Charles Mizrahi: Dakin, thanks so much for coming on the show.  I really appreciate it. Since I read your book I said, “Wow, this is really great stuff.” There’s so much about the IPO market that I thought I knew, but you just show it warts and all. Really fantastic job.

Dakin Campbell: Thank you very much.

Charles: Folks, the name of the book is Going Public: How Silicon Valley Rebels Loosened Wall Street’s Grip on the IPO and Sparked a Revolution. Before we begin, I want to go really elementary here. The way you analyze IPO, who the winners are, who the losers are, who the players are, give company examples, really great stuff. I guarantee most people on Wall Street don’t even follow how this is done.

First off, did it take you a while to get all the mechanics of how things are done and all the shenanigans that take place?

Dakin: I’ll tell you, I’ve been writing about Wall Street for 15 years. I was in the same position. I knew about IPOs, I read about them in the news, but I didn’t really know the mechanics of how they worked and what happened in these back rooms. The process of writing this book was about two years beginning to end.

It was during that time that I really learned how the mechanics worked and educated myself on how IPOs took place.

Charles: Right, and who the winners are. I think that’s really key because I think that’s the whole premise of your book. I think the IPO system was designed back in the 1920s. They are trying to use that today. You still have investment banks telling you it’s the best thing since sliced bread, right?

Dakin: That’s right. The modern IPO was really designed in the 1980s by a Goldman Sachs banker named Eric Dobkin. That still means it’s 40 years old. Obviously there were IPOs before the 1980s, they were just marketed and sold differently. In the course of the book I do go back in the history of the IPO market and look at how things have changed over time.

The modern IPO as we know it and read about it came about in the mid- to late-1980s.

Charles: When I saw your book – I forgot who introduced me to it. I think it was Mary Childs, who was a guest on the show a while back.

Dakin: Mary’s a good friend.

Charles: Wrote a great book on Bill Gross. When I saw the title I said, “I gotta have you on the show.” So many subscribers and so many people I know think buying an IPO is like a ticket to wealth. It’s such a rigged game for the retail investor and some institutional investors that it makes no sense.

Before I jump ahead of myself — I’m just excited because you have so much in here I want to talk about – what is an IPO? I just came from Mars, explain it to me.

Dakin: Sure. An IPO is the first time that a company sells shares to public market investors. As part of that, it gets listed on an exchange like the New York Stock Exchange (NYSE) or the Nasdaq, so you and I, your listeners, my parents can buy a slice of the profit from the company.

Before that, companies are private. Investors can still buy into those companies, but you have to be an accredited investor. It means you have to have a certain amount of wealth or you have to be an institution or somebody who is more wealthy.

So, really, an IPO is the first time regular people can get access to the profits from some of these fast-growing companies. Well, any company.

Charles: Buying a piece of their business, right? I want to be part of Airbnb, I could not have done that unless I was a private investor, had a high net worth, happened to get in at a good valuation – all those things which make it extremely prohibitive. Here I can get a piece of Airbnb.

I rent out my house – theoretically – as an Airbnb, I love the company, I want to be a partner with them, I can’t buy their stock. They go public, I can now buy their stock. Why do companies go public? To stay private you don’t have all the scrutiny, regulation, board of directors telling you what to do.

Why do companies go public?

Dakin: I think the short answer is to get more money. Or to get access to a broader group of investors. If you think a company is raising money in the private markets, that’s a small pool of cash they have access to. When you add public investors into that group you get a much larger pile of money.

Companies need money to hire employees, to do R&D, to build their business. Going public allows them to raise money from a much broader and deeper swath of investors around the world.

Charles: That’s one reason. Give me another reason from the employee side. If you and I owned a company, why would we go public?

Dakin: When a company is private it’s much harder to sell shares. If you’re an employee and you want to put your kid in private school, you want to put a down payment on a house, and you have to sell shares, that’s a very hard thing to do. The market is illiquid.

When a company goes public, any employee that has shares can go and sell those shares at any time they want. It just goes onto the exchange and anybody can come along and buy it. For employees who have been working in many cases for years for these startups, they want a way to cash out their investment and move that money into other productive ways of buying things.

