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 12 exchanges and six clearing houses around the world. And now welcome Inside the ICE House. Here's your host, Josh king of Intercontinental Exchange
Josh King:
It's still unseasonably cool in the Northeast, but on the floor of the New York Stock Exchange, things are heating up considerably as we move deeper into the season of tech unicorn IPOs on our iconic parque floor. In the past weeks, Jumia, the Amazon of Africa, Tufin, an Israeli network security startup, and PagerDuty, and Pinterest two Silicon Valley darlings joined the wave of companies emerging into the public markets. Check out any of their symbols as JMIA, TUFN, PD, or PINS. If there was any doubt that the NYSE is the home for tech, you can point to any one of these examples. Or wait a bit, for Uber, NYSE:UBER and Slack, NYSE ticker symbol, SK, both to come to have their debut on our floor.
Josh King:
What's it like to be one of those CEOs on opening day? A tweet from Jennifer Tejada, PagerDuty's CEO, keyed in on a mindset shared by leaders who celebrate their company's IPO on the New York Stock Exchange. She wrote, "We are ready for the first day in the next leg of our journey, our IPO tomorrow at the NYSE." On an upcoming episode of Inside the ICE House, we'll have a conversation with CEO, Jennifer Tejada, that we recorded on the day of her big show here, but that's for another day.
Josh King:
This recording represents a milestone of sorts for our humble little podcast, our 100th episode. What better time then to reflect on the journey that many of our future guests, like Jennifer are on now, transitioning from just a nascent idea, to then start a privately funded enterprise, to then joining the community of public companies here at the New York Stock Exchange. Today's guest has a unique perspective into what private companies consider when deciding to go public and works closely with all of the technology companies looking to be up on the podium in the near future. Hopefully, followed by a visit here to the library of the New York Stock Exchange to share their stories with Inside the ICE House.
Josh King:
Joining us today is a return guest of the show, a friend of the pod, as you might say, the man responsible for helping IPO prospects from unicorns to emerging biotech companies navigate the complex path from series A raises through the filing of their S-1 and joining the 2300 listed companies on the New York Stock Exchange, Jose Cobos, former Navy Seal, and now the NYSE's Silicon Valley based head of Technology Capital Markets. When should a company begin to think about tapping the public markets? What is the process and pitfalls on the road to and IPO? And why does the New York Stock Exchange continue to reign as champion of the most complex large capital markets transactions? Our conversation with Jose right after this.
Speaker 3:
Our mission is to bring the world together through live experiences. We're focused on building a technology enablement platform for event creators, lower the friction and cost of creating an event, and increase the rate of success for event creators all over the world. We're a global inclusive company in 11 different countries. This really marks a new chapter for Eventbrite, and it feels like the starting line. Eventbrite now listed on the New York Stock Exchange.
Josh King:
Our guest today, Jose Cobos, head of Technology Capital Markets at the New York Stock Exchange joined the podcast a year ago to lay out his team's mission to guide the biggest tech innovators from private sector through their IPO. We asked him to come back Inside the ICE House from his home based at the NYSE West in San Francisco to give us an update on the IPO market and an insider's view of the process. Welcome back, Jose.
Jose Cobos:
It's great to be back, Josh. How are you?
Josh King:
I'm great. It's been a busy month for the NYSE tech team. You had Pinterest, PagerDuty, Jumia, and Tufin all go public on the New York Stock Exchange in the past three weeks. Then just yesterday, CNBC's, Deirdre Bosa broke this news,
Deirdre Bosa:
Another tech unicorn has filed to go public, this time it is WeWork. Now known as The We Company, it has announced that it has confidentially submitted its paperwork to the SEC for an IPO. This is a company that has raised some $6 billion from SoftBank. It is very unprofitable. When we talk about these unicorns going public, it's saw $1.9 billion in losses in 2018, which was double the year before, but it's growing quickly, guys.
Speaker 6:
Yeah. Those losses got big headlines and they're The We Company now.
Speaker 7:
We Company
Josh King:
Jose, 2019 has seen a race to market after years of staying private by a large number of these high profile technology companies, why is that?
Jose Cobos:
The market is definitely open and I think that's really the result of two things. One, volatility remains at an all time low. And anytime you have a low volatility environment, it really opens up the opportunity for companies to take advantage of it and go public. I think the second reason is you've had a tremendous amount of success and good performance by the tech companies that have gone public. When you look at the companies that have gone public in the tech sector over the course of 2018 and 2019, the average performance is up about 40%. And so anytime you have an opportunity where you have low volatility and companies performing well, then investors are going to want to continue to deploy capital and companies are going to want to come to market.
Josh King:
Talking about volatility Jose, last year ended on this volatile note, the S&P 500 swung up and down more than 1% on nine different days last December, a gyrating month, dominated by uncertainty over the Federal Reserve and this looming government shutdown that really shut down the IPO market for the first two months of the year. As we turned into the new year, we were wondering if we're hearing the drum beats of 2009, the low point of the global financial crisis? As you've been having in conversations in the offices of startup CEOs and the venture capitalists who back them, what are you hearing in their offices about the capital markets? And what's the general sentiment in the Valley?
Jose Cobos:
The sentiment is really positive. And I think there's a number of differences between 2009 or even 1999. The companies at this point in time are significantly larger than they were back in those time periods. Companies have stayed private longer, and as a result, the scale of the business, the potential profitability of the business and the infrastructure, controls and teams that they've put in place, are such that they're frankly just better companies. And as a result, when they combine that with the market conditions that we currently face, they have the opportunity to tap into them and be opportunistic in order to achieve a successful outcome.
Josh King:
You've had a front row seat to the IPO process for dozens of companies from your time here at the New York Stock Exchange, and also Jose as an investment banker yourself. When you sit down with a founder for the first time, what are some of their initial concerns and questions they ask you?
