Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision and global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICE's exchanges and clearinghouses around the world. Now, welcome Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
As I sit here in the library of the New York Stock Exchange, in a couple of days, Spotify, that's NYC ticker symbol S-P-O-T or SPOT, is going to issue its third quarter 2022 earnings. The last time that CEO Daniel Ek got before shareholders to announce second quarter results on July 27th, CNBC ran with a headline, "Spotify pops on revenue beat, subscriber growth." The story noted that the company had 433 million monthly active users, which was up 19% year over year, and five million users above their guidance.
Now, the King family, Amy, my wife, Toby, and Annabelle, one of those monthly active users, and teens, like my daughter, streamed millions more plays of songs by Taylor Swift, our family paying for the Spotify service via the so-called family plan. It translates into real revenue for the company, which reported 2.86 billion euros in revenue for the second quarter. The CNBC news story back in July said that Spotify anticipates its active users to be 450 million and revenue to increase to three billion euros by the time the next earnings report rolls around. It's just coming up a couple days, October 25th. Only time, as they say, will tell.
As I sit here looking at the ticker for SPOT, it reads $88.75 a share. It's been quite a four-year journey for the shares since they were publicly floated on the floor of the NYSE in the first ever direct listing on April 3rd, 2018. That day had its apex on the keyboard of Citadel's direct market maker Pete Giacchi, who at exactly 12:43 PM barked out his command to those huddled around him saying, "Guys, the book is frozen," and pressed the done button at $165.90 a share, the midpoint of the book between buyers and sellers. After 30.5 million shares traded hands, about 17% of Spotify shares outstanding, the day ended with the company trading at $149 and a penny, and a market cap of 27 billion. Not a bad day at all for then CFO, Barry McCarthy, who engineered the deal. About a year later, the market cap would double again as the shares hit $364 on February 15th, 2021.
Now, those are the highs and lows of going public, the journey that tech companies like Spotify make as it arrives at the decision that it's grown as much as it wants to in private hands, the founders, the employees, and the original investors, and is ready to tap the public markets, whether to raise new funds or in the case of Spotify's direct listing, just create a liquidity event for original shareholders and expand the club to institutional and retail investors like my daughter, who want to own a share of Daniel Ek's creation in addition to the ability to stream one of Taylor Swift's songs on the platform.
In a minute, we're going to talk with a man who has chronicled this modern journey in intimate tale, Dakin Campbell, author of Going Public: How Silicon Valley Rebels Loosened Wall Street's Grip on the IPO and Sparked a Revolution. Our conversation with Dakin, Wall Street reporter for Insider, is coming up right after this.
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Josh King:
A guy in my position as head of communications doesn't often want to get a call from a guy like Dakin Campbell, who covers the finance industry for Insider. You could take a look at some of his recent headlines, "Who's up, who's down in the latest Goldman Sachs restructuring under CEO David Solomon?" Look, I just don't want to be the person at Goldman who walks into David's office at Goldman and says, "Boss, Dakin's at it again," and now, there are a bunch of egos you need to bring back down to earth. There are bruised feelings that you've got a massage.
Happily this time, I'm on the dialing end of the call to Dakin. Dakin, I say, you've got a new book out, Going Public: How Silicon Valley Rebels Loosened Wall Street's Grip on the IPO and Sparked a Revolution. Why don't you come down to the exchange and let's talk about it on Inside the ICE House, and Dakin might say-
Dakin Campbell:
I Would love to.
Josh King:
Oh, sure. So there you are, Dakin Campbell. Welcome, sir, Inside the ICE House.
Dakin Campbell:
Thanks for having me.
Josh King:
So tell me who is up and who's down in Goldman's latest restructuring under CEO David Solomon?
Dakin Campbell:
Yes, this is a good question. The big winner seems to be Marc Nachmann, a guy who will now run a new division of Goldman, the asset and wealth management division on his own. So he won't have co-heads, and he will be in charge of, I guess, setting Goldman's strategy for their asset management business in which they're challenging folks like Blackstone, and their wealth management business, which they're trying to grow into something that challenges Morgan Stanley or Merrill Lynch.
Josh King:
Is this waving the white flag on Marcus in the retail effort?
Dakin Campbell:
It is to some extent. I mean, on the earnings call, David was very open in saying their ambitions for Marcus were too big and that this is a dialing back of those ambitions. They will be still working with retail type customers, but they won't be doing the direct to consumer type marketing and customer acquisition that we've seen from them in the last few years.
Josh King:
Are you ever at a loss of what to write about Goldman? I mean, on September 21st, you published a big piece, which I read, "Goldman Sachs inside is refuming over their CEO's use of private jets to promote his side hustle as a DJ."
Dakin Campbell:
I think if Goldman Sachs were to get boring, then I might run out of things to do, but at this point in time, there are a lot of people who are unhappy inside there. There are a lot of shareholders who are wondering what the company's strategy is and what CEO David Solomon is doing, flying the jet around and hanging out with celebrities and DJing at Lollapalooza. So while that tension is still rife inside Goldman, I think I'll still have plenty to write about.
Josh King:
Well, let's pivot away from 200 West Street because you are, with your latest piece or one of them, a man after my own heart. You also gave a lot to listen to with your piece. Check out, "What Wall Street's rising stars are reading and listening to, from books on the origins of politics to fantasy football strategy podcasts." Not your usual subject matter. What did you learn and why no ICE House mention?
Dakin Campbell:
Yes, and why no going public mention? I mean, I needed to-
Josh King:
Selling your own book, literally.