Charles: Liquify their wealth. That’s what it is. I could work for the company for 10 years, 100 hours a week, for a terrible hourly wage. But the golden ticket is the shares I’m getting, which don’t mean much until the company goes into the public market because then I can sell them and liquify my investment.

Dakin: That’s right. It’s worth saying that it’s very hard to sell in the private market. You don’t get what the shares should be worth. It takes months of writing contracts and sending contracts back and forth. It’s not attractive to any employee. You want your company to be public. You want to sell these shares at a moment’s notice.

Charles: If a company has enough money, they don’t need public money, and their employees are cool with the incentives they have in place, isn’t there a regulatory reason when a company has too many investors that they have to go public?

Dakin: Yes, that’s a very good point. The SEC has rules. I think it’s now 2,000 investors. If you have more than 2,000 investors you have to go public. I think regulators basically think at that point you are a really big company and you should have some obligation to share your financial metrics and your performance with the broader world or the broader financial markets.

Charles: Prior to the JOBS Act of 2012, it was only 500. That’s why Facebook had to go public. Post that, it was a great thing for companies. Let’s face it, to go public is a double-edged sword. You now have to have a whole new set of bosses as a CEO or founder. You are under much more scrutiny.

You watch your daily fluctuations go up and down with the stock market. This could be very distracting when you have a long-term view.

Dakin: If you talk to founders, many of them will tell you they would like to stay private forever. Obviously employees don’t like that for the reasons we have talked about. One of the things I say in my book is that going public and becoming public companies are a good thing for the system.

Private companies have to submit themselves to more scrutiny. We learn more about how their business is performing. Sunshine is a great medicine. That really brings some needed scrutiny and helpful scrutiny to these companies.

Charles: Those are the reasons companies go public, you discussed IPOs with us, but I want you to share the story of Steve Jobs when he was looking to make Apple a public company. In three questions he found out that the Wizard of Oz was nothing more than a guy standing behind a curtain.

With all the charades and everything it’s very expensive and a very rigged system.

Dakin: When I was reporting the book and I came across this story and it was gold. In a very short amount of time, as you mentioned, Steve Jobs just cuts right to the center of the conflict that’s at the heart of IPO and calls his bankers out on it. It’s short, sweet and it shows the man’s brilliance.

It was in 1980 when Apple went public. He’s sitting in a conference room in San Francisco’s financial district, sitting down with his bankers and trying to come up with a price of the shares that Apple should sell at in its IPO. The bankers want to tell him, “Hey Steve, we think you should sell the shares for $18.”

Steve hears them out. Then he says, “But I’ve been talking to people and they tell me they think I can sell the shares for $25, $26, $27.” The bankers say, “Maybe, but $18 is our recommendation.” He says, “Who is going to get these shares at $18? Aren’t they going to go to your best clients?”

The bankers say, “Yeah, our best clients will get them, but they will be good Apple shareholders.” They jumped to interject. He said, “Won’t they be terribly happy when they get the shares for $18 and they can turn around and sell the shares for $25, $26, $27?”

The bankers hesitate a little bit and say, “Well, yes, I guess they will be.” Then Jobs says, “And you’re going to charge me 8% to do that?” He just cut right to the chase. I open the book with that anecdote. It perfectly forms the questions you and I have been talking about and people have been talking about the IPO business.

It’s this idea that bankers agree to sell the shares for these companies at too low of a price, at $18 in Apple’s case, when I reality they could sell them for many dollars more. The people who are getting the shares at $18 are only the institutions. That’s the crux of the IPO business.

Charles: So the shares are allocated on a very small percentage basis because in a rising market this is guaranteed money. They are going to open up at a higher price, so if you got them at $18 you can turn around and flip it for $25, $26. In some cases it goes up 100% or more.

It’s found money. Correct me if I’m wrong, the underwriters when the company is going public allocates these shares to their best customers who are doing commission or transactional business. It’s like the cherry on the cake. It’s to keep them doing business with them. Is that right?