Jose Cobos:
One of the first questions they ask is, when are we ready? And that's a very personal question. And obviously that means not only having a story, but obviously the infrastructure in place to be able to tap the public markets. The second is what do the markets actually look like? And that obviously varies depending on the quarter, depending on the year. And last but not least is, at what scale and at what stage of growth do I need to be at in order to tap into the public equity markets. And that obviously depends on the sub-sector within tech, but I think for the most part, what we're seeing is most companies that are going public have about a 30% growth rate on a year-to-year basis. They don't necessarily have to be profitable, but they do have to have a long term opportunity to get there. And so one of the questions that investors will ask and managements need to know is at what point do the unit economics of the model enable some of the top line to start dropping down to the bottom line in order to get to a profitable long-term state?
Josh King:
So they're asking these questions of themselves and also of you, are we ready? As someone who wants to help them answer that question to themself and also lead them down the path if the answer is yes, what kind of posture do you take into these rooms and evolve in these relationships as you become their guide through the journey to come?
Jose Cobos:
Yeah. I see my role as that, of a trusted advisor. What I'm trying to do is impart the wisdom and information that I've gained over the course of the last 14, 15 years helping companies go public. And that's really a role that enables me to not necessarily sell one part of our business or another, but to give them an understanding of the challenges they might face, the obstacles that other companies have faced and more importantly, the things that they should be doing proactively ahead of an IPO in order to set themselves up for success.
Jose Cobos:
I'm also finding ways to introduce them into our network. We have, as you mentioned Josh, 2300 companies, and we have a lot of companies that have recently gone public. And I think one of the great opportunities that we have si to enable these individuals to interact with one another. So we're constantly finding ways to get someone like a Jennifer or her CFO, Howard in front of potential private companies that are looking to go down this roadmap so that they could learn from one another as well.
Josh King:
Okay. A CEO and their team have decided they're ready to take the plunge, their board is on board and so are their employees and early round investors, what's the rundown you give a company of things to consider when deciding if now is the right time to go public?
Jose Cobos:
Yeah. I think of it in two different ways. The first is, what are investors going to be looking for? And there's a number of different parameters and characteristics as they make an investment decision in a company. For instance, what is the addressable market that the company is going after? How big is it? How quickly is it growing? And what is the competitive advantage of this company that it has in order to successfully gain market share? Another thing would be, what is the management team make up? What is its experience? How does fit the opportunity that's currently at hand and what is going to be their opportunity to really take that market share that I talked about previously? And last but not least is valuation, at what price is that company going to come to the public market and what is my potential investment return if I deploy capital in it? So that is as an investment decision maker.
Jose Cobos:
The other way to think about it is the company itself. And some of the advice that I give to companies that are looking to go public is first, make the investments in the systems, in the controls, in the personnel, in order to successfully become a public company. What we find with private companies is that, not surprisingly, they don't have a tremendous amount of resources and when they do, not surprisingly, they're investing in R&D, they're investing in the products, they're investing in sales. They're not necessarily investing in the non-sexy things that truly matter when you go public. Things like a financial planner, a accounting system. But to be honest, when you go public, you need to have enough experience with those systems and with those people such that the cost associated with any major misstep will be more than offset by the investment that you made in it.
Jose Cobos:
I think another thing to think about is acting as a public company well ahead of becoming a public company. One of the things, for instance, we'll tell companies to think about is doing a mock earnings call, including answering questions prior to becoming a public company. Maybe a couple quarters out before you go public, ensuring you have the cadence and the rhythm, and an understanding of what it is you're going to be doing on that earnings call. Ensuring you have the opportunity to close the books accurately in a timely manner and answering the questions that you know you're going to get. You don't want to do that for the first time when you are a public company.
Jose Cobos:
And last but not least, and I think probably this is the most important mostly for the CFO, is having enough visibility and predictability in your business to ensure that you can accurately forecast what it's going to look like a year out up to three years out. It's difficult to be a public company, we get that. And it's more difficult if you missed an earnings. One of the things that we definitely trying to emphasize with potential private companies is to make sure that they have a full understanding of the business, the key drivers associated with it, and then have the opportunity to forecast it in a way that they feel comfortable, that they're not only going to meet, but beat their first two or three quarters out the door.
Josh King:
So in this six month or year long run up toward being an IPO Jose, do you serve also as a matchmaker of sorts? Do you put people together in the Valley or the other cities where people are operating and say, "You need this kind of accounting support. You need this kind of legal support. You need this kind of banking support." And even long before, they're ready to become an IPO, you are putting together the right people and capabilities that a company might not have on that first meeting they have with you.
Jose Cobos:
No doubt. Without the support of the IPO ecosystem that is in place, it would be difficult for companies to go public. But the great thing is that there's a large number of third party service providers that help companies along that path. Obviously the New York Stock Exchange is one of them, but there's bankers, there as lawyers, there's accountants, there's IR firms, there are IPO advisors. And that collective team does a really good job ensuring that, A, either the holes are being filled or B, the blocking and tackling needed in order to get a company public takes place in a way that's optimal and enables it to be ready for success.
Jose Cobos:
And so we're constantly trying to provide these introductions, not only with the IPO ecosystem, but potentially as the company starts to migrate from a private board to a public board. Obviously they have to change the look and feel because board members now have to become independent. And given that we have 2300 companies again in our network, and a tremendous number of people who have historical board experience through other companies, there's always opportunities for us to introduce companies to potentially future board members.
Josh King:
And sometimes these companies don't need all the elements involved in an IPO. For instance, the New York Stock Exchange offers several different ways to tap the public markets, including a route that Slack will take later this year, let's have a listen.
Ellen Huet:
So as we reported earlier, it seems like Slack is preparing to list on the New York Stock Exchange, probably June or July. Although as these things go, we never really know how it's going to happen until it does. But unlike with a traditional IPO, the direct listing means there's no lockup period for employees, and there's no additional stock that is released into the market, it's just current shareholders then have the ability to sell.
Speaker 9:
So current shareholders and employees can sell right away?
Ellen Huet:
Yes, right away. And so that's very different for a lot of employees who are waiting for the IPO moment to realize some of the value that they've made in their equity. They get-
Speaker 9:
What's the motivation for that?
Ellen Huet:
It's different with every company. Direct listings, just like with Spotify, work really well for companies that have a few things going for them.
Josh King:
Jose, that was Bloomberg's Ellen Huet. What's happening right now with Slack's direct listing lead up and how does it differ from the IPO process generally? We saw a preview of that last April with Spotify's direct listing.