Dakin Campbell:
Yes. I should have pressed the book into one of those rising stars' hands, but every year, Insider does our annual list of Wall Street Rising Stars, and every year we get more and more nominations. So this was a group of 25 young folks on Wall Street who are really impressing their colleagues and friends and competitors, and we pick them out of hundreds of nominations. That wasn't always the case, but now, it's a very desirable list to get on. So we really have our pick of-
Josh King:
Did you find anything new to listen to that you hadn't been on your radar before?
Dakin Campbell:
Yes. One of the rising stars mentioned the ... I'm going to regret saying this, but the autobiography of Jewel, who when I was in high school, I guess, listened to. So I didn't even know that book was out there. So that actually made me think like, "Hey, maybe my 18-year-old self might be interested in Jewel's autobiography."
Josh King:
You, Dakin, were early on the story of Peloton's John Foley, his use of his equity in his former company to back personal loans that he got, you guessed it, from Goldman Sachs. One of the major characters in your book, Going Public, Barry McCarthy is now CEO and president of Peloton. Any insights from Barry about whether that ship can be righted?
Dakin Campbell:
I think I shouldn't talk for Barry, but I can tell you, I think the fact that he took the job tells you that he thinks that ship can be righted. He is not the kind of person, I learned as I reported my book, to take a job that he thinks is unreasonable or something he can't be done. So I think he does believe or certainly did when he got in the door that he could right the ship. I feel like he's made some comments recently saying that the latest layoffs are it or he's just about done with layoffs and that now is the time to start turning the company's fortunes around.
Josh King:
I mean, we're going to get much more to Barry later because this is a guy who has taken on this, in some ways, beloved but beleaguered fitness brand, Peloton. He's a person who in your book begins this journey from Woodside, California, all the way to Stockholm, Sweden. Walks into the office, it's deserted. He's saying, "What did I get myself into here?" Then moves back to New York, all with this purpose of basically reinventing the IPO. So when this former Marine decides to take on a mission, he thinks it's something that can be accomplished.
Dakin Campbell:
Absolutely. I mean, I think he's done well enough for himself at Spotify and Netflix before that, that he did not need to take another job. So I think he was excited about the mission and I think probably still is.
Josh King:
So I know the basic gestation of a book, Dakin, written one myself. Your book comes out in the fall of 2022, which means a lot of it was probably being written in the spring and summer of 2021. In fact, the title of the final chapter is Specs Everywhere, but today, essentially, they are nowhere. What's different about the environment of the world that you've finished typing that manuscript to hand it into the publisher and where we find ourselves today?
Dakin Campbell:
Oh, so much. Wen I finish typing, I can tell you I didn't think to myself, "When I put this book out, let's put it into the deepest IPO freeze in 20 years, certainly." Specs, specifically, I think, to me and many people at the time felt very cyclical. So I can't say that I'm surprised that specs were everywhere and now they're they're not everywhere.
Interestingly, as I was selling this proposal, which would've been in the fall of 2020, one of the editors that I showed it to said to me, "I think I'm going to pass on this book, but you should have written an entire book about specs. If you'd written an entire book like this but about the rise in specs, I would've bought it." If I'd written that book and been putting it out into this market, that wouldn't have been good either.
Josh King:
So if you had imagined different between the book that was actually put in your proposal and the book that was published by Twelve, I mean, it could have been something, quoting John Tuttle, the people's IPO, but how did it transform really in basically the finished manuscript, copywriting, editing stage, and finally the printing of the actual books because that Specs Everywhere chapter is pretty darn short?
Dakin Campbell:
The book I wanted to write had a big section on the history of IPOs, and the final book has a big section on that. So that part of it didn't change, and that part of this journey and the story of IPOs is still very super interesting to me, and I feel like there's potentially even more to write about it, but when I set out to write the book, I didn't really know exactly what deals or companies or people I would focus on, and I had a much wider universe of companies and executives that I was looking at.
So during the reporting process, I really whittled that down into the big transactions and companies that I talk about in the book. What that meant is that I did a lot of extra work, but it also meant that I really understood the narrative, and I understood that I was trying to tell, and I really understood which companies were important to that and why they were so important.
Josh King:
I mean, talking about putting the work in and the creative process and the journey that it takes to write a book, to cycle way back to the beginning in your acknowledgements, you thank your dad for buying your first laptop when you returned from abroad. Where were you abroad and why did that journey make you want to become a writer?
Dakin Campbell:
So I was teaching English in Southeast Asia a couple years after college, and it just so happened that I bought my tickets to go there a couple weeks before September 11th. So I had to make the decision to continue on this journey and take this job that I was going to do. So over the next year, I basically was in Southeast Asia as the only American explaining to English, Australian, Asians, lots of folks what had just happened and how was the country responding to it and what the political economic implications of it were.
As I was doing that, I was also writing in my journal at night and explaining this to people during the day. I really came to this realization that, "Hey, I really like communicating and I like explaining myself and I like trying to figure something out." In high school and college, I was much more of a hard science guy. I was very good in biology and majored in human development at Cornell. So this was a new realization.
So when I came back and my tour of duty was done, my dad said, "Well, what are you going to do now?" I said to him, "I think I want to be a writer. I've just been writing in my journal and talking to people about this and it seems really interesting." So he put up the money for a Dell laptop that I still have and I'm very appreciative for that.
Josh King:
Then you also thank your mom and Bob, who I imagine is your stepfather, for a love of language and of critical thinking. So what mom and Bob did? If dad helped you with the laptops that you could write, did mom and dad help you of say big idea IPOs, critical thinking, the bigger deals?
