because if you invest the time to let them see where the business can go over time, they're going to leg into their position over time. You know, if we had been, we were in a lousy market, one expression we always use is in difficult times, our investor clients focus on the things they own, not those things that we want to show them. What do you mean by that? Meaning new ideas. So it's just a risk curve issue. And Jeff made the point about great, great companies being able to go out whenever they want. Yeah. Good and okay companies need to pay more attention to the investor risk curve. Back to the notion of pricing. We had Lawrence Levy, who is a former CFO of Pixar on this podcast. And he's the one who helped Steve Jobs take Pixar public. And one of the things that he talked about, how it was the biggest fight between him and Steve. And the reason was because of course he wanted to go high because he wanted a big ass IPO, like Nutscape at the time. And he was on the heels of that. Lawrence was like, no, no, you want to deliver some returns for the investors. And there's sort of this sort of dance back and forth. How did you guys kind of do that dance? Yeah, it's a lot of discussion. Is that a euphemism for fighting? No, no, no, no. There was a lot of discussion, you know, our at IPO market cap was $450 million roughly raising, raising proceeds of just under 70. The IPO size was 70 million. Now I'll be the first to admit, did it trade kind of too well? Yes. So what is that? Why is that bad if it trades too well? It means the company didn't get as much money as they could have if they had a crystal ball. Right. Because the whole point is to get capital to continue growing and building a business. You don't want to leave a lot of money on the table. Yeah. Now, to be clear, when you end up floating a small amount of the business, you kind of compound this problem. Why is that? Go back to the point around the Fidelities and T-Rows needing larger position sizes. Yeah. They recognize that the two events that they care about are the distribution of shares at IPO, the allocations, which we went back and forth on, and the first day of trading. And then these stocks become very, very illiquid. They're in the public market. How do they become illiquid? Because the float is only $70 million. And we convinced people that it was an interesting stock to buy and hold. That meant we had no daily trading volume. So if the stock was trading around $30 a share, there were days when it was trading literally 2,000 shares, 2,500 shares. Not many people moving money. Correct. And so you can get these huge gaps. So it did trade, quote, too well. Yeah. That's a balance that we're always trying to stretch. So from your perspective, Jeff. Yeah, I know. So when we, the original documents had a $12 to $14 price range. I think we updated it to 16 to 18 over the course of the roadshow because the roadshow was going well. The first two investors said, I want a full allocation. So it quickly became a hot IPO. We ended up being oversubscribed 20 to 1, 25 to 1, something like that. So we probably could have run it up into the mid-20s easily. But you guys priced it at? We talked the market to 22. Yeah. And we priced it 20. And most management teams, boards, CEOs are going to grasp for that last dollar. I think the OpenTable team collectively was very thoughtful about the fact that this is just the IPO. I care about the next two years. Did you guys, tell me the truth, did you guys have like a magic number in your head before you started those pricing discussions? Like, did you think in your head, you know what, when I go to sleep at night, I want $25 when this thing goes on the market. No, you didn't. Part of what our strategy was, we're going to do a teeny little IPO. And then if it went well, we're going to do a pretty big secondary. And so the company was much more focused on make the secondary successful than it was make the IPO successful. Part of making the secondary offers successful is you need a couple deep pocket people in the IPO, even though it was a teeny little IPO. So one of our leading shareholders ended up being Will Danoff of Fidelity. And so we say, Will, invest out of your $10 billion, whatever it is, fund $4 million. And he's like, I don't have the time to read your earnings release at that level. But we convinced him to come in because then in the secondary, he was able to back up the truck. And he got what he wanted, which was a large ownership allocation. His IPO allocation was what? 5% of 70 to $4 million. Some number like that. Yeah. And one of the things that made the add-on so much easier is because everybody knew that we could have priced well above $20. When we priced at 20, that I think built some real goodwill between the management team and the investors. That you guys were willing to be thoughtful about the long term. We ended up optimizing for who got the shares not the price they got the shares at Yeah And I would do that again in a second I advise management teams to do it like crazy because as a CEO managing a public company you don want people who are in and out on momentum hot money, because you spend then all your time literally marketing to new investors, please buy my shares. There are multiple reasons to want a small, from my perspective, to want a small handful of 10 pole investors who buy and hold your stock. One is they buy and hold. The other is it just makes your life easier. Because you only like talking to a pool of like four or five people. Yeah, I've got a handful of owners and most of them, I actually said, how do you want me to work with you? You