Jose Cobos:
You're spot on, Josh. The first direct listing candidate that we brought to the markets was Spotify. And the reason that they chose that particular way to list was they were in a very special situation. First, they didn't need to raise capital, they had a strong balance sheet. When most companies think about going public, part of the reason is to strengthen that balance sheet. As a result of them having enough capital and enough cash on the balance sheet, they didn't feel the need to rise additional primary capital.
Jose Cobos:
The second one was that Barry McCarthy, the CFO, felt that there was an opportunity to potentially lower the cost of coming to the public markets. And that was really as a result of what we call the discount associated with the IPO pricing. Most companies, when they go public, they do so at a discount to their comparable peers. And what Barry realized was that by enabling the New York Stock Exchange through the designated market makers and the IPO price discovery process to determine the effective price where supply really would equal demand. In enabling the market forces to determine that, there would be no discount. And as a result, when you look at most tech companies that face anywhere from a 15 to 30% pop, as you call it, on the day of the IPO, they're leaving a significant amount of capital behind. When you look at the tech class of 2018, on average, they had about a 30% pop. When you look at an average deal size about $300 million, that's 90 million that's being left at the table by the shareholders of the stock the night before it opens up. And so I think what Barry realized was that there was an opportunity to come to the public markets without this discount, which would enable shareholders to effectively get every single penny that they deserved based on their historic investment.
Jose Cobos:
And I think the last but not least was that they didn't want to be locked up. The shareholders had the opportunity through the direct listing to effectively get liquidity the moment it opened up. And as a result, there wasn't this wait and see 180 day period, where management teams and their employees were constantly fixated on the stock price because they recognized that it was only at 180 days that they would be able to get some liquidity. As a result of them being able through the IPO price, discovery process, and the direct listing to effectively get liquidity day one, they could focused on the business, which is what really matters.
Josh King:
Jose, you saw the Spotify story unfold before your very eyes on the first months of your tenure here at the NYSE. At that moment down on the floor, as we watched the price discovery process unfold, did you see it as a path that others could take? And how did your conversations change in San Francisco when you went back home and began sharing observations of what Barry McCarthy did at Spotify and how their journey unfolded?
Jose Cobos:
There was a tremendous amount of interest when Spotify went public in the direct listing process. Post that transaction, we spent a lot of time educating investors, shareholders, VC firms, law firms, everybody in the Valley and the IPO ecosystem, explaining the differences between a traditional IPO and a direct listing. I think what most people have come to the conclusion of is, that the direct listing is one way to become a public company, but it's not the only way. And it may not be the best way for all companies.
Jose Cobos:
I think when we think about the companies that have probably the ability to go and use that mechanism to list their shares, I think there's a number of characteristics that they all have. The first, I think is they don't need capital, at least right out the gate. As we mentioned, when you go public through a direct listing, you're not raising primary capital, you're not strengthening or adding cash to the balance sheet. And that was the case with Spotify. That will also be the case with Slack. So first and foremost, you don't have a situation where the company needs cash day one.
Jose Cobos:
I think the second thing is the company needs to be of a scale, and of a brand that is well known in such a way, because unlike a traditional IPO, there is no roadshow associated with a direct listing. And so investors have to be understanding and familiar with the business model enough to do what they need to do from a diligence perspective and investment decision perspective without the typical roadshow associated with an IPO.
Jose Cobos:
And then last but not least, you have to give the company and its shareholders the opportunity to leverage the resources and benefits associated with a typical banking syndicate, even though you may not have a full banking syndicate as you do with a traditional IPO. The fact of the matter is banks bring a tremendous amount of value to the table through sales and trading, through the capital markets, through investment banking, and through research. And I think one of the things that we're cognizant of is if you have a limited number of banks on the cover, then you could find your yourself in a situation where you don't get the support that you typically would if you had a larger syndicate associated with your transaction.
Jose Cobos:
So I think in the spa, in the case of Spotify, in the case of Slack, because of who they are, how big they are, and the fact that investment banks have to be there, they will get the support. But I think if you are a maybe smaller company, a less known company, maybe a less consumer tech related company, it will be harder to potentially get all the benefits of a direct listing and still get the support that you would if you were a Slack of Spotify through the banking syndicate.
Josh King:
Were there situations where you had to basically walk a CEO back off the precipice of a direct listing and say, really the more traditional route is better for you?
Jose Cobos:
Look, my job is not to tell a CEO what to do, it's to inform him or her on the opportunities, the obstacles associated with them, the benefits associated with it, and then to effectively enable that individual to take that information to their board members in order to make an informed decision. Ultimately, it's his or her responsibility to do what's right for the company. I think of my role as just being there as an advisor to ensure that they have the information with which to make that decision.
Josh King:
The tech companies that I mentioned during my introduction, in addition to PagerDuty, have all performed well as publicly listed companies. As of this recording, as you and I are sitting here in the library, Pinterest has seen gains every day since its debut on April 18th. That probably of course won't continue, but the stock was a main topic on Fast Money last week. Let's have a listen to that part of the conversation.
Speaker 10:
As the tech unicorn stamped continues, Pinterest is leaving the pack this week, soaring more than 50% since it's IPO. Joining us now as one of the social stocks earliest investors. Let's bring in Rick Heitzmann, managing director at FirstMark Capital, an early investor in Pinterest. Rick, you got to be a happy guy.
Rick Heitzmann:
I'm happy. I'm happy. I'm happy. Thanks for having me back. I think the company's done well. I think different from a lot of the IPOs out there right now, especially on the consumer side, Pinterest really had a unique positioning and was really driving value, both for the Piners and the advertisers, so people are realizing that.
Josh King:
Jose, I was on the floor the day that Pinterest went public talking to several other of the very early investors in PINS, and they too were very happy with the results. Pinterest was priced at $19 and chose to come into the market with evaluation below what most expected. Under-promise and over-deliver, is this a strategy you expect to see repeated? And what are investors looking for when making an investment decision on a tech IPO?