Dakin Campbell:
My mom and Bob's house when I grew up was they'd been subscribing to the New Yorker for as long as I've been alive. It was a house that was just overflowing with books. So it's actually surprising that I didn't come around to the writing game sooner than I did. My sister, actually, started writing poetry when she was 10. She's got a poetry book coming out next year, and she's been a writer her whole life. So she grew up in that same environment. So it was really surrounding me with the written word. It just took me a little while to come back to it, but I appreciated that upbringing and making it so important.
Josh King:
So my basic math has you at Bloomberg from 2008 to 2018, thereabouts the same year that Spotify goes public in its direct listing. For a listener who may not have an insider subscription or have access to a Bloomberg terminal, what's the contrasting challenge for the reporter putting together pieces for both of those two outlets?
Dakin Campbell:
So I think the audience, certainly when I was at Bloomberg, the audience was different than the audience is at Insider. Now that Bloomberg has a website that's big and robust, that differences have gone away a little bit, but when you were writing for Bloomberg, you were writing for the terminal subscribers who are largely institutional investors, Wall Street traders, folks like that. So you learn to be very precise in your writing, but you also don't learn to squeeze the jargon out of your writing. Your readers, they know the jargon, and so you can get away with not defining terms or not stripping your language down to the studs.
At Insider, we're really writing for a much more general audience. So I really have to focus on explaining things much more basically for the Insider audience. Honestly, as a writer, that's a very good place to be because when you strip the jargon out, you really understand what you know about it and what you don't, and you just get smarter and more precise with your thinking.
Josh King:
So you know what the IPO market is like. What's your assessment of what the writer's market is like in 2022? You made the move from Bloomberg to Insider, which really broke the mold when Henry Blodget created it. Now, you have outlets like The Information, Puck News, The Ringer, Vox, Semaphore offering branded alternatives to writers creating their own brands out of medium. From an economic and professional and satisfaction standpoint, what does Dakin Campbell think about his profession right now today?
Dakin Campbell:
I think there are a lot of opportunities for writers to apply their trade. You can go to, I don't think you've mentioned Substack.
Josh King:
Yup, I have not mentioned Substack.
Dakin Campbell:
Also, Semaphore is another example and The Information. Those are all great examples. It feels like, to some extent, we're in this great age of digital journalism. I think a lot of these are funded by subscriptions, some portion of Insider is as well. I largely write behind the paywall, so people are subscribing to read. Those feel durable to me or more durable to me than ad-supported free stories.
So one of the things that I was able to do at Bloomberg was stick my head in the sand, honestly, and just focus on writing. One of the reasons I came to Insider was that I wanted to get a much better understanding of the digital media landscape. So over the last four years, I've really been able to see that, and really interesting and it looks healthy, and job offers for my colleagues have been good. I mean, what happens next year if we go into recession? I don't don't know.
Josh King:
Yeah. You write about the journey that you took in terms of writing Going Public: How Silicon Valley Rebels Loosened Wall Street's Grip on the IPO and Sparked a Revolution. You were looking at one particular deal in particular that really never got off the ground, at least for a long time, until it came public via spec at the New York Stocks Exchange. I'm talking about WeWork. Let's hear a little bit from Adam Neumann on stage here at the New York Stock Exchange in a fireside chat with our former president, Tom Farley, from 2017. They were gathered under the auspices of the Economic Club of New York.
Tom Farley:
... company with a collapsible heel shockingly did not work. The second called Krawlers with a K was onesies for babies with knee pads. What was the slogan?
Adam Neumann:
"Just because they don't tell you doesn't mean they don't hurt."
Tom Farley:
Also did not work shockingly, and then he started this little company called WeWork. So Adam, that's really the lead up. It would've been great to hear you tell that, but we have limited time and I really wanted to hear more about how that formed you as a leader and then move into your business, ease into the business.
Josh King:
So Dakin, I mean, based on studying that company a bit following Adam's story, would WeWork have been better focusing on the knee pads for kids under Adam's leadership?
Dakin Campbell:
I think WeWork, this is not my analysis, but WeWork got into trouble when they tried to position themselves as a tech company, I think. I think if everybody admitted and understood that it was a real estate company, Adam might still be running that business and he's got a new one going. I do thank Adam and WeWork because it was my writing about that company and its ill-fated IPO the first time that really got the attention of a book agent and wrote a narrative feature. He reached out to me and he said, "Do you want to write a book about WeWork?" and I said, "Not really. It feels like a lot of people are writing about WeWork. There's a lot of coverage there," but it has tuned me into or turned me onto the IPO market.
I'd been covering Wall Street at that point for a decade or more. I knew about IPOs and I knew lots of bankers and I knew lots of equity capital markets bankers, but I'd never really done a deep dive into what the IPO market was and how it worked. So I went back to my agent and I said, "Hey, no on WeWork, but yes on a book about IPOs. Let's talk about it," and we put together a proposal over the next six or nine months.
Josh King:
I mean, based on what you do know about WeWork, if Adam had first followed advice number one that you gave, which is present yourself as a real estate company or commercial real estate space leasing company and not as a tech company, but also had followed thoughtful guidance of bankers and lawyers to write a decent S1, do you think he could have survived as well?
Dakin Campbell:
I mean, I'm not sure, but that's certainly the way the S1 was put together was a very specific thing that got my attention and that said, "Well, what are bankers and the companies that they represent doing in these rooms when they write S1s or when they're talking to investors?" If we want to say for WeWork that it didn't work or that it could have been done better, then I better figure out how it's supposed to work or how people say it should be done. So that was the very beginnings of my explorations.
Josh King:
So in your author's note, Dakin, you talk about the exhaustive process of more than 150 interviews, 75 sources for the book. Contrasted with your regular gig for Insider writing pieces, let's say, between 1,000 words and 2,000 words, what kind of journey was it for you to delve into for you this previously unknown world, except for maybe some WeWork stuff, that produced this manuscript of 100,000 words?