Dakin: Yes, that’s right. I think we should take a step back. Thank you for slowing me down a bit. I have been writing about this stuff for two years. I get excited about it jump ahead. Investment bankers are not talking to retail investors. They’re not talking to my parents. They’re not talking to you and I.

They are only talking to mutual funds and hedge funds. So when it comes time to do an IPO, to price a company’s shares, the only investors they are talking to are mutual fund and hedge funds. Those are the investors getting the company shares. You and I, individual investors, don’t get the shares until the stock starts trading the next day on the stock exchange.

Charles: The reason that they are getting these shares and offering these for sale to the hedge funds and institutions is because of what reason? Altruistic? They want to help their widows and orphans funds? Why are they allocating shares to multi-billion-dollar funds?

Dakin: The bankers and companies will tell you the investors getting these shares should be long-term holders of the stock. So people who really believe in the company’s story and the company’s growth aspects. In many cases that’s true, but when you really dig into the process you see the bankers have financial incentives to give the shares to the investors who pay them a lot of money in commissions and fees.

It’s difficult to disentangle the financial incentive the bankers have to give the shares to certain of their favorite investors and clients.

Charles: As a reward for doing business.

Dakin: As a reward. Exactly. Or the investors that supposedly are going to be good, loyal shareholders.

Charles: Let’s cut the crap on that right off the bat. You know and I know that volume they have on the first day is not these guys holding it long term.

So that’s incentive number one. Chalk that up to the bankers. The bankers want to get those shares into hands that reward them with future business. Now, like everything in life, there’s a price. The people paying that price are the company, the company’s treasury, their employees. That’s because of what?

Dakin: That’s because the incentives that the bankers have to reward their best customers lead them to price the shares at a lower value than where they might otherwise do that. In the Apple case, they have an incentive to sell Apple shares for $18 to their investors instead of charging their clients a higher amount.

Charles: More accurately, the truer value of the underlying worth of the business, right?

Dakin: Yes.

Charles: It’s their incentive if the underlying worth of the business, let’s say Jobs felt $25 or $26, if they were to do it at $22 or $23, their favorite customers who are getting these shares might see a 10% pop between $23 and $25, but if they offer it at a lower price they are able to say, “I just made you a 40% or 50% return in a heartbeat. Keep doing business with me.”

The one who pays for this is the company. Once they sell those shares – and this is what I learned from your book – once they sell those shares at the predetermined price, any fluctuation up or down is nothing to them.

Dakin: That’s right. There’s a company in my book, Unity Software, this example makes it very clear. They were selling 25 million shares. When they were thinking about what price to set those shares at, the CFO was very specifically thinking, “If we can sell these shares for $1 more, that means $25 million more to our company that we can then use for software development. If we can sell for $2 more, that’s $50 million.”

So the fact that Unity had this round number of shares they were selling makes it a great example for you to look at how much money companies are potentially missing out on. On Twitter and in the marketplace of ideas that’s called leaving money on the table.

That’s really what critics of the IPO market argue against. Underpricing the shares, which the bankers are doing, leaves money on the table that could otherwise go to the companies for software development and the employees.

Charles: Even more so, if these shares double in price that day, the company could leave hundreds of millions of dollars on the table that were eaten up by institutions who made the gains and nothing goes to the company.

Dakin: Right. Or less goes to the company, certainly. It’s an economic rent in theory.

Charles: Also there’s another thing I learned from you. The company could have raised the same amount of money by selling fewer shares if it was priced at a higher amount. As an owner of a company you never want to dilute your shares. You want to sell as few as possible to make the most.

The bankers and underwriters are doing the opposite. They want to sell as many as they can as low as possible to create that buzz and get that first day pop, which does nothing for me as an owner. By the way, another rigged system is I can’t sell for six months or so. Is that right? A lock-up period?

Dakin: That’s the traditional model.

Charles: So you and I own Campbell and Mizrahi Widgets. We go public. We can’t sell our shares, yet those guys can flip them back and forth 50 times before the closing bell. We just have to sit there and suck it up.

