[00:00:00] Hi, everyone. This is Michael Zeuner, one of the managing partners at Wave Family Offices. Thanks for listening to the Wealth Enterprise Briefing. We’re joined again today by Matt Ferrell, our deputy CIO, and we’re going to talk about a topic that’s been in the news a lot lately, namely IPOs. , because there are several very high-profile, venture-backed companies that are talking about raising significant, sums of money in the public markets through an IPO. And we’re going to take a step back and talk with Matt about, what IPOs mean and, more importantly, what the implications are and, best practices are for, investors who do have the tolerance and capacity to invest in illiquid private markets, about the venture capital markets and, important lessons learned. So Matt, welcome. Thank you. Matt, [00:01:00] just take a step back for our listeners and, talk about IPOs, which we haven’t seen in a long time, right? In several years, and now all of a sudden, we’ve had the SpaceX IPO and there are several others that are, slated to go IPO. What is an IPO? And how does it work? Sure. So an IPO stands for initial public offering, and, to be short, it’s when a private company becomes public. I think what’s lost is it’s actually a financing event to where a company issues new shares. But maybe just to back up and go through the, kind of the path a company takes to go public. So initially, it’s private. It could be, bootstrapped by the owner, it could be injected from venture capital, private equity, doesn’t really matter. It’s a private company. Probably six to 12 months before a company goes public, they file what’s called an S1 registration statement, and that’s just to initiate the process. It’s a public disclosure document. It covers business, [00:02:00] financials, operations, use of proceeds, et cetera. So then leading up to the IPO, there’s something called a roadshow. That’s when the management team can travel around and kind of pitch the company to institutional investors. , That’s to essentially gauge demand, drum up demand, and ultimately help with pricing the share price of a stock. And then you go to the pricing, which happens, a couple days before a company goes public, and that’s the actual price in which it’s going to be offered at once it goes public. So then you have the first day of trading, and that can be on an exchange. , You can see IPOs pop and go up. That may sound good, but that could mean a company left money on the table by pricing too cheaply. , Or conversely, it could go down and mean they, they kind of overpriced. But what does that mean for the insiders? So insiders could be management team, it could be institutional [00:03:00] investors who invested pre-IPO. There’s something called a lockup. Typically, it’s a 180-day lockup. That means that you’re unable to sell your shares on the market for 180 days. Now, there’s different types of lockups. We actually see it with SpaceX. Not to get into the details, but it’s what’s called a laddered approach to where there’s going to be different liquidity events along the way. And that could be a signal to where if management team sells, it could be a signal maybe they’re kind of less bullish on the company or just seeking liquidity. But it can drive volatility once insiders start to sell. Okay. And so let’s, let’s focus on not so much the IPO itself, but what happens long before the IPO with venture capital firms and venture capital firms making investments in startup companies. And clearly not every company in [00:04:00] their portfolio is going to, do an IPO at some point in the future. Uh, how does that work? How should investors be thinking about the opportunity to, invest early? , Again, investors who have the tolerance and capacity to lock up their money for 10 or 12 years, how should they be thinking about, accessing potential IPO companies early on in the process? Right. I would think of it as an IPO as the finish line, but the race started a decade plus prior. And generally speaking, you can start investing in what’s called the seed stage. That’s an unproven company. They often don’t even have a product, maybe not even revenue, certainly not profitable. But you can invest at the early stage of a company. And, the average hold period can vary, but what’s it like 80% of VC funds are active after year 12, right? So it’s a long hold. And so you really are making a bet a decade plus [00:05:00] prior And ultimately seeking a liquidity event. Now, it doesn’t have to be an IPO. It could be an acquisition from a strategic company that’s looking to acquire, a technology or product, whatever it may be. But an IPO is a method of liquidity, and it just starts a decade plus prior, quite often. And How is venture capital investing different from traditional private equity investing where, my sense is you’re investing in companies that already exist, that have cash flow, that have earnings, that have a product, that have revenue, that, that have a trajectory. Uh, venture capital investing is an entirely different activity. Yeah. So when you think about a company’s life cycle, it’s often started by friends and family or bootstrapped by a founder, and you think of the maturity of the company. You know, as