own a lot of my share. Do you want me to call you after every earnings call? And they're like, no, I'll listen to the call. Almost all of them were just like, nope, I'll reach out if I need anything. Thank you very much. In the first year and a half, there was a period where we dealt with the momentum crowd coming into the stock. Late, yeah. And it was challenging. That sucked. Because we essentially went from, you know, the projected, keep in mind when we were going public in 2009, the projected top line growth in the business was 20% from an analyst perspective, right? Just under 16 to 20, depending on what the analyst, it was always a high margin business. And then it was when you went to 40% top line and 40% margin. That's when every momentum investor came in. And so that was one of the things that I think became more challenging to manage. Yeah. I mean, momentum investors, you mean like hedge fund people? Not just hedge funds, but in many cases it is. That's a broad stroke. Ultimately, they're investors who just care that you're going to beat the quarter. Yeah. I mean, it was so interesting because there were a handful of investors before the IPO who were tracking the business. So I was told that Fidelity, Will does not do IPO pitch meetings. Will walks into the meeting and spent the whole 60 minutes there. Dennis Lynch at Morgan Stanley does not do IPO meetings. Dennis was early. He was waiting for us when we got there. You've got those who you're like, okay, they've done their homework. They get it. Network effects, everything else. Dennis can tell you what three private companies he wants an IPO allocation. And today for five years from now. They have a strategy. They have a strategy. The other guys, you've just blown away six quarters and said, oh my God, I need to latch onto that sucker. It's like, where were you when it was 20? You're buying at 110 now. They're the guy that will jump in, but they also jump out. That's when stocks refall. Tell me about any behind the scenes fights or discussions that you've had with your team. Like, were there disagreements? I mean, you might, you're saying this, but were there parts where you guys were like, we can't agree on the pricing that these guys are discussing with us. We can't agree on the timing. Not a ton. The board gets involved at a few steps along the way. One is I involved them in the selection of bankers. They were there. Is that a best practice that you advise that people should actually involve their board in that? We did a bake-off. We had like six people and we tried to do wisdom as a crowd. No one was allowed to say who they liked and didn't like. And we got a ranking one to six. And it was unanimous. We did a subgroup that went deeper than the rest of the board of the IBO committee. Then the board also gets involved in things like, okay, do you launch the roadshow and what's the price? Almost all of the decisions, the process is being run by the management team. And so in our case, it was CFO, Matt Roberts and myself, and we insulated the entire rest of the company from it. Wait, so you did not involve the rest of the company? No, they're back in San Francisco building the business. We're spending two and a half weeks running around the country. Is that typical? Is it the CEO and the CFO that you typically want in the room? And in fact, one of the mistakes that we see companies make periodically is, is one, building employee expectations towards an IPO too early and two, involving too many people. If you think about it, one of the things that larger companies, private equity backed companies tend to do well is they value that they value the option value. They get themselves ready to go. But guess what? They've also got more resources at the company to do that. Can you break down what you mean by option value? That's a very loaded, those are two very loaded phrases in our business. The preparation phase. And with venture backed companies, I think you have to be mindful and the boards are mindful of the fact of the distraction that you can create through the IPO process. And so what Jeff and Matt did was say, you know what, this is going to be born by us. Everybody else do their job. Everybody else was focused on doing their job and managing the business. Go back to when we were talking about the odds of it being a lousy market that we might say, you know what, this is not our year to go. We're there. So it would have been a huge distraction. One of the things we haven't talked about is that, you know, in a lot of cases, the IPOs involve novel technologies that are not familiar to the market. And you're essentially selling a new way of doing things. Now it's very familiar to us. So I actually book our reservations online. But how do you think about involving other key like technical people to help sort of educate? Or is that the CEO or the CFO? Don't you feel frustrated as a founder that my CFO can't represent this that well? I had a very good CFO. Matt Roberts did a fantastic job. He actually was the one who orchestrated almost all the IPO till the roadshow. But if your CFO can't tell the story, you need a new CFO. Well, that's what I'm asking. Because honestly, when I think of a CFO, no offense to all the CFOs out there, I think of numbered people who are just sitting there with like spreadsheets. Different CFOs can have different styles. They just had, the investor has to trust them. And then that's what the investor is looking at. Can the CFO telling me the truth, know what's going on in the business? And how does that play? There's one thing that you're like, I want every CFO to have this from