Dakin: That’s right. One of the arguments I make in the book is direct listings, which I’m sure we’ll get to. It is certainly talked about in the book. They gave companies a lot more leverage in their conversations with bankers.

Charles: Don’t even go there. There’s another step I want you to speak to. It’s absolutely fascinating. To take my company public, to take our shares and put them on the open market, to liquefy our investment, to me us money, you as an investment banker are going to charge me a fee to do that.

You are going to charge me a fee to lower the price. Your incentive is not to get me the highest possible price on the IPO. Your incentive is to take care of where your bread is buttered, which is with your clients. My father was a warehouse manager. His boss each year used to give him a turkey.

This is a turkey for Thanksgiving. Here it is. What’s happening there is that when they do that, price it lower and have that pop, they’re charging a fee on the total amount raised. I’m not getting – let’s use $20 a share – I’m not getting $20. What am I getting?

Dakin: That’s right. You’re getting $20 less some fee. That fee is typically 5%-7% for the bankers. It hasn’t changed in years. I guess if you’re a Facebook or Airbnb you can negotiate a little bit.

Charles: But, bottom line, it’s costing you a fee for the benefit of Wall Street mavens to sell my shares to their most favorite clients who, odds are, will flip them as quickly as possible, which were priced low for that first day pop. Then CNBC says, “What a successful IPO. The thing went up 80% today.”

I never understood that until I read your book. The only ones who should be happy for that 80% are the underwriters. From the company’s perspective, they should not be happy that the stock went up 80%. You don’t want that first day pop.

Dakin: That’s right. I think you really want a very small pop – 10% to 30%. Employees do see the stock price rising in the days and weeks of the IPO and that leads to some soft psychological morale boost.

Charles: 100%. Everybody starts to buy cars and Rolex watches. I got that. I totally got that. But we don’t want to see the price go down 50%. That’s not what we want. I think the first example you come up with with the sea starting to change was Google. Walk us through how Google did something a little different than going through this process.

Dakin: That’s right. Google went public in 2004. Even in 2004 its business model was largely what it is today, which is selling ads on the internet. They were auctioning off thousands of ads every day. Google founders, Larry Page and Sergey Brin, thought, “If we can auction ads, why can’t we auction shares? Why do we need to go to an investment bank to tell us how to do an IPO and fund investors?”

They said, “Let’s just auction our shares off to the highest bidders.” They went out to try to do that. First of all, they ran into regulatory skepticism. The SEC did not like what they were trying to do. The SEC was worried that individual investors were going to get ripped off in some way.

The SEC really slowed them down. I think they had to put out 9 or 10 amendments to their IPO prospectus. But guess who else didn’t like it? Investment bankers didn’t like it and institutional investors didn’t like it. They had a good thing going with traditional IPOs.

They said, “Why should I have to do an auction? Why should I even play around with this? I’d much rather talk with my investment banker and tell him or her how many shares I want and get my shares. That’s the way it’s always been done.”

The investment banker, for the reasons we’ve talked about, said, “Why do we want to put these shares up to an auction? We’d rather hand allocate them to our chosen clients.” There were a lot of forces against Google. It didn’t work out the way they wanted it to go.

They initially tried to sell shares as high as $135. They didn’t get as much interest as they thought because a lot of people were scared off by the auction. They ended up selling them for $85 on the day of their IPO. The next day it went up to $100 and it never looked back.

Talk to people, financial historians, Google executives and employees and they will tell you Google’s IPO went great, thank you very much. We are quite happy with how it went.

But in the days, weeks and months after Google’s IPO you saw lots and lots of news reports, anonymously sourced bankers talking on the front page of the Wall Street Journal saying how Google’s attempt at doing something different completely failed. It was terrible. Don’t try to change it.

Charles: I just want to dig a little deeper into that. The stock price rose. I remember reading the S-1 at the time and I remember thinking, “What a profitable business.” I wasn’t the only one who said that. It was selling clicks. Keywords was such an amazing business.

They did accomplish what they wanted. You didn’t have that one-day pop. It was only 10% or so between $85 and $100. The reason they could not have gotten more, just from my humble opinion on this, is because people were scared, but this was a new business.