I said, often there could be not even a product, it could just be an idea, no team, no revenue. It’s the most, the highest risk part of the company, [00:06:00] right? Because there’s no revenue. And then you move along the, business cycle, gets to what’s called growth phase. You know, generally speaking, they have product market fit, they have top-line revenue, usually not profitable. But as a growth company, it’s de-risked because, as I mentioned, they have revenue now. And so they’re seeking capital at this phase to continue to grow and scale. Then you get to, post, more of a mature phase of a company. That’s generally when you’re going to see private equity. And the play there is less about this rapid growth, the more mature, it’s more about optimization of operations. So that’s, continue to increase top line, but also synergies, via mergers and acquisitions. It could be reducing costs, introducing new product lines, depends on the company, obviously. But c- considering that these companies are generally profitable by this phase, it’s lower risk, and therefore you expect a lower return. So [00:07:00] there’s a risk-return spectrum starting at the seed stage, and it can make sense for investors, again, who have the illiquidity tolerance, because each has a different risk-return profile. It’s just important to size them appropriately for the risk. , And Matt, when one invests in venture capital in the early stage funds, should one’s expectation be that every company is going to be a SpaceX or an Anthropic or a, an OpenAI? No. So again, these are highest risk part of a company’s life cycle. I’d say rule of thumb, 30% or so are going to fail, go to zero. , And then you expect some kind of range of outcome for the rest. Now, there’s something called the power law of venture capital, and that essentially means that a, a handful of companies, if not one, is going to drive the bulk of the return in venture capital. Uh, it’s a high risk, high return proposition. , And we’ve talked about this before to where, [00:08:00] we’ve gone through a period of lack of distributions over the past, I don’t know, four or five years. And it’s been really difficult for investors to pull the trigger on new venture investments for that reason. But I think there’s an important lesson here with the SpaceX, for example. You know, we have investments in SpaceX through private funds. And, there’s one fund in particular that comes to mind that otherwise wouldn’t be a very great fund, but they invest in SpaceX very early on in the life cycle, continue to double down throughout the growth phase, et cetera, and it’s going to drive the outcome of the fund. The fund is going to be marked at a five times multiple and probably going to be higher at the end, depending on what SpaceX does publicly. The point here is that power law is, is alive and well, and it’s very hard to predict. I think you can go back to, the dot-com in 1999 when Google was backed. Um, that [00:09:00] was kind of a bubble during that time, and it wasn’t– it didn’t really feel good to invest at, at stretched evaluations, but you would’ve missed out on Google. Or you can go to Facebook, during ’05 to when social media wasn’t really developed then. It didn’t really feel like an obvious winner at the time, and you would’ve missed out on Facebook. So usually, again, when those times , it may feel the least comfortable to invest, it could be the best time ’cause you can miss out on a SpaceX. So that’s why it’s important to continue to invest across vintages so you don’t miss out on these generational companies. Well, more than just investing across vintages, it’s important to have a strategic private investment program that allocates a certain percentage to venture consistently year over year. Uh, the themes may differ, right, as cycles change, but investing with high quality venture managers consistently, is important. Uh, not every fund and not every, manager will own, the next SpaceX, but, to [00:10:00] continue to invest through the cycle becomes important. It’s, it’s very hard to predict the future, but staying consistent with your allocation and being strategic, is important. Sure. Agreed. I think one last point is kind of post-IPO, what one could expect. You know, there’s some interesting stats and case studies. Looking at Facebook back in 2012 when it IPO’d at $38 a share, that was 104 billion market cap. It was the largest IPO in history at the time. Um, its stock struggled initially. It closed by… It went down 50%. , I think it finished one year later down 35%. And so you project now, though, it’s, it’s roughly at $600, right? So it’s not a guaranteed that’s going to be pop immediately . It’s another investment. It’s another phase of the company’s life cycle. I saw a good chart. It was, like, the median drawdown of the largest IPOs over a course of a year was about down 55%. So they can [00:11:00] certainly be volatile, especially as the insiders liquidate, as we talked about. So, one could be, tempted by, the FOMO, fear of missing out, but just recognize that these are often very volatile. So having the right expectations is important. Okay. Well, thank you, Matt. I think we’ll leave it there. I appreciate, the update. Thank you.