Dakin Campbell:
It was really super interesting and really a journey. Like any reporting project, it is a process of discovering, going back to people with what you've discovered, testing it out on them, having them tell you new things that you didn't know about, and through that way, getting deeper and deeper into a subject and coming to a fuller and fuller understanding of it.
Josh King:
Any adaptation rights inquired so far?
Dakin Campbell:
Not yet. I am in the process of hitching a couple places for that. The trick is or one thing that I've thought about is do you pitch the Spotify story, which it would be a carve out of the book or do you pitch the whole book and the narrative? So I'm going to be talking to some TV folks to see what they think.
Josh King:
Well, then let's use the rest of our conversation then as a audio version of a pitch. Let's dive deep into the Spotify story. Just teasing around what's going to be in around the corner after the break, 2013, Barry McCarthy is an executive in residence at Crossover Ventures after his time at Netflix, and then he heads over to Stockholm to meet with Daniel Ek and his management team. What does Barry find in the data room that they've set up for him?
Dakin Campbell:
Barry found a lot to like. He's coming out of Netflix, which he was there for I think a decade. They define the streaming business. It was DVD by mail when he started, and through process of iteration, they created a new business and a new industry, really. So when he looks at Spotify, he realizes that, "Hey, there are a lot of similarities here. It's a streaming business, a lot of subscribers, and a lot of the same drivers of the two businesses."
Josh King:
Does he think after spending so much time with Reed Hastings in Silicon Valley and California, the heart of tech, what does he think? Is he going over to Sweden and seeing this reclusive guy like Daniel Ek, and is that a tech titan?
Dakin Campbell:
I don't think Barry had lived outside the US before moving to Sweden. So I think that was new for him, but I do think he found some similarities between Reed and Daniel, and that is a willingness to break glass in the service of the business or creating a new business, the fact that both were visionaries and seeing their way around corners and seeing their way through an ecosystem that had stymied so many other people. I mean, when Spotify came along, Limewire, Napster, lots of other companies had already tried to figure out the digital music business, and Ek was undeterred in what he envisioned for Spotify. So it was those kinds of qualities that I think Barry saw in Daniel and noticed some similarities with Reed.
Josh King:
So at this point, Barry is still this executive in residence at Crossover and investor. I think, was he put on the board at this point?
Dakin Campbell:
Yes, that's right.
Josh King:
Before he actually joined, it's probably around 2014, things are getting a little dicey between Daniel and the management team at Spotify and the rest of the music industry. Taylor Swift's own label, Big Machine, removes her catalog from Spotify, but in actual fact, Spotify's royalties are becoming the lifeblood of the industry. Meanwhile, Ek and McCarthy are having these secret negotiations for McCarthy to officially come on board as CFO. The thinking is, "Someone like Barry McCarthy needs to be our CFO when we go public."
Dakin Campbell:
That's right. Daniel Ek has a theory that, and I think practice, that every two to three years he wants to turn over his direct reports. Now, I don't know if that's still the case, but back then it was. So his prior CFO had been in the job going on five years, and Daniel was basically looking to upgrade and, frankly, even then, thinking about going public. The company was not yet ready to go public, but they were starting to think about it.
So I think when he saw Barry and started talking to Barry, he soon started thinking that, "This could be my next CFO." They were both united in their belief that they never wanted Spotify's lack of money to be a weakness in their negotiations with the music labels, and this is what you are referring to. Spotify pays out about 70% of the revenue that it takes in from subscriptions back to the owners of the music, the masters, and the copyrights. So that is a negotiated contract rate that they talk about every two or three years.
So if the music labels could get 80% or something out of Spotify, then that would make it very difficult for Spotify to continue growing and to build this business that both men really wanted to build. So one of the first things that Barry does when he comes in as CFO is go out and start raising money because he thinks, "We need to have a ton of money in the bank because we don't want the record labels to try to starve us."
Josh King:
After the break, Dakin Campbell, author of Going Public: How Silicon Valley Rebels Loosened Wall Street's Grip on the IPO and Sparked a Revolution, Dakin and I are going to dive into the succession of stories as the IPO becomes a bigger and bigger part of the investor landscape during the watershed four years, 2017 to 2021. That's all coming up right after this.
Audio:
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Josh King:
Welcome back. Before the break, I was talking to Dakin Campbell, author of Going Public: How Silicon Valley Rebels Loosened Wall Street's Grip on the IPO and Sparked a Revolution. Talking about Dakin's career arc and the setup of his new book, the dichotomy between WeWork on one hand, Spotify on the other. Now, we're going to dive into this amazing sequence of blockbuster technology IPOs at the NYC that was spawned by Baron McCarthy's journey to try to build a better mouse trap.
So before I get into that, Dakin, let's actually spin the clock back about 38 years before the Spotify deal and travel back to Cupertino, California. There's Apple's founder, Steve Jobs, in a room of suits in the financial district of San Francisco. There's Bill Hambrecht in the room, the namesake of the Boutique Investment Bank, Hambrecht & Quist, the bankers at Morgan Stanley. They want to price Apple at the IPO at about $18 a share. What's Steve Jobs's basic question about that $18 price and how does the path that he and Hambrecht took from there really changed the IPO proposition forever?
Dakin Campbell:
So I love this anecdote, and when I heard it, I knew I needed to lead the book with it. When the Morgan Stanley bankers tell Steve Jobs that they think they can price the Apple shares at $18, Steve's been having his own conversation with investors, and investors have been telling him that they might buy or they would be willing to buy Apple shares for 25, 26, 27 dollars. So when Steve hears that 18 figure, he wonders whether the bankers are coming up with an artificially low number for his shares. If people are telling him he could sell it for 26, why would Morgan Stanley sell it for 18?