People weren’t grasping what this business was. I remember at the time, I think it was ’02 or ’03, I read an article about the algorithms and how it searches. I said, “Holy smokes.” I didn’t quite understand it, but you knew it was a great business. I remember using Gmail and Google Search as soon as it came out. I loved it.

I think the key thing here from my perspective is that 15% pop was cool because it wasn’t enormous, they didn’t leave a lot of money on the table. Also, once the business was more palpable and more understandable, that’s what I think sent the stock rising. Not the flippers.

It was the valuation of the business. I remember Bill Miller at the time who bought in on the IPO said this thing was underpriced. Even $135 was priced at the wrong number.

Dakin: You mentioned Bill Miller. This auction method was so foreign to investors that Bill Miller hired experts in auction theory to help him figure out how to structure his bids. It helped him. He got a huge part of that IPO. Obviously Google performed very well after that.

You know, you talk about it being an unknown and not quite established business yet. This was 2004, we’re coming out of the dot-com crash. Google was the first sort of big IPO to come down the pike after all that carnage. There were still a lot of people who were burned and still wary of high-growth tech companies and whether they could live up to their promise. That certainly didn’t help.

Charles: If you recall, the call was for Google on their search page because they had no advertising. Yahoo at the time had their own page and it was full of advertising for search. Google was how it is now. It’s just kind of blank with a box to put in.

People said, “These people don’t know what they are doing.” Yahoo was ahead of them. There was AltaVista. I forget all the web searches back in the day. If you didn’t understand how they were making money on keywords you missed it. All these others were making money on advertising on the home page and all these things.

Google came up with an algorithm. I think maybe – and I’m not sure – that was a big part of the underpricing. They didn’t understand the business or the business model. Could be, I don’t know. You know better.

Dakin: Yeah, that makes sense. But coming out of Google with it not going as well as some people would have liked, it gave an opportunity for naysayers to say, “Don’t change this process.” A few others tried to do an auction like Google before the financial crisis.

Rackspace was one I think they IPOed in the same month Bear Stearns was bailed out. But largely, the traditional IPO didn’t change. Any thoughts at innovating it or introducing new elements died away with Google. Until really Spotify started thinking about doing something different around 2016.

Charles: Walk us through Spotify because, first of all, here’s a company located in a cold part of the world. I think the CEO said, “Your people are living in beach houses, we are living in 400 sq ft apartments. I want to make that money for my employees, not for rich guys to get richer.”

What did Spotify – the CEO was…

Dakin: Daniel Ek.

Charles: Daniel Ek. Brilliant guy. He gamed the system. He knew exactly what was going on. Just give us the highlights of that. I think you positioned them as the first company to start the fire here.

Dakin: That’s right. So Spotify CEO was Daniel Ek and his CFO was this guy Barry McCarthy, who had been a longtime CFO at Netflix when Netflix was still trying to establish its business model and figure out what it was going to do. Spotify had no need to raise money.

They had about $1 billion or more in the bank, but they wanted to go public for this reason we talked about earlier. They wanted to give employees and early investors liquidity. Basically, an easy way to sell shares if they wanted to.

Charles: Let me interrupt you because you do a fantastic job describing this. It really crystalized it. You take a lot of theory and it really put flesh to the bone. You have these guys living in Sweden where Spotify is. These people are working 100 hours a week. It’s dark most of the time. It’s freezing cold.

They are living – you know the Swedes are not glamorous in terms of spending on a whole bunch of luxury. They are working out of 400 sq ft apartments. These guys have not been able to cash in on the growth of Spotify. Now that I set that up for you, tell me how this CEO said this system that is currently for IPOs is not one for us.

Dakin: Right. They were really trying to give employees liquidity, let them buy a house. Again, spend money in other ways. They also didn’t want to issue shares in a way that would dilute them or other investors any more. Barry McCarthy set out to figure out if there’s a way to go public without issuing, without selling, new shares.

