00:27:41 · Peter Singlehurst
What are the signs that you could look for as to tell whether, you know, an IPO is gonna be effective or not? The the... There's a truest answer to this, which is, like, if a company is a great business, it's probably gonna have a good IPO. And if it's a mediocre business, it probably won't, or it might for a bit and then get found out. There's a little bit of a truism perhaps. But what what might be a little bit more insightful than that slight... Than that slightly obvious answer? So companies can choose to optimize for certain things when they come to the public markets. They can choose to optimize for price if they want, get the highest possible price in an IPO, minimize dilution from an IPO. Those IPOs usually end badly, because if you optimize for price at the point of IPO, you're not really leaving enough on the table for new investors coming in to have a good experience. You're not building trust with the public market. And trust is so important both in public and private markets, but I think people really undervalue it as a currency in in the public markets. Or you can optimize for the quality of your partners. Now that might mean that you don't get the highest possible price on the day the IPO opens. But it might mean that you get investors that can be with you for the journey, that can support you in difficult times, where by leaving a little bit of value on the table, you can make sure those investors have a good experience, which makes them more likely to help and support you in the future. Something I often tell our portfolio companies as they come to the public market is is that an IPO roadshow is about... Is, yes, certainly about attracting the right kind of investors, but it's also about putting off the wrong kind of investors. Yeah. There's a... I think there's Buffett who says, like, you get the shareholders you deserve. I'd... I strongly believe that. And if you look at the shareholder registers of... You know, take a business like Amazon for much of its history. It actually had a very stable group of long term investors that stuck with it to the top of its cap table throughout its journey. And there's an argument to be made that a stable, strong support of investor base can be part of a company's competitive advantage. And so to answer the question, Riva, what is it that we like to see our, you know, companies do in IPOs?
00:29:59 · Peter Singlehurst, Guillaume Moubeche
We like to see them optimizing for the right kinds of partners, the quality of the investor, not optimizing for valuation in IPOs. [00:30:07] S1: Super interesting. And I want to continue on that topic and take the the couple of example you mentioned. Do you think that for Amazon... Because Amazon basically was criticized a lot when it entered like the the public market because it was not profitable at the time. And I think back then it was not as common as it is now to have companies losing so much money. So I think like at the time it required people with a certain mindset, you know, like a long term thinker that the company would actually be, you know, become what it is today. And I want to make the parallel with SpaceX. So if you look at the the valuation of SpaceX versus the revenue and you look at the revenue multiple, I think I think they are at, like, 18,000,000,000 or something like this in in revenue and potentially want to IPO at, like, 1,750,000,000,000. It's not like it's numbers on the press, like, or is this kind of thing. So it's not super accurate, like, don't know yet, but it's what we see. So what... What's kind of your vision on how do you value a company? And also, do you think that these companies who have extremely big long term bets can actually attract investors who are here a lot more for the long term and not just trying to make a quick buck on an IPO opportunities that they see and where they can kind of, like, play with public markets.
00:31:42 · Peter Singlehurst
[00:31:42] S0: Yeah. Yeah. So I think I think the first thing to say is that when you invest in a company, you need to understand how a founder is gonna run a business, what they will optimize for, and the kind of risks they're going to take and underwrite within their company. So we we first invested in Amazon in 2004, but I can't take any credit for that. But I think it was actually very clear at that point in time how Jeff Bezos was gonna run the company. And it was very clear because you could just go and read his shareholder letter from when he IPO ed. And, again, this is something going back to the previous question. I think when founders very clearly communicate how they will run their business and the things they will optimize for in an IPO in an IPO letter, I think it's actually very effective. What did Bezos say? He said that he was going to run Amazon to optimize for long term free cash flow per share. And it was also very clear that sometimes that would mean taking bets that had low probability of... Low probability payoffs, but high impact payoffs. So where the, you know, the the magnitude of payoff would more than outweigh the low probability. That's what he did. I mean, he did that consistently. I think Musk is actually pretty similar in terms of how he runs his businesses. What you know about Elon Musk is that every couple of years, he will bet the house. He will, you know, put everything on black in his companies. And we saw him do that time and time again in Tesla. You know, whether it was, you know, going through production hell, kind of scaling up the Model y, We've... And we've seen him do it in SpaceX as well. You know, initially, it was launching rockets. Then it was reusable rockets. It was betting the house on reusable rockets. Then it was Starlink, betting the house on Starlink. And it's Starship, betting the house on Starship. And now it's the next generation which is saying, hey. You know, maybe we can do orbital data sectors. And he's not gonna take that bet half hearted. So if you're gonna own these companies, you need to know the kind of way in which they will be operated and how the founders of those businesses will take risk. And if you don't like that and you don't want founders that are gonna take risk in that kind of way, it's fine. Just don't own them. Just don't invest in them.