Jose Cobos:
It'll be interesting to see whether or not that becomes a norm. I'm not necessarily sure that it will. I think Pinterest and a number of other companies that look like it had situations where maybe their comparables were down relative to where they were when they lasted a private round. I think the was also a desire, frankly, to get enough investor demand, to build the book in such a way that potentially had the opportunity to increase the price and increase the size of the deal. That's not necessarily always going to be the case. I think other companies have performed extremely well, continue to see their comps do better since the time they lasted their private placement. And as a result, you'll see them go out at a significantly higher step up than their last previous round.
Jose Cobos:
I do think that we continue to see a situation where investors are frankly limited by their ability to deploy capital in the public markets in tech IPOs. And as a result, what you're seeing is to some extent, not only great companies getting valued appropriately because they're great companies and have great financials with great management teams addressing really interesting market opportunities, but there's also somewhat of scarcity value associated with these assets. PagerDuty, which you spoke about recently, was the first software company to go public this year. And I think the fact that there haven't been that many opportunities for investors to deploy capital into these type of assets, enabled them to take advantage of that and create a situation where the valuation was a really nice one.
Josh King:
On the topic of PagerDuty and also this issue that you brought up earlier about this idea of leaving money on the table, when Jennifer Tejada was here on that day, and her shares had gained 60% in the hours following her first trade, she echoed this common refrain that bankers might be upset because as you said, and she noted to me one on one, some money was left on the table. Wearing your former investment banking hat, what does that really mean? Do bankers really win when a stock pops like that on opening day?
Jose Cobos:
Yeah. Taking a step back, a pop of a stock is something that is expected. The fact of the matter is, investors that are coming in the night before are taking some risk by holding that stock overnight, but also investing in a company where there is no liquid market as of yet. And so the expectation by both the banks and investors is that there's going to be some discount again to the comparable companies in such a way that balances the additional risks that those investors are taking over the course of those hours. Now, that being said, what you don't want to have is a situation where the stock pops so much, that the previous shareholders are leaving to your point, a significant amount of money on the table.
Jose Cobos:
Having been an investment banker, I can tell you, it is hard to price a transaction. In addition to dealing with macroeconomic conditions and what the markets are doing, you're also though dealing with what's going on during the IPO roadshow and what you're hearing from investors. And not surprisingly, investors, to some extent, have an incentive, to be less open and less transparent in terms of what they want, because that can help them potentially get more benefit from the IPO and the pricing. And so part science, part math, part art. And when you are trying and working with a management team to determine at what price to open up that stock or at what price to price the transaction the night before, there's a lot of information that's being disseminated that is being ingested by the board members, by the management. And ultimately, the bankers are making a recommendation with a hope and expectation that the stock is going to pop and then it's going to continue to ride up, but not in such a way where they're leaving so much money on the table that the management teams and their shareholders are upset.
Josh King:
Jose, on the flip side of the coin, we've been talking about a lot of what appear on the surface as real success stories, one other company that went public, not on this exchange, but it was highly anticipated by the marketplace was Lyft. And it had a good first day or a good first several hours, but then since then trading has been down about 20%. As you go back to Silicon Valley, what's the after action report on the lessons learned from Lyft?
Jose Cobos:
Look, I think most people understand that the IPO is one day in time. And what truly matters when you're building a long sustainable business is the execution over the course of not quarters, but years. Lyft and most companies will have its ups, it will have its downs, but my expectation is if they continue to deliver and perform the way institutional investors and research analysts expects, their stock price will continue to go up, and over the course of time, it will find its true sort of trading point.
Jose Cobos:
The thing that I think is probably even more telling is that we've had now a fair number of tech IPOs this year, Lyft is the only one that's actually down. And so the broader markets, and specifically within tech is extremely positive, IPOs are performing well. And I think that again, enables companies to opportunistically, put themselves in a position to go out. And that's what we're seeing now, we have a very robust pipeline of tech IPOs that we expect to go into the public markets this year. And we're truly excited about what's going on in the sector.
Josh King:
Talking about what's going on in the sector, let's zoom out for a moment, Jose. Companies that have not yet gone public like Uber, Slack, Airbnb, WeWork, Palantir have been rumored IPOs for years, and maybe the time wasn't right for the company's product development or its culture or the markets were too choppy, in your experience is this wave of new offerings typical? And how long does the IPO process typically take?
Jose Cobos:
Yeah. The IPO process typically takes about four months from the time you start the actual process. Meaning there is a tremendous amount of work that goes into even kicking off the IPO process. And that's where you're investing in the systems, where you're investing in personnel. But the minute you say go, and you have the organizational meeting with your banking team in place, that process typically it takes about four months. And those four months are really broken out into sort of three different components. The first one is the filing preparation, meaning you're going to put together a perspective, otherwise known as an S-1, which is a document that institutional investors will use to make a decision as to whether or not they want to invest in the company. That prospectus has a tremendous amount of information, not only on the company, its addressable market, its products, its services, but also on its financial performance, on its legal concerns. And that is the document through which most investors make a determination as to whether or not they want to put capital to work.
Jose Cobos:
Once you file that document with the SEC, then the SEC has the ability to maybe ask you additional questions that they feel need to be incorporated within the document. They may ask you to modify some of the language in order to provide additional visibility and transparency to institutional investors. And so that back and forth will go on for a few months, depending on how many questions and how difficult the conversation or story is, it could take longer. And so that's the second part, which is, you know, getting through the SEC registration process.
Jose Cobos:
And last but not least, is the marketing and pricing of the transaction. This is where the management team will go out on the roadshow, typically about a two week process, eventually getting to the place where institutional investors communicate to the bankers what the demand is for that specific stock. The bankers will then aggregate that demand over the institutional investors to determine how big or how many times oversubscribe the book is. And the way to think about it effectively is if you have a book that five times oversubscribe, that means that you have five times as much demand for that stock as you actually have stock to sell. And that's effectively what you want because when you have a book that is more than oversubscribed or multiples of what you need to bring to the market, then it gives you confidence that you'll have the opportunity to price it well and have the stock do well.
Jose Cobos:
The last component of it is the pricing call, which is obviously extremely important. And that is where investment bankers provide their recommendation to the management teams based on the demand that they have, based on the investors that are at the table, at what price they believe they should price the transaction. That enables management and the board to then determine whether or not that is the recommendation that they will ultimately go forward with. Again, that process of itself takes about four months. But it's really all the hard work and investment that goes into putting yourself in a situation where you could even kick off the process that most companies spend a lot of time on.