That’s an IPO. An IPO is a company selling new shares. He said, “We want to be public. We’re happy to make our financials clear and be very transparent about all that.” He spent six or nine months talking to lawyers and other people’s opinions he respected talking about going public without issuing shares.

Most people said, “You’re crazy. The traditional IPO model is the way to do it. I’m sorry, you are going to have to issue some new shares and dilute existing shareholders to do that. That’s just how the system works.” Because of who the CFO was, he knew the financial markets.

Charles: He had a lot of credibility. When he was at Netflix the company soared. He had a lot of street cred.

Dakin: Right, exactly. And he had a partner in CEO Daniel Ek who loved change, loved doing things differently and was totally open to going on the road less travelled. So together the two of them figured out a way to directly list their shares on the exchange.

This was taking the existing shares that had been sold or issues to employees or investors and just putting them on the NYSE so they could trade freely. In 2018, that’s exactly what Spotify did. But to do that, they had to talk to the Securities and Exchange Commission (SEC).

They had to talk to officials at the NYSE. Both expressed real reservations in the beginning. But because of the credibility of Barry McCarthy and his insistence that this is the way they were going to do it, they pushed it through. They did it.

Charles: How did they get the shares listed without giving up anything?

Dakin: It was really a process of talking to existing investors and putting them in touch with people who wanted to buy. To do that, they did hire investment bankers to act more as advisors, not really as underwriters in the way they would in a traditional IPO.

So the investment banks talked to the investors who wanted to sell their existing shares and the employees and they went out there and found other investors who wanted to buy the shares. They decided the way they were going to do this was they were going to pull all this activity into one single trade on the morning the shares were going to start trading.

The way it worked was over the course of three or four hours in the morning, the investment banker and the company talked to everybody who wants to sell and everyone who wants to buy. They tried to put them together and find a price where they can match them.

When they do that, then they talk to the NYSE and the shares are released for trading.

Charles: So basically what they did was they orchestrated one big trade between all the buyers they accumulated over three years. That’s the first trade and then let the games begin. Then every subsequent trade on the exchange was off that one as a starting point.

Dakin: That’s right. Exactly. Guess what, that’s how every stock is opened for trading in the morning on the NYSE. He had to figure out the legal aspect and the regulatory aspect, but it’s not like he was creating something out of thin air. Yet, everybody he went to and said he wanted to do it this way said, “You can’t do that. This is crazy. You have to do it the traditional IPO way.”

He really tapped into an existing mechanism and really used it for their purposes.

Charles: If you and I were a private company, we’re going public, the best investors are those who believe in our mission and are going to hold the shares for the long term. Avoid the crazy volatility and fluctuation which is nothing but a distraction to us and the workers trying to build a business.

One company you mention here in the book, Unity, they spent an awful lot of time creating this master spreadsheet of every investor they met. What they did is they went ahead and circumvented the process of the allocator writing to their people. Want to just share that?

Dakin: That’s right. The investment bankers will come to a company and say one of the things we’re going to give you in this IPO is access to institutional investors and we’re going to tell you which ones are the best.

Charles: The best that would be long-term shareholders.

Dakin: Exactly. So many companies take them at their word. Lo and behold, some of those investors sell the next day and are not great partners for the company, for the reasons we’ve discussed. What Unity decided is let’s go meet these investors ourselves.

Let’s cut out the bankers and do the hard work ourselves of researching the best investors out there, talking to them about our story, hearing how interested they are in us. As they did that, they created a huge spreadsheet with each row for the investor and lots and lots of columns for the different attributes.

They held a cocktail party where there were no bankers but they invited a bunch of investors they really liked and wanted to get to know. So when it came time for Unity to allocate their shares in the IPO, they had this huge spreadsheet. They could easily see the investors they determined were going to be the best long-term shareholders.

In cases where the bankers came to them and said, “We have this investor we think they’re going to be a great shareholder.” Unity could go to their spreadsheet and say, “We talked to them at our cocktail party and they didn’t’ seem that interested.”

Or, “We had a meeting with them and they asked not very smart questions.” Unity took some of the power back from the investment bankers and played a much more active role in allocating to only the people they thought would be the best shareholders for them in the long term.