00:33:51 · Peter Singlehurst
When we're investing, we're underwriting to a five times upside. So we're trying to find companies where we can make five times our money. That's not an easy thing to do. It's not easy to grow a company's value five times. To do... To grow the value of a company five times, you have to be the business that's willing to take risk. And our job as investors is to try to price that risk and say, if a founder is gonna run a business in this kind of way and there are these kind of business risks inherent within the business, are we paying a price today that is gonna reward us for those risks being taken and mean that in the event that those risks pan out, we're going to get re... Rewarded for taking that risk? And, again, going back to SpaceX, the journey so far has been very much that, like, that has worked out. It was not clear that any of these step functions would work. It wasn't clear that Starlink would work. It wasn't clear that Starship is working the way it is. And today, it is not clear that orbital data centers will work, but there is risk that's being taken. And so you need to make sure when you're investing in a company that you can still see that path to a five times upside scenario. Now I can't tell you whether SpaceX has that today because I can't tell you what the valuation is gonna be in the IPO. And the maths are very, very different if it's, you know, $1,500,000,000,000 IPO compared to if it's a $2,500,000,000,000 IPO. But, ultimately, that's what we're trying to do. We're trying to underwrite those five times upside scenarios. We're trying to find founders that are willing and able to take risks, and then they're able to execute on the delivery of that risk.
00:35:26 · Guillaume Moubeche, Peter Singlehurst
[00:35:26] S1: So lesson is never bet against Elon. [00:35:30] S0: So far, it wouldn't have been wise to bet against Elon. [00:35:34] S1: And looking at ByteDance, because I think it's a company you also invested in, I think it's kind of like the the opposite of of like a SpaceX. Like, I've came across some numbers, not sure if they're accurate, but I think it was like a 50,000,000 EBITDA or something like this. Like, what's why do you think the valuation is, like, so low in a sense? Because I think, like, if you look on private markets, ByteDance is probably trading at around, like, 600,000,000,000. It's hard to trade ByteDance because, obviously, there are a lot of restriction and a lot of, like... I think it's geopolitical, also, like, climate that is a bit tense between The US and China. But how do you explain, like, such a low valuation if these numbers are accurate?
00:36:24 · Peter Singlehurst
[00:36:24] S0: Yep. So ByteDance is way too cheap. And by the way, it's not as cheap as it was. We were buying shares a couple of years ago at about four times free cash flow, for a company that was growing really, really quickly. So what's going on, ByteDance? I I can't think of a company in sort of my fifteen years of investing where the price is so disconnected from the fundamentals of the business, yet for rational reasons. Let me unpack that a little bit. So, yeah, on one hand, the share price of a company should be driven by the fundamentals of the business. On the other hand, it's also driven by the demand and supply dynamics of those shares. And I think that the picture that we've seen in ByteDance over the last five or six years is where the demand supply dynamics have swamped the, the business fundamental dynamics in the share price. So if you look at who owns ByteDance and who might buy ByteDance, well, anybody that owns ByteDance, if you're an early stage investor in ByteDance, even, you know, at a $23.45, $600,000,000,000 valuation, it's the best investment they would have ever made and probably will ever make. And it's probably 99% of the value of their funds. And they probably have their LPs saying, great job, guys. Please, can we just have some money back? And by the way, if you give us some of that money back, you are gonna crystallize astronomical amounts of carried interest. Please just sell some. And a lot of those early stage investors will say, yep. That's a very rational thing to do. Even if I'm gonna keep a large amount of my, you know, position, I'm gonna sell a little bit. And because the company is so big, selling a little bit of an early stage VC portfolio can be hundreds of millions of dollars or billions of dollars of supply. So that's actually quite a rational, you know, supply dynamic in the shares of ByteDance. What about the demand side? Well, ByteDance is, like, probably the most controversial company in the world. I mean, it's probably a little bit less controversial now, but if you go back a few years ago where it really looked like TikTok might get banned, it was the most controversial company in the world. Like, who wants the headache of buying a really controversial company? Plus, you had a lot of US investors that were just, you know, not gonna touch it with a barge pole.