So he puts the question right to them. He says, "Well, if we price it at 18, who would you sell that to? That would go to your best clients, right?" The bankers ultimately admit that, "Yes, that would go to the best clients."
He said, "Then when the stock price goes to 25 or 26, won't they be terribly happy that they bought the shares at $18 and can now sell it for 25 or 26?"
The bankers admit that, "Yes, they would be very happy with that," but it's not about that. It's about the fact that these would be good shareholders for Apple and they'd be long-term shareholders supporting his mission of building the company up. So ultimately, Steve convinces them and they get to a $22 figure. So they price the shares at $22, and it spikes close to 30 that day. So I guess people would say a very good outcome, but if it had been priced at 18, then it would've been wildly out of the park.
So in 1980, Steve Jobs saw right through the entire pump and circumstance of the IPO and got to the heart of the conflict at the relationship between bankers and the companies and the investors who buy the shares. I just thought that was really interesting because we think of Steve Jobs as being a technology builder, and this showed him as being just a very insightful business mind.
Josh King:
In some ways, really well guided by Bill Hambrecht over the years, and Hambrecht & Quist really are important disruptors in this whole history as you point out. They're joined by three other firms that together comprise The Four Horsemen. What is the old line traditional Wall Street coming to realize about Silicon Valley at this point?
Dakin Campbell:
I've always been fascinated by The Four Horsemen. I spent four years in San Francisco, and that was in the mid 2000s, and even then, people were talking about The Four Horsemen, but The Four Horsemen were basically the boutique investment banks that served the tech firms out in Silicon Valley. As the technology industry got bigger and bigger, the Wall Street banks on the East Coast started realizing that, "Hey, there's a lot of money to be made out here," that these boutiques might have a good business on their hands.
So as the first tech boom expands in the late '90s, one by one, the East Coast Wall Street banks buy up these boutiques and fold them into their operations. By 2000, all of them were gone or subsumed, but Bill Hambrecht, his firm gets sold and he spins himself out into another company and decides that he wants to try to auction off IPO shares. He'd been in the business for a long time going back to 1968 and wondered why in auction wouldn't be a better way of doing things.
So he designs a process and takes about a dozen companies through that process, but it never really takes off. All of the companies that he does or he takes through the process are relatively small, and he feels like the Big Wall Street investment banks are sort of talking about him behind his back and keeping him from landing any big deals.
Josh King:
Talking about the role of the Wall Street big investment banks as they begin to get their footing back, let's hone in around 1984 on the story of this 41-year-old trader Goldman Sachs named Eric Dobkin. He had some useful transportation to get his work done.
Audio:
Toulouse, Concorde 001 made her most important public appearance back end verse. She was being nosed out of her hangar by a tractor on the day for which Britain and France and the rest of the world had waited so long. The Great Giant Supersonic jetliner was going to fly. A year late, millions of pounds over the estimated cost and still a very big question mark. These were Concorde's first claims to fame, but on this day, a lot of those question marks would be answered. For Concorde W001, this was the chance to prove she was the super bird everyone had hoped and worked for.
Josh King:
Dobkin got a lot of freaking flyer miles on Concorde W001, didn't he?
Dakin Campbell:
He did. That's for sure. He was pitching the British government quite frequently in those days. That was Margaret Thatcher's big privatization wave.
Josh King:
So tell me about his role in the book and how a bank like Goldman begins to get its mojo in this space.
Dakin Campbell:
So if today you think about the IPO process, you think about the S1 as a marketing document. You think about marketing to big institutional investors like the big mutual funds. You think about the road show two or three weeks of talking to those investors. None of that was really put together into that package until Eric Dobkin came along. He was a trader at Goldman Sachs and spent his days selling blocks of already public stock to big mutual funds. After his boss came to him and said, "Hey, can you help get our equity business out of ninth place?" Dobkin was in the shower one day and he said, "Well, if I'm selling blocks of already public shares to these institutional investors, these mutual funds, why can't I sell them new shares, and why can't I turn this S1 that the SEC requires into more of a marketing document that the company can use to tell its story and to frame itself in the market?"
So Dobkin created the first ever equity capital markets business on Wall Street, and that was in, I think, 1985 or something. Now, every bank has an equity capital markets business, and every IPO, aside from the direct listings and some other offshoots, is marketed and sold through this process that Dobkin created.
Josh King:
Now, so this process that Dobkin created in the process probably needing to fly less on the Concorde back and forth between the UK and New York. I remember where I was in the middle of 1997, maybe May 1997 because as a new customer of this retail trading firm called E-Trade, I could get some shares of Amazon for its IPO price of $18 a share, which I promptly unloaded for about $36 a share a couple weeks later, which made me a 300% profit on those shares, which qualified me to buy a new sofa from Creighton Barrel, but Bill Gurley, you had a little more foresight about Amazon than I did. Let's hear a little bit from Mr. Gurley.
Bill Gurley:
So across our partnership, the majority of the partners joined at about 30 years old, and there's a number of reasons why I think youth plays to an advantage. One, it's a hustle game. You've never finished. There's always some other piece rock you could turn over, executive you could try and recruit, and so you're never done. So being able to hustle is a young person's business.
There's also this generational thing, right? The majority of the great companies in our world were started by someone very, very young and, certainly, not in all cases, but in a lot of cases, being somewhat close to that generation, sharing similar likes and being empathetic and understanding of the product offering, which may have a generational component as well, it's important, right? It's important to the game.