Josh King:
On this marketing roadshow and the determination that a book might be five times oversubscribed, that's a good problem to have. But walk us through actually the minutia of the process to telling some investors to say, "You can only have 20% of what you're indicated into interest was."
Jose Cobos:
Yes. The allocation of shares is really interesting. You want to have a situation where you have a lot more demand than you do supply. But then what you want to do is enable those shares to be allocated to institutional holders that will do two things, either one, be a long term holder, meaning they will continue to ride the stock and over the time gain additional shares in it because they want to build their position. But you also want to create enough liquidity in the stock to enable the effective and smooth trading the transaction once you open it.
Jose Cobos:
And so what companies and investment bankers do is open up the book, if you will, meaning figure out who has come in at what demand, and then determine what allocations they are going to give to each of those investors. And the expectation is that if you have enough demand, you don't necessarily want to give someone 100% of the demand that they've requested, because then there's no opportunity for them to come back into the market once the IPO opens and the stocks starts to trade, because they've effectively already received their full allocation. What you want to do is keep them, if you will, somewhat hungry, such that when the stock opens up, they have to come back to the market, buy additional shares in order to build the allocation that they really wanted.
Josh King:
From an investor standpoint, having been on the other side of the table and the roadshow, what's their strategy about indicating what their level of interest is to actually build this book? Am I as an investor holding back a little bit of what I say my total demand is, or will I want to overstate what my demand might be?
Jose Cobos:
It really depends on the investor and on the transaction. But when you think about it, investors have an incentive to provide as little visibility as possible until the latest point in time. And so that's why during an IPO roadshow, you really start to see the book build the last 24 to 48 hours before the pricing. That is ultimately when institutional investors have completed their work and now have to communicate what their let level of interest is. The longer they could wait to communicate that decision, the more information they're going to have in terms of how that book is potentially being built and what's going on in the stock to effectively make a better informed decision.
Jose Cobos:
And so institutional investors typically on a hot deal will ask for more shares than they will probably want or expect to get. Because the expectation is on a hot deal where you have a book that's five times, 10 times, 15 times oversubscribed, they know that their allocation is going to be cut back. And so the expectation is if I'm going to be cut back, I should be asking for more with the full understanding that I'm not going to get everything I want, and ultimately I might get something that looks more like what I wanted by asking for more than I actually needed.
Josh King:
How fluid is the process?
Jose Cobos:
Think of this as a situation where over days more information is coming to bear, that additional information gets stacked up on one another. It potentially moves and it's a fluid situation, but it's really the last 48 hours where the bank and the management team really starts to have an understanding of how that book is coming together. Again, every transaction's a little bit different, but that is the typical norm. And so as a result, the management team who has been on the road for two weeks is tired from all the traveling, and all the meetings, and all the bad dinners are now at a point where they're given a tremendous amount of information, which they need to make a decision on in a very short period of time.
Jose Cobos:
But the expectation is that the banks have been working with management teams throughout the roadshow, given them an understanding on a daily basis, if not on an hourly basis of what they're seeing, what they're hearing, what accounts are saying, such that by the time they get to that pricing committee, hopefully no one's getting surprised, and the board already has a pretty good understanding of where things are coming out, such that they can make a calm and well understood decision as to whether or not to take that price.
Josh King:
How does media coverage affect the process in the final seven, five, three days?
Jose Cobos:
We actually have seen reporters sent to the offices of investors in Chicago, in Boston, in L.A., in London, and rumors coming out of these rooms that the roadshow is going great, or the roadshow is a little flat. And sometimes there are stories that come out that say the price is going to be lowered, or the price is going to be raised by a couple bucks.
Josh King:
How does what gets reported in the news affect this process?
Jose Cobos:
It does have an impact, not necessarily a on the management teams, because that's probably information that they already have, but it could lead to a situation where it potentially impacts other investors. Where it potentially impacts people that are still doing their homework, and now they're starting to get another piece of information that they didn't have. It's part of what management should just expect. They should not react in any way. And they should just take the advice of, again, the team that they built in order to get through the noise, if you will, and to the optimal outcome, which is hopefully a good pricing call.
Josh King:
On the pricing call, Jose, it is now 4:00 PM, the day before the IPO scheduled for opening bell 9:30, the next morning, the roadshow is done, the team is exhausted, they've got all their inputs and information, help paint a picture of who is around the table and how this pricing call is actually made.
Jose Cobos:
The pricing call typically has three entities involved in it. Obviously the management team, who's been on the roadshow and trying to obviously drum up investor demand. The second is the lead left bank. Typically they're going to be the one that has aggregated all the orders across the banking syndicate and communicating to the management team, this is what we have at different price levels, at different scales of demand. And last but not least is obviously the board. Because ultimately, it's going to be the board and the management team that either takes the recommendation of the bank or pushes back in some way, shape or form. But typically what you find is it's a very collaborative event where tough questions are asked, a lot of information is shared and ultimately, 99.9% of the time, the right decision is come to.
Josh King:
When we come back, more with Jose Cobos on the parallel paths of training for life as a Navy Seal and getting ready for life as a public company. That's right after this.
Speaker 13:
Farfetch is a platform that connects the most beautiful boutiques, brands to people who love fashion from all around the world. We have customers in 150 country, we have 300 designers. What Farfetch has created is a fashion community in the New York Stock Exchange with such a strong brand and we are in the industry of brands. So for us it was a perfect fit. Farfetch is listed on the New York Stock Exchange.
Josh King:
Back now with Jose Cobos, the NYSE's Silicon Valley based head of Capital Markets. Before the break, Jose and I were talking about the amped up IPO season of 2019 and some of the tech unicorns coming to market. Jose, back in episode 18, 78 episodes ago, when you had your first visit here Inside the ICE House, we talked about your service as a Navy Seal. It's one thing to go through four years of an excellent education like the US Naval Academy at Annapolis, quite another to show up for 24 weeks of BUD/S training in Coronado. The stakes for going from business school to draw comparison are certainly different from the training you get as a startup CEO. But how did the level of preparation and attention to detail compare between separating well-educated Naval engineers from elite special warfare experts and getting a tech startup team ready for public ownership?