Charles: Their incentive was to get long-term shareholders. The investment bankers, their incentive is to give these as a gift to their best clients. I remember in the book you describe some of these bankers and hedge fund workers were pissed that they weren’t getting allocation.

Dakin: For sure. Some of them come to expect this or think they are entitled to allocation. That’s just not true.

Charles: Let’s fast forward because we’re running close to out of time. I highly recommend if you want to learn more about IPOs and why the public is the sucker, if you’re at a poker table and you don’t know who the patsy is, you’re it. Your IPO jumped and it was successful and people are buying at the worst possible price.

It’s absolutely ridiculous. I think you had professor Jay Ritter who has every stat. You know who gave me that? Spencer Jacob from the Wall Street Journal.  We had him on meme stocks. He wrote a fantastic book on that. He said if you want to know anything on IPOs and performance to go to his website. Ritter’s website shows you in black and white how terrible these are as investments.

One year, two years out. There’s always time to buy it. Don’t buy with that first day pop. You are buying from people who are looking to sell and got the stock for virtually nothing or with a big profit baked in.

So where are we today? You and I go public in 2022. Where is the marketplace now?

Dakin: Great question. There have not been any IPOs in the U.S. in a long time. There have not been any tech IPOs in many months. We’re actually in the longest drought for tech IPOs since the dot-com crash 20 years ago.

Charles: I think this year we only had around $5 billion or so, which is a puddle. It’s nothing.

Dakin: I saw a stat that was even half that. Like $2.5 billion or something. We’re starting to see signs that’s it’s opening up. Intel is looking to sell Mobileye, one of their business units. People are talking about maybe we’ll see a couple tech IPOs by the end of this year.

That would be nice to see that come back. One of the big questions I was grappling with and people mentioned to me in the writing of this book was Spotify direct listings, other companies did that, we talked about the lock up a little bit being changed in the last couple years, but will companies still have the leverage they’ve had over investment bankers now that it’s a bad market?

Or is everybody going to run back to the traditional IPO and hand over control to investment bankers much like they have done over the years? I think it remains to be seen whether companies are going to continue to have some leverage and some ability to craft the deal for themselves in a down market.

I’d like to believe so and many of the people I speak to would like to believe so, but it sort of remains to be seen.

Charles: I was thinking about that this morning before we got on the air. I think it depends on the company. Certain companies are going to want to liquify and get money as soon as possible. Any type of movement in a down market is a happy day. As long as it didn’t go down I’m happy.

It’s not the same as it’s going to be in a bull market. You write here that if an IPO wasn’t subscribed to 10 or 20 times it was a failure. I think, just my two cents worth, just knowing how people react and people’s behaviors I think it’s going to matter what environment we’re in and how badly a company needs money.

What you brought up in this book, Unity for example, had to create a whole new computer interface because they didn’t like Goldman Sachs’ interface to do this trade. The regulatory hurdles which cost millions and millions of dollars. The time. The amendments you have to keep filing.

You know what, I gotta keep the lights on or I’m going to lose people to other companies if they don’t get their options liquified into cash so they can pay their rent, buy a car or what have you. I think it’s going to – just my two cents – depend on the size of the company, how desperate they are for cash.

If Spotify didn’t have McCarthy, this could never have been done. That’s my opinion. Everyone you bring in here, even Airbnb, Snowflake, had the right people in the right places who knew the game, had credibility.

If you are Joe’s Hamburger Stand and have this new widget, it’s going to be tough to go against a Goldman Sachs or a Morgan Stanley if they do decide to take a shot. 7% would be a good number you’d be happy to pay.

Dakin: We’re seeing a lot of startups turn to debt. Startups typically don’t like debt, but because the IPO markets are closed, a lot of them are issuing convertible bonds or otherwise borrowing to raise money and extend the runway a little bit more. They won’t be able to do that indefinitely.

To your point, the need for money may lead some of these companies into the IPO market, even if it’s a down market or very volatile.