Josh King:
So Bill Gurley got where a young man like Jeff Bezos was coming from. Tell us about Bill Gurley and his role in the story.
Dakin Campbell:
So Bill Gurley, just to talk about his influence on the Amazon.com IPO, Bill Gurley was the research analyst who helped the investment bank, Deutsche Morgan Grenfell, get the lead left mandate on Amazon.com because he and his boss or the lead investment banker, Frank Quattrone, really impressed Jeff Bezos, but by the time our story really picks up in the mid 2010s, Bill Gurley is a super famous venture capitalist, maybe one of the most successful of all time, and he's on the board at Uber and already has a couple wins under his belt. He's really started noticing that the IPO process is not going the way he thinks it should.
Investment bankers are controlling the process more than he would like. He's seeing lots of company shares pop on the first day. So he starts questioning the process or the IPO, and there are a couple deals specifically that really lead Bill Gurley to pick up the baton. One is Elastic, and he thought those shares were underpriced by Goldman, and another was Stitch Fix. He thought that the Stitch Fix process was not run to the best of its ability.
So Bill Gurley picks up the baton and starts talking about how the IPO system is broken, and because he's such a successful venture capitalist at this point, he's got a huge following and a huge platform, tens of thousands of Twitter followers. He can go on CNBC really or Bloomberg TV anytime he wants. So he really sees what Barry McCarthy and Spotify are able to do in 2018, and he adds fuel to that fire and really starts banging the drum basically in favor of direct listings.
Josh King:
In our little run up to where Barry and Daniel take things in 2018, we're still a couple years short of that. We're somewhere around 2004. We've had the dot-com crash of Petopia and other startups in 2000, and we're in Mountain View, California. Let's listen to ABC World News tonight reporting on the event that happened in Mountain View.
Speaker 8:
The 30-something founders of Google had good reason to cheer today. On their first day of trading as a public company, they raised 1.7 billion in cash and made the stock of Google as valuable as General Motors. Sergey Brin and Larry Page achieved that success despite cutting the professional investment community out of the process.
Speaker 9:
Most of Wall Street wanted this offering to fail. Loved that it was developing problems and hoped that the stock price would crater or the offering would be postponed.
Speaker 8:
The offering went off as scheduled, but the outcome was often in doubt. Google's decision to snub Wall Street investment bankers in favor of a complicated auction process soured big institutional buyers.
Josh King:
So Dakin, what were Sergey, Larry, and Eric Schmidt trying to accomplish with the auction of Google?
Dakin Campbell:
So even back then at that point, Google was auctioning off tens of thousands of ads every day. So when it came to time to do their IPO, they thought, "Hey, why can't we auction our shares? We know everything there is to know about auctions." So they really wanted to democratize the ownership of Google shares. They thought that by doing it through an auction, they could really include retail investors, as well as institutional investors and really open it up to everybody at the same time.
Josh King:
So that all brings us to Stockholm, Sweden, as we've hinted that before Spotify, Daniel Ek, Barry McCarthy, but let's have this quick detour to Menlo Park and Facebook's IPO just a couple years earlier, 2012. Why was that experience at Nasdaq a cautionary tale for Barry?
Dakin Campbell:
So in 2012, Facebook went public. They did their IPO, but Nasdaq had a computer glitch that really made that deal into a troubled deal, I guess is the way to put it. There was a lot of investigations that came out of that and Nasdaq paid some fines. So when it comes time for Barry to do his direct listing, which he started thinking about with Daniel Ek, he really turns to New York Stock Exchange and sounds them out about doing this new way of doing things.
Josh King:
Yeah. So here's where the NYSE comes into the story. It's October 2016. McCarthy has moved from Stockholm back to New York City, and then he gets the then NYSE president, Tom Farley, who we heard earlier in that conversation with Adam Neumann to take the subway up to see him in the flat iron district. What goes down at that meeting between Barry and Tom and what does Farley do next?
Dakin Campbell:
That's the first time that Barry tries out this idea on somebody outside of the four walls of Spotify. I mean, he talked to some friends, he talked to some lawyers, but this is one of the first times that he really takes his idea for a spin.
Josh King:
He wants to get rid of this population. He wants to take all the money that is, quote, "left on the table" and keep it for the people who have the stock.
Dakin Campbell:
Yes, and he also doesn't want to sell or issue new shares, Spotify, because of his efforts has a ton of money in the bank and they don't want to issue new shares and dilute current or existing investors to raise more money, which is what an IPO is. So he wants to directly list shares right on the exchange. He gives this idea to Farley, and Farley, I think, does not know what to think for the first few seconds of the conversation. I think he thought it was going to be a normal meet and greet or maybe a soft pitch session. He didn't know that he was going to be sounded out on this entirely new way of doing things, but he's very quick on his feet and he says, "Oh, well, what Barry just proposed to me, that sounds pretty interesting. Let me go and think about it."
As he goes down the elevator and walks out onto the street, he calls his boss Jeff Sprecher, and he says, "Jeff, you'll never believer this meeting I just had. Spotify wants to directly list their shares. They want to cut out the investment banks." Sprecher has been around a long time, says like, "Oh, that sounds interesting, but I bet the banks will be involved. Spotify will need them in many other realms of the financial markets than just an IPO and we'll eventually have to kick in the banks."
Josh King:
Sure enough, and I remember this clearly, what are the bank's economics in a direct listing versus in an IPO? I mean, they still come away with a nice big check.