Jose Cobos:
Yeah. Coming out of the Naval Academy, I was really excited about joining the Navy Seal Team. Obviously the experience and the training is very difficult and there were very long and cold nights. But it was really sort of the mental strength that got me through it. It wasn't necessarily my physical capabilities or those of the people around me. Now that being said, teamwork really mattered. They were training teams, not individuals. And I think there are a lot of similarities with IPO companies or management teams looking to go public as they are, maybe with SEAL Teams. Obviously they're very focused on the end task, right?
Jose Cobos:
And again, the IPO is only one day in the life of a public company, but it's an important day. And there's a lot of processes, there's a lot of things that need to transpire in order to get there. And just like putting a mission plan together and ensuring you have the right team, the right asset, and everybody coordinated and effectively focused on the mission, that's very similar to a banking syndicate working alongside the accountants, the lawyers, the IPO advisors to ensure that ultimately you get to the finish line. And the finish line again is taking the company public and obviously having the opportunity to go and do great things in the long run.
Josh King:
So mental toughness and teamwork. Were you an athlete at the Naval Academy before you graduated?
Jose Cobos:
I definitely spent a lot of time doing sports. I was recruited for swimming, decided to try something different. While I was there, I did crew my first year. And then ultimately decided, very early on that I wanted to get into the SEAL Team and spent the better part of three years preparing. There was an actual Navy Seal at the academy who did workouts, and so I did a lot of stuff with him.
Josh King:
What are the mental preparation exercises that you learn as you go through SEAL training and as you on the teams that are applicable to that change in posture between, "Hey, we're a startup tech company. We live on fast food. We've got our VC money, there's no need to get ready for quarterly reports. There's not too many people looking for us as long as our venture funders are happy." But then you'd get to this point where regimentally every 90 days, you're on a phone call with analysts and changing that mental toughness and teamwork that you probably learned all sorts of different skills and exercises as a SEAL Team member that you might impart into the way a management team needs to toughen itself up.
Jose Cobos:
Yeah. When you think of a SEAL Team, obviously the training is a big component of what makes them successful, but also equipping the forces with the tools, the equipment, the information they need to carry out their mission is also critical. Very similar to a man management team, looking to go public and be a successful public company. Obviously the amount of experience and training that team has and the preparation that they take on in order to put themselves in a position to go public is important, but you also have to enable them to have the investment, the tools, the systems, the controls, the policies, all of which enable them to at least put themselves in a position to walk out the helicopter door and complete the mission.
Jose Cobos:
Now, that being said, I think probably one of the interesting similarities associated with a high flying or a tech company looking to go public and a SEAl Team is that the environment in which they operate is constantly changing and they have to be open-minded. They have to think outside of the box and they have to adapt to what's on the ground. And nothing moves faster than tech sector, there's always someone looking to do what you're doing better, faster, cheaper. And so management teams have to constantly not only be able to execute on their own business, but have a very good appreciation and understanding of what's going on around them and how they need to pivot the business in order to continue to grow and expand and invest. Similar to the SEAL Teams, they have to constantly not only be trained and equipped and ready to go, but they have to monitor the situation on the ground and ensure that they have as much as information as they possibly can to put themselves in a situation and in a predicament where they can effectively get to the right outcome.
Josh King:
As you talk to CEOs like Mark Mader of Smartsheet and Tien Tzuo of Zuora, two companies that you helped bring along toward their IPOs in 2018, what do executives like these tell you about their experience one year in? Are they hardened by the first year of duty running a public company or have they found a good rhythm that works for them?
Jose Cobos:
I think they're enjoying being a public company first and foremost. They recognize they spent a lot of time and a lot of effort trying to get there. They've had some ups, they've had some downs, they've had some bruises, but they continue to learn along the way. And there are many things that you can talk to people ahead of time in order to become better prepared, but ultimately it's only when you finally get there that you have a full appreciation and understanding of what it truly means. And I think if you were to talk to either one of them, they would tell you that there's been a lot of learnings along the way. And over the course of time, that will only make them better, it will only make them stronger, and I think ultimately successful.
Josh King:
Are there general themes that either Mark or Tien have expressed to you or others that sort of say, these are some of the hard lessons you learned in your first year of being public?
Jose Cobos:
I think there are things that they were appreciative that they did ahead of time. And when I talk to other management teams, for instance, one of the things that I think is really helpful and I believe management teams now are doing more frequently and has significant benefits, is talking to institutional investors well ahead of an IPO. Historically, you didn't have the opportunity to do that, but through the JOBS Act and now subsequently all companies have the ability to what we call test the waters, meaning they have an opportunity to go build the relationships with institutional investors, communicate their story, build the relationship and give them an understanding of what is to come.
Jose Cobos:
And that does a number of things, one, it enables institutional investors to start to get to know these individuals one-on-one versus meeting them for the first time when they're actually trying to sell you shares. That I think in and of itself is helpful, but it also enables the company to have an understanding of what type of questions are going to be asked during the roadshow? What are the holes that they need to feel prior to going public? Where are the potential concerns that teams are going to have when making an investment decision? In such a way that when they finally get to the roadshow, it's not the first time that they're going through this exercise. And as importantly for the bankers, it also gives them an understanding of where that demand might come from. So that is one thing that has changed here over the last few years that I think is really helpful and a lot of companies are taken advantage of.
Josh King:
You now have a new place, Jose to be holding conversations like this with these CEOs both before and after their IPO, with the New York Stock Exchange's recently opened NYSE West in San Francisco. It includes a trading floor for NYSE Arca options as well as space to bring together the NYSE community outside ahead of 11 Wall Street. How will the space be used? And what is the Exchange's relationship with Silicon Valley right now?
Jose Cobos:
I'm really excited about the new space. We will have some kind of an opening ceremony or event I expect in the July time period. But I think one of the things that it enables us to do, and we had a space there before, but it wasn't set up as well as this one, is to bring the network of companies that we have together and introduce them either to one another, or to potential private companies. And so we have a relatively large reception area where we could host events. And that could be panels, it could be conferences, it could be investor days. It could be a host of number of things that enable companies to leverage, frankly, not only our physical space, but our network of companies in a way that enables them to learn from one another, potentially become customers and partners of one another and frankly build their business. So while we've always been in San Francisco, now this additional and new space really gives us an opportunity to take it to the next level.