both of your perspectives. Integrity. Attention to detail. That's true. The market will be on the IPO. My mom with her like 15 snapshot shares wants that too. I mean, we all want that. We often ran into management teams that wanted to have too many people on the road. Three people, sort of the outer number. and you kind of- Who is a third, by the way, when it is not the CFO and CFO? To your point around technology, periodically, if it's a highly technical business, you might suggest you have that person there for Q&A. Yeah. But you don't want to have the distraction. You want to have dialogue. Most investors expect CEO, CFO dialogue. So when you get to the CFO question, we can tell which teams are going to need a lot of preparation. And it's seldom both CEO and CFO. And then we just, we hit them with questions. These are the types of questions you're going to get. He was the CEO in my case. He just doesn't want to say it. You're in a different city every night. You're doing like seven meetings a day, hour-long meetings a day. And the thing they stress more than anything is give exactly the same presentation and answer every question exactly the same because regulation FD, fair disclosure, literally, they said, no, no, no, no. Don't be playing around with giving that slide two different ways. You give that slide one way. You're like a robot. We did it 42 times in like two weeks. Oh, my God, I'm really tired of hearing your own voice. Yeah, I can imagine. I'm not sure I want to work with you. Oh, it's unbelievable. One really helpful thing is the OpenTable core customer included bankers living in New York, Boston. Earlier in my career at eBay, none of those owners would use eBay. Interesting. Unless they happen to be collecting something because, you know, time is much more valuable to me than money. And eBay was a cost saving thing. It strikes me that that's actually one of the challenges because OpenTable at the end as a consumer business, it's one of the challenges of enterprise-facing businesses and especially SaaS businesses where the financial model is also not, it's not as familiar for people to talk about. So I want to talk about the bumps in the road now and the unexpected things that happen. I mean, there's a lot of doing it in the road up to the IPO, a lot of prep, clearly. But despite all your hard work, unexpected shit happens. It happens in everyone. I wasn't at eBay at the time, but I believe Amazon launched their auction competitor on during either the IPO and the secondary and Yahoo launched their auction competitor on the other one. We had two big ones. One is we got our obligatory patent troll lawsuit. That happened while we're on the road. They wait till you're on the road, point of maximum leverage and file. They can get the money and get you out of the way. I get the call, probably you saying, oh, by the way, you just got served. You're like, oh, you know, so that was one. The other one was a little more self-inflicted. And it turned out no one had done an IPO for a long time, including the SEC, our accountants and our attorneys. And our attorneys at the last minute update the filing. You know, it's very formal. They update the filing the night before and the SEC gets it and they say, this is approved and you're ready to sell the next morning. So after a bottle of wine that night, when I get the price, we're trading the next morning and I wake up a little early for like 3 a.m. I mean, you're just wired. Go to the gym. I'm working out. I open up my smartphone and see. Was that a BlackBerry at the time? It probably was a BlackBerry at the time. because this was 2009. Offering on hold. What happened? Attorneys had, when they did the last turn, had attached the wrong attachments. The SEC had proved something that we actually knew was erroneous. And so if we started trading on an erroneous document, there's a chance the SEC could say, no no no you have to unwind all those trades Go start over Now you just like it in every newspaper or business section in America We going public today now we not going public our attorneys sort of start um all the attorneys on the deal just start trying to get the sec on the phone and so we ended up delaying the opening finally right as the market opened is the sec's oh no you're blessed again and so then started trading an hour or two later but we did have a delayed open yep we had we had a significantly delayed open not unlike facebook's delayed open just a different outcome so just like went at Like 10 a.m. instead of 7 a.m. kind of thing. If you're on the New York Stock Exchange, you'll typically open closer to the 9.30 start. And on NASDAQ, they always have somewhat delayed windows. We were very delayed. We were very delayed. And that is a case where time is literally money. It's like ticking away. Now, you know I'm obsessed with Hamilton. We both are. You know, one song says, he walks the length of the city. They have me show up about a half hour after trading has started, so I don't walk into a potential disaster. That's like four or five miles, you know, just through the city. It starts trading well. He goes, you're in good shape. You can go home. And so I walked back. Wow. And then I walked across. And then I watched it. It was just like, oh my God. What about the whole ring the bell thing? Didn't you guys want to like be there? We didn't end up having it the same. We had delayed. Yeah, we had. Yeah. Which is, by the way, is the weirdest thing because it's a soundstage on Times Square. That's amazing. Okay. Wrap up and takeaways. Relationships matter. Timing matters. But while I understand your earlier point