Dakin Campbell:
Yeah. So the banks get paid a fee as financial advisors in the direct listing. On an IPO, they act as underwriters and they get a portion of the proceeds. So usually, the proceeds are large, 500 million or 150 million or something. So companies end up paying out much more in money to the underwriting group of banks. A direct listing, as McCarthy designs it and as the SEC signs off on it, really just needs two or three financial advisors. So companies doing direct listings pay much smaller fees to the group, but because there are so fewer banks involved in a direct listing, the banks, I think, end up coming out basically even.
The question is which banks get chosen for the direct listings, and it wasn't long before Goldman Sachs and Morgan Stanley and Allen & Co. established themselves as the defacto banks to be hired if you want to do a direct listing.
Josh King:
We ought to bring in the government here because this wave of tech IPOs at the NYSE corresponds with a very different kind of leadership at the Securities and Exchange Commission, SEC Chairman Jay Clayton, who takes over for Mary Jo White, new Director of Corporate Finance at the SEC, Bill Hinman is there. It's hard to get, usually you'd think, two high flying corporate lawyers like Clayton and Hinman to give up their lucrative gigs. Why did they do it? Why did they come into the government?
Dakin Campbell:
One of the things that I think was really important, certainly to Jay Clayton, was giving more Americans access to the capital markets. So one of the big trends that has been in the background of the IPO market that we've just described is that fewer and fewer companies are actually going public. The number of companies listed on public exchanges has halved, so dropped 50%. As Clayton is considering the SEC and coming into the SEC, he wants to make it easier for companies to enter the public markets.
So when it comes time for Barry and his team and exchange officials to pitch him and Hinman and the rest of their teams, he's more open to the idea than maybe other SEC commissioners would have been.
Josh King:
You spend some time talking about Hinman's background as well and his role because we could pause for a second and hear in Jay's own words what he said to the economic club of New York in 2017. President Trump had just appointed him. He'd been in office for a couple months and he said basically, "The longer companies stay in private hands, the less of this great American dream opportunity investors have."
Bill Hinman:
While there are many factors that drive the decision of whether to be a public company, increased disclosure and other burdens may render alternatives for raising capital, such as the private markets, increasingly attractive to companies that only a decade ago would've been all but certain candidates for public markets, and fewer smaller and medium sized public companies may mean less liquidity for peer companies that remain public, regardless of the cause of this decline in public companies, it's a serious issue for our markets and for the country more generally.
To the extent companies are issuing our public markets, the vast majority of our main street investors will be unable to participate in their growth. The potential lasting effects of such an outcome to the economy and society are in two words, not good. I'll again deviate. This really matters to me. Our main street investors should have access to our growing companies and we should be doing what we can to facilitate that.
Josh King:
Two words taken, not good. Have you been able to catch up with Clayton and Hinman a couple years after their service to reflect on their contributions to this?
Dakin Campbell:
I haven't, to be honest. Hinman as the Director of Corporation Finance under Jay Clayton was quite a pick. I mean, we've talked about Google, we've talked about Facebook. Hinman was a lawyer on both of those deals, so he knows IPOs as well or better than most people in the country. So when it came time for Spotify and its advisors to pitch the government, they're talking to a guy who knows the securities rules inside and out.
Josh King:
So one of the unique aspects of the New York Stock Exchange is the role of the direct market maker, the human judgment that goes into a moment of price discovery in particular transactions such as the direct listing, Spotify. When Spotify looks around, it chooses Citadel, the company owned by Ken Griffin, and in particular its direct market maker, Pete Giacchi. What are the inputs into that decision and why was picking Citadel, Griffin and Chichi, so important?
Dakin Campbell:
So a direct listing is really an auction of shares on the day that they start trading. So the auction is really pulling together buying and selling and doing it with a computer. So it was very important to Spotify that they get a market maker that was very technologically proficient. At that point in time, Citadel securities, actually, was not the leader on the stock exchange. They were the number two, they were the challenger. So Spotify ends up picking them because they think that as the challenger, they are going to work harder than maybe the leader in putting the technology together, in stress testing some of the models that are used to start the shares trading.
So it was really because they were the underdog at that point in time, which is hard to believe now, but because they were the underdog underdog, Spotify thought that they would work a little bit harder to make their deal a success.
Josh King:
I mean, it's a big moment for Giacchi in front of those lights, and I remember the crowd gathered around his trading booth as did price discovery at around 165. Even his mom is in the audience.
Dakin Campbell:
Yes, that's right. That's right. I think he's brought her to a couple other big deals, Uber too, if I'm correct, and I just think that's really sweet.
Josh King:
So I remember that date was not quite the Spotify IPO, but March 15th 2018 when Daniel Ek leads Spotify's investor presentation. I watched it live from my office here at the NYSE. Barry McCarthy doesn't even speak in that presentation until 109 minutes into the event. Why was that way in which they talked about their company unique and how did McCarthy provide the quota to that presentation?
Dakin Campbell:
For an audience like that, which is really made up of institutional investors and analysts, the CFO is the person of the moment, and particularly somebody like Barry McCarthy who's got this long career at Netflix of impressing Wall Street and being very disciplined on costs and the finances, but I think Spotify saved him towards the end because they wanted to get into the vision that Ek had for the company and they wanted to really play up their music industry roots.
The people I talked to who were there in that room that day were really blown away by how much the event felt not like an investor conference or an investor day, but like a music industry event, a concert or something like that. So Spotify was really trying to get across their story to investors, and a lot of their story has to deal with, obviously, music and music industry and how they work with the music industry. So I think that's why they saved Barry for last or close to last, but it was like a star walking onto the stage when he did come on.