Josh King:
As I faintly suggested in my introduction, the NYSE was historically not viewed as the home for technology. Look around in this library or in the other ornate rooms on the sixth and seventh floors of 11 Wall Street, it certainly doesn't scream tech. It's more an homage to those who built the country through railroads, bridges, dams, airplanes, and the gamut of inventions in the 19th and 20th centuries. But now in the 21st century, does this sentiment still exist? And how does your team address the questions that inevitably come up about the NYSE being a home tech?
Jose Cobos:
You're right Josh, I think the New York Stock Exchange has always been known for bringing the largest companies to the fold. We work with a lot of small companies and we do those really well as well. But when you think of the largest 20 IPOs of all time on a US exchange, we've done 19 of 20. Now that being said, we probably hadn't tapped into the tech sector as much as we could have. And I think part of that was self-inflicted. We had a listing requirement that forced tech companies to be profitable before having the opportunity to list with the New York Stock Exchange. When you think about it, most tech companies are super focused on market share, on continuing to disrupt the status quo, on the top line versus the bottom line. And as a result, there were many companies that came and went that frankly could have had the opportunity to list with us, but couldn't because they weren't profitable. We changed those listing requirements.
Jose Cobos:
And as a result, we've been able to gain market share over the course of the last five to 10 years. Just to put it into perspective, the last five years, the New York Stock Exchange has done north of 50% of all tech deals, but they have also raised roughly 75% of all tech proceeds. And when you think about the who's, who of tech IPOs over the last few years, when you think about the Ubers of the world, the Pinterests of the world, the Slacks of the worlds, the Tencent Music Entertainments, the Spotifys, the Twitters, most of those companies are coming onto the New York Stock Exchange. So we've not only invested heavily, but made it easier for those type of companies to come on board. And as a result, we've seen a significant pickup in our ability to be helpful to them.
Josh King:
Back in the day before the rules were changed, names like Apple, Microsoft, and Google, almost $3 trillion names couldn't have even been listed here because they weren't profitable at the time of their IPO?
Jose Cobos:
That's exactly right. Obviously when they went public, they weren't a trillion, million dollar business, they were much smaller. And frankly, we didn't have the listing requirements needed to be user friendly. And as a result, they had no other means with which to go public than to go with our competitors. Obviously we've changed that, and since, we've garnered significant market share.
Josh King:
The attention for technology and innovation is often on your home base in California, but your team is also focused on the global market. In mid April, Jumia, we mentioned them in the introduction, the first African tech unicorn listed on the NYSE. Let's listen to the company's CEO on CNBC that day.
Speaker 14:
Talk about you as the "Amazon of Africa", the company as very big continent, many different countries, many different cultures, many different phases in terms of economic development, where is the growth for you and where are you focusing?
Speaker 15:
Look, the uniqueness of Africa is for the sellers, it's very hard to distribute their products because of the inefficiencies of Africa and the challenges that the infrastructures present. And with technology, we have built a platform which is very effective for the sellers to distribute their products and for the consumers to shop. In Africa, there's very little retail and the solution is to go online and go on Jumia. So the relevance of eCommerce in Africa is very strong given the unique nature of this continent.
Josh King:
Jumia's IPO has the potential to certainly help that company expand its operations throughout the African continent. What potential impact can an IPO have not just for Jumia and for the NYSE, but for expanding where investors can actually look for innovators like Jumia and other places where you wouldn't expect the next IPO listing to come from?
Jose Cobos:
Look, we're really fortunate. We have the opportunity to bring companies to the public markets so that they can continue to build on their own business, invest in people, invest in resources and frankly, change the world. And about a third of the tech IPOs that went out last year, came from the international markets. When you look at Jumia, it is the best tech performing stock of this year. The same week that Jumia was going out, we also took a company by the name of Tufin, that I think you mentioned earlier, that has dual headquarters in both Israel and the United States.
Jose Cobos:
We are constantly working with the best companies in order to enable those opportunities to be tapped into by institutional investors. We are the home to the deepest pool of capital. And the companies that like to work with us recognize that in association with us, they will be able to not only come out to the markets, but brand themselves in a way that isn't available in other exchanges.
Josh King:
Right. We've been talking a little bit about companies like Spotify and Uber, names that people know because of their consumer applications and their millions of users in the United States. Sometimes those names are not known before their IPO. So for companies like Jumia or Tufin, not top of mind for us investors. When you're in the room pitching a company, how important is marketing and aligning their brand with the NYSE?
Jose Cobos:
Depending on the company, marketing could be a really important factor to the determinant as to whether or not they want to work with us. Now, I think when you look at all our value proposition, it's really the market model that truly shines and differentiates us. The way we trade our stocks and the reduction in volatility, because we have people intersecting and interacting with technology in order to affect outcomes is what really drives the needle and enables us to provide a great service to our clients. But for companies that have a consumer tech angle, that want to raise brand awareness, we have a great team of experts and a tremendous number of channels through which we enable those companies to communicate the word effectively to the right audience. That could be institutional investors that maybe haven't heard of this story, it could be potential partners or customers that they want to bring into the fold and obviously have hit the P$L, but it could also be employees, right? Whether it be current or future ones that they're trying to tap into because they operate in a very competitive hiring environment.
Jose Cobos:
So what we like to do is work with the marketing teams in such a way where we take their goals, their objectives, and then allocate our expertise and our resources in such a way to ensure that they get the most visibility at the time of the IPO, but then also post. So one of the things that I think is important to know is that we've had companies that have been listed with us for north of 100 and years. Those companies still come back to the New York Stock Exchange to announce a new acquisition, a new milestone, a new product, whether it be Shake Shack or Coke. The fact of the matter is those companies have a deep relationship to the New York Stock Exchange, where we, in addition to trading their stock also are an extension of their marketing department. And the fact of the matter is by combining those individuals that we have along with the 35 media outlets that are here at the New York Stock Exchange, it creates a very easy and effective way for companies to get the word out.