that you can't time the market itself, the context, a broader environment does matter. And how do you sort of look at back then? That was 2009. And now 2017, it's eight years later. What are some of your reviews on how IPOs have changed given this context? So a couple of the things that are big takeaways from the open team have actually been somewhat formalized in the market. And so one of my big takeaways from this transaction was what the team did well was invest in the process, be ready to go. They valued the option value of being ready. They invested in that and then were able to respond to an open window, essentially. The other thing that Jeff highlighted was spending time with the public investors long before that 45 minute to an hour long meeting when you're on the road. Yep. Well, post the JOBS Act, that second part has been somewhat formalized. You can do that more easily today. It's called testing the waters meetings. Now, some management teams probably place too much value on it. To your point, you weren't going and meeting with a cast of thousands. You were meeting with a narrow group of believers. Right. Right. And so what I tell people is beyond a certain number, you hit diminishing returns. It is particularly helpful for a unique business that you don't think you can get a full appreciation for in that one hour meeting. And so it's a business to business discussion, but have a discussion with your bankers around whether the testing the waters meetings have value on a relative scale for you. But that's something that the market has enabled with the Jobs Act. Layer that into your timing equation. I think the other piece of advice I've given people is time the IPO for your business and your team, your team, including your board and investors. Don't time it around the market. Time it around at the right time for your business. Think about the scale that you need to be at to be a public company. One of the questions we get is, you know, what market cap is too small? Well, below certain thresholds, we just shrink the number of investors who will buy the deal. And that's not a good leverage thing for the company. But there are small cap IPOs out there. There certainly are. In fact, that seems to be a growing trend in some ways. Yeah. Yeah, there certainly are. I think that you have to think about how unique is the business. If there are four public companies that give an investor the same exposure, and three of them are of decent market cap, and you're going to be the very small one, you better offer something different. OpenTable was certainly unique and thus way more leeway from the market. There's also, I mean, you can go public too early. You can go public too late. If you want a multiple, you want to be a growth stock. When does that matter to be a growth stock? You get a different fundamental valuation and a different set of investors who are willing, if you're growing, investors can say, boy, if they keep that up for five years, look at that InVision future. That's wonderful. You're not growing. They look at it and say, like, it ain't going to get any better than this. It does seem like the best technology companies are like that. Oh, yeah. You want to have the perception you're a growth company, which actually means you have to be delivering growth results. And typically, growth rates decline over time. We were in the teens growth year over year growth rate, according to the analyst models when we went out, that's not really a strong growth company. Then we increased growth in the 30, 40 plus percent. That was a growth company. So if you wait too long, but if you're too early, if you're not ready to be a public company, you can, you know, your business is unpredictable, you know, a bunch of things there. So there is this element of, okay, the biggest timing is from the company's perspective, not from the market's perspective. That's a really great shift in mindset. So just one quick thing, then you mentioned results and that is obviously like the quarterly results, the earnings calls, and the whole song and dance that goes around that. How do you manage that? Well, two thoughts. One is on the timing of going out. When you go out, you don't want to miss the first X quarters. You're going to know how many X is. But you want to be highly confident you can exceed the expectations that your investors have. So I usually counsel CEOs before they go out, have something in your back pocket. We had two or three initiatives that we tested at small scale that we knew were going to work and add to the business. So I was highly confident. But isn't there a tension, though, that, of course, you want to make your numbers, and I get that's important for the market, confidence in you as a company, but it's also very frustrating because the criticism people say about IPOs is that then you're now wedded to this ridiculous quarterly measurement of innovation. I think that's whether you allow yourself to be or not. The pressure is there to conform to investor expectations. You know, oh, my God, I'm going to miss their number. That's the most off-cited reason for not wanting to be a public company. Look at Jeff Bezos. He's run the business exactly as he wanted. He told investors exactly how he was going to run it. He's been completely consistent with that. And some of his investors bought in his IPO. They've stayed with him, what, 20 years now? Yeah, it's incredible. I actually heard some statistics just yesterday because of its anniversary that some of the people who got the early IPO, they might have only spent like $100 and it's now worth $64,000. But so part of it is