Josh King:
Star walking onto the stage when he did come on, and he's taken a new stage now, but following Spotify at the NYSE, there was this string of other direct listing, Slack, Unity, Snowflake. I mean, how did these firms and their leaders build on the idea that was first fomented by Steve Jobs and then brought to life by Ek and Barry McCarthy? These guys like Stuart Butterfield, John Ricky at Hello and Frank Slootman, they have different relationships with their bankers and lawyers, but the same real North Star.
Dakin Campbell:
Yeah. So just to be clear, Unity and Snowflake are traditional IPOs. They're not direct listings, but all of them are trying to launch their companies into the public markets as successfully as they possibly can and to really attract the attention of investors when they do that.
One of the interesting things about Unity, and I focus on them quite a bit in the book, they did not do a direct listing, but they're a very good example of a company that used the threat of a direct listing to change the rules of the IPO in their favor, so to really get a better outcome for their company than a traditional IPO would have. So one of the things that I say in this book or one of the cases that make is that even though not every company after Spotify did a direct listing, the fact that companies could do a direct listing meant that they could start thinking creatively about different ways of doing the IPO process.
Josh King:
Are banks still vehemently opposed to direct listings or do they accept that it could be different but their fee structure will be somewhat intact, it might be six or four of one another but it's still a viable option for them or are they trying to get companies to stay away?
Dakin Campbell:
So if you talk to them publicly or on the record, they'll tell you that they're agnostic, whether a company does a direct listing or an IPO. One of the questions I wanted to answer with this book and with my reporting is what is it like in the closed door meetings. Do they come across just as agnostic as they do when they talk to me, for example? What I learned time and time again is that the bankers do offer their, traditionally, and I probably shouldn't generalize, but they do offer their company clients the option, but they make it clear that they favor a direct, sorry, a traditional IPO. I have not heard of any examples where the big banks tell companies that they should do a direct listing. It's new, newish. From the banker's perspective, it carries some risk.
So really, the big IPO investment banks have an IPO machine and they put companies through this machine, and they've dialed that machine in so that it carries the least amount of possible risk. So their preference is really to put companies through that IPO pipeline.
Josh King:
As the book ends in your Specs Everywhere chapter, it's brief and it's also a bit wistful as you note how the main characters have scattered to the winds. McCarthy, we've talked about already. Gregg Lemkau at Goldman Sachs had left Kim Jabal at Unity, Bill Gurley at Benchmark. As you end, you're prognosticating that it's going to take a new personality to continue pushing for change, perhaps more direct listings, perhaps the direct listings with the capital raise, who might be that Bill Hambrecht or Bill Gurley of the future of the next wave of IPOs in whatever form that they might take. Do you think that's viable? You think there is another McCarthy or Hambrecht out there ready to take this new wave of change?
Dakin Campbell:
I think there is. I don't know who it will be, but I think in that chapter and your description of wistful is a good one. I mean, that was as close as I'm ever going to get to predicting the downturn. What I captured in my book was really a moment in time of several years that was really unprecedented change in the IPO market. With this year's dearth of IPOs and talk of a recession, I don't think we know who's going to be the next wave of companies to get the market going. I would like to think that the changes that were put into place and the fact that direct listings work will stick with us. I am in favor of change and innovation and moving things forward just as a human. So I hope that when the IPO window does open again and markets do right themselves, that startup executives will still have the courage and the interest and the energy to do something different.
Josh King:
The energy to do something different, we certainly know that there are hundreds, thousands of companies. There's no lack of companies being formed, doing innovative things, disrupting what they're doing, and ready to take the next step, raise public capital or come public without raising capital through direct listing. They're out there. This biggest just has to open up again.
Dakin Campbell:
That's right. It's a risky or people think it's a risky event going into the public markets. So traditionally, you want a super stable market or a gently rising market to go public into. Obviously, we haven't seen anything like that this year. So hopefully, we'll see some more of that next year and we can get some more private companies into the public markets like Jay Clayton said so well.
Josh King:
When we see things happening, when do we know that IPOs are soon to follow?
Dakin Campbell:
I think we need to see the first couple IPOs. There are a couple companies that are poised to do it. I think Intel's Mobileye unit has been public about it. Instacart has been public about it. There are a couple others who've talked about filing confidentially. There needs to be guinea pig, really, and if it's one of those strong, stable companies, one of the big unicorns, then one of them or two of them or a couple or a few of them need to test the market, see how their deal performs, and if it performs well, the other companies that aren't as strong or don't have as distinct a narrative will follow them.
Josh King:
What are the economic conditions we should be looking for? I mean, can there be IPOs in the middle of a recession? Can there be IPOs in the middle of stock market volatility?
Dakin Campbell:
I think so, yeah. I mean, I would need to look at the data to be definitive about it, but I think so. I think we just need a couple weeks of good markets, of healthy markets for somebody to feel like they've got the window to price the deal, and then also a week or something, ideally or more, to let the stock find its level in trading.
Josh King:
Well, that is a moment that we all wait excitedly for, whether it happens at the end of 2022 or some time in 2023. We are ready here at the New York Stock Exchange. Dakin Campbell, thanks so much for joining us Inside the ICE House.
Dakin Campbell:
This was a real pleasure. Thanks a lot.
Josh King:
That's our conversation for this week. Our guest was Dakin Campbell, author of Going Public: How Silicon Valley Rebels Loosened Wall Street's Grip on the IPO and Sparked A Revolution. Out now from Twelve. If you like what you heard, please rate us on iTunes so other folks know where to find us, and if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us, @ICEHousePodcast.
Our show is produced by Pete Ash with engineering and production assistance from Ian Wolff. The Director of Programming and Production for ICE and the New York Stock Exchange is Marina Stanley. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. Talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties expressed or implied as to the accuracy or completeness of the information, and do not sponsor, approve or endorse any of the content herein. All of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.