Charles: I forget who said it but cash is like oxygen, you don’t think about it until you need it. Then when you do need it, you are wiling to pay whatever it is to get it or else you have to close the lights. I hope five or 10 years from now we can look back on this and see your book is a pivoting point which, as you say, sparked a revolution.

I think it’s going to be an evolution. I don’t think the underwriters and investment bankers are going to be at a standstill. You remember back in the day mutual funds used to have 8.5% commissions. Then you had no load funds. You don’t want that. You have no salesmen.

Why would you want that? They don’t direct you. Then eventually as no load funds gained traction, people weren’t paying 8.25% or 8.5%. They went down to 4%. Until now, there’s no such thing as what I know as a loaded fund. But it took a good 30 years.

Dakin: Right. One of the reasons for writing the book was just to open the IPO market to anybody so you can understand through the work I did and talking to these people how it works and how, if you’re a startup employee, executive or investor, you can arm yourself with information so you can better take advantage of the system.

Charles: I think if you’re the public, read this book and you will never buy another IPO again. If you do, you buy at your own peril. If you’re a startup, a CEO, a founder of a company, you have so many great models to work off of. You have the Spotify model, the Unity model, the Airbnb model, you have Google.

You could take that so at least you walk into the meeting, like Steve Jobs did, with a lot more knowledge. These founders are fantastic entrepreneurs, they’re not phenomenal business people. That’s why they hire them and that’s why Wall Street comes in and does their tap dance, their private planes, their dinners. They are driving an Uber to show, look, I really care about the company.

It’s very competitive. You have the smartest and brightest people trying to get a piece of that fee. They will overwhelm you. At least now founders, CEOs and CFOs will have a playbook to work off of. I think you did a great service in that sense.

A regular investor, you just have to look at Professor Jay Ritter’s stuff and you’ll never want to buy another IPO. It just doesn’t make any sense. But from a founder’s perspective, this book tells you. The price of the book is just worth reading the Jobs story.

Dakin: Ten years ago I don’t think any founders even thought that they had a choice in doing an IPO. The banks arrived and they said we’ve been doing this for years and years. We’re the experts. So many of them said, “Fine, you’re the expert. You’re telling me how it’s done.”

The argument you are making and I would like to make is read the book. You’ve got a lot more leverage in that conversation. If you educate yourself in how it works, you’ll have a much better outcome I think.

Charles: The last point I want to make. I could talk to you all day about this because I have so many thoughts going in my head. But the founder is so diligent in not diluting his or her company or giving away shares. Every round is carefully planned. Then here, you are pissing money in the wind.

You’re giving out large chunks of your company. I think you bring this up in the book. Imagine you have a CEO and you say, “He just lost us a half a billion dollars.” That’s what happens if your IPO pops 100% or so and $300 million, $400 million, $500 million is left on the table.

That’s what you just did. You didn’t add value. You detracted.

Dakin: That’s the argument the venture capitalists have made. If the CEO lost the company $500 million he’d be out the next day. But it happens in IPOs all the time and nobody blinks and eye.

Charles: Dakin, we have to have you back on the show a year or two from now when the IPO market settles down and the bull market starts up again. Maybe we can discuss what happened in the IPO market. Maybe you’re right, maybe it’s just a hybrid.

Maybe it’s an evolution now that you got the ball rolling. Folks, if you never read an investment book, it’s not an investment book. It reads like a novel. You get the players. You get everything. It’s really exciting.

Dakin, thanks so much for coming on the show. Folks, the name of the book is Going Public: How Silicon Valley Rebels Loosened Wall Street’s Grip on the IPO and Sparked a Revolution. This is your first book, right?

Dakin: It is. That’s right.

Charles: When’s your next one coming out?

Dakin: I’m working on it. Everybody is asking. I’ve got a couple ideas. We’ll see. I’ll bring it on the show.

Charles: People don’t realize, this was two years of your guts. Every day working. The footnotes. You gotta be a masochist to write a book, but you did a great job. Alright, Dakin, thanks so much. Continued success in all you do.

Dakin: Thanks a lot, Charles. This was a real pleasure.