Josh King:
Many of these 2300 companies are not based in New York City or even in the Northeast United States, they are like Jumia or Tufin based all over the world. And for them, these two floors, the New York Stock Exchange are almost a headquarters away from home. This is their building that they can use just like Exxon and Coca-Cola use it every day for their investor days.
Jose Cobos:
We are fortunate. We took a major renovation to the six and seventh floors of the New York Stock Exchange. We took what had been historically management offices and converted it into working space for our listed companies. And so we now have 20 spaces or rooms available free of charge for our companies to come in and use. And they use them regularly for board meetings, for investor days, for partner meeting, customer discussions. And it creates an opportunity for them, not only to your point to leverage our facilities on the East Coast, where maybe they don't have a presence, but also to interact with one another.
Jose Cobos:
Last year, we hosted north of 2000 events here at the New York Stock Exchange. And those were not only for one off companies, but it was for conferences where people had the opportunity to, again, talk to one another, learn from one another, engage, and hopefully drive their businesses forward. And so there is a lot of power to the network, and we're constantly finding ways to create situations where they connect with one another. And the facilities that we have here are second to none in order to make that happen.
Josh King:
So far in our conversation, Jose, we have been focused on the big unicorns IPOing, which grew by staying private for a long time. And Stacey Cunningham, the president of the NYSE will say, that's a good part of the story, but it's an incomplete part of the story. Are smaller companies still coming to market? And what are their specific challenges and how are you engaging with them to try and tap the public markets sooner than the multiyear journeys that people like Airbnb and Uber have taken?
Jose Cobos:
Private companies are definitely staying private longer. We now have about a 12 year time horizon between a company's founding and when it goes public. That doesn't necessarily mean it has to be the norm. And I do think that there are a large number of smaller companies that haven't been around that long, that are looking to tap into the markets. But ultimately the time is right when the company is ready. And we talked about what it means to be ready and the things that companies need. And I think what you find is that investors still want to put capital to work when there's a lot of growth to be had, because that is where the value is being created.
Jose Cobos:
And part of the reason we think it's important for companies to continue to go public is that retail investors, meaning you and I, who aren't necessarily an institution, don't have the opportunity as these private companies stay private longer to ride and take advantage of some of the value that is being created. And the mechanism with which to do that is effectively by enabling these companies to go public on an exchange where people have the opportunity to grow with the companies and therefore ride the appreciation associated with it.
Josh King:
Is there enough appetite for a smaller company these days? Will the bigger companies swallow the investment interest at the capital markets level or is there room for a smaller company to come through as an IPO and find the right investors for their stocks?
Jose Cobos:
Look, we talked about Tufin, we talked about Jumia, those companies have done amazingly well. They were relatively small IPOs, and compared to someone like an Uber or a Slack, significantly smaller. I think investors are looking for great companies. Scale is one determinant factor, but it's not the writing or major one. And so they're going to put money where they think they're going to make a great return. And a lot of these smaller companies, because they're earlier in their life cycle, because they're going to continue to grow at a significantly faster rate than some of the bigger ones that have matured a little bit more, have the opportunity to create outsized returns relative to some of maybe the larger ones.
Josh King:
At the beginning of our conversation, you noted that this has been a low volatility period in 2019, a very fertile atmosphere for IPOs. It did not look that way toward the end of last year in December. Do you expect market conditions to allow the unicorn stamped to continue? I don't want you to be a sage, but what, what are you feeling about it?
Jose Cobos:
Right now, we find ourselves in a low interest rate environment, unemployment is also low, companies that are stating their earnings now are communicating very positive results. We obviously don't have a crystal ball, but I think, feel really positive about the way the economy continues to perform, about the environment in which companies have the ability to take advantage of the public markets. And the fact of the matter is, by effectively shutting down the government and the SEC in the first quarter, you had a situation where there was a tremendous flow of companies into the SEC registration process that were effectively put on pause. And as a result that has to be flushed through the system. And I think what it will create is a continued large number of companies that are tapping into the public market and going public. And I think as long as you have, again, low volatility and the performance that I mentioned at the beginning of the program, you're going to have a situation where companies continue to put themselves in a position to go out.
Josh King:
A lot of us don't have the privilege of being able to drive along Sand Hill Road and have conversations in the shops and restaurants of Silicon Valley and Palo Alto and knowing what kind of tech companies are coming over the horizon. As you think about the companies that have gone through the IPO process over last 12 months, you see a lot of business models that weren't really front of mind. Bring us as we wrap up our conversation out into the Silicon Valley for a minute, and tell us about some of the tech trends that you see emerging, the kind of names that you'll be seeing public six to 12 months from now.
Jose Cobos:
I continue to be really excited about traditional industries that are now using technology to change the way things were being done. And when you think about technology in healthcare, in the financial system, in the automotive sector, there are a number of different verticals that are really being disrupted and where technology is now playing an increasingly important role and getting new business models, set up and new ways of interacting with technology. And so I think in the next six, 12, 18 months, companies in the healthcare IT sector, companies in the FinTech sector, companies in the blockchain and crypto sector that we've been reading a lot about will have the opportunity to have their big day on the stage.
Jose Cobos:
I think autonomous driving and artificial intelligence or other areas where we haven't seen, or haven't had an opportunity for investors in the public market to put capital to work. But I do expect given the amount of investment that's being made and the opportunity within those sectors to be really large and disruptive for companies in that space to go public.
Josh King:
And on that note, Jose, three time visitor to Inside the ICE House, maybe we'll have you back in 12 months, your fourth time visit to Inside the ICE House and see how this prophecy has panned out. Thanks so much for joining us.
Jose Cobos:
Thank you for having me, Josh.
Josh King:
That's our conversation for this week. Our guest was Jose Cobos, head of Technology Capital Markets at the New York Stock Exchange. 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 was produced by Pete Ash and Theresa DeLuca, with production assistants from Stephen Romanchik and Ian Wolff. I'm Josh king, your host signing off from the library of the New York Stock Exchange. Thanks for listening and 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, express 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 proceeding conversation may have been edited for the purpose of length or clarity.
