Hey Y’all,
This week, I did a deep dive into the history and biggest lessons from two companies that went public this week: Airbnb and DoorDash.
In its simplest form, this is my attempt to distill down what these IPOs mean for the greater tech echo-system.
Below are the topics I’ll dip my toes into today — feel free to view each topic through the lens of either: a founder, an institutional investor, a retail investor, and/or, simply, a curious person. :)
Setting the Stage
An Overnight Success
The Unseen Winners
Are We in a Bubble?
Is the IPO Process Broken?
Conviction + Resilience
Celebrate!
What’s Next?
Before we jump in, two quick disclaimers:
@retail_investors: I do not recommend buying stocks in an IPO. It is very volatile. In fact, I don’t necessarily recommend buying individual stocks at all. Instead, invest in ETFs (S&P 500, DOW, Nasdaq, or otherwise).
@all: To steal from Packy McCormick’s latest article “APIs All the Way Down” (I highly recommend reading, by the way), I am going to echo his sentiments:
“I feel like I have nowhere near the technical depth or hands-on experience to write about the topic with the nuance it deserves.
But in these cases, I view my role as being the shameless kid in class who’s not afraid to raise his hand and ask the question that everyone else is thinking. If there’s something happening that I know is important, but don’t know nearly enough about, and I do this for a living, chances are there are many of you who want to understand it a little bit better, too. This, then, is the beginning of an exploration, and I look forward to your thoughts and feedback.”
Let’s get into it…
1. Setting the Stage
From Robinhood’s Snacks this morning:
Thursday morning, when Brian was told of the pre-trading price on live TV, his reaction was incredible:
That’s the first time I’ve heard that number. In April, when we raised money, and it was debt financing, that price would have priced us around $30. So I don’t know what to say, that is… I’m very humbled by it.
And as Fortune points out about his reaction:
This is key: Chesky then cogently summed up the flip side of attaining such a high valuation: “The higher the stock price, the higher the expectations.” He’s right. No one wants to be the company whose stock was hyped during the IPO process but gets rebalanced after its first earnings call.
This begs the question: how does this day-of “pop” happen? And is it good or bad? I will address this question in point number six, further down in this article.
But first, let’s go back to the beginning:
2. An Overnight Success
All overnight success takes about 10 years.
- Jeff Bezos
You can watch DoorDash’s 2-minute YC application video here:
And Airbnb’s night-before Hail Mary to get into YC:
The grit over the years is evidenced in everyone who talks about both of the company founder’s maniacal focus.
What I like about juxtaposing these two companies, is that you can see two clear category winners, but from different perspectives.
DoorDash was the classic “why will you win in a crowded space?”
Airbnb was the classic “why will you win big in a new, untested, market?”
What were the things that helped them both, in being break-out successes?
As Lenny succinctly summarizes this Tweet thread by an early DoorDash employee, turned investor (obviously), there were three key reasons:
3. The Unseen Winners
The founders and employees of Airbnb and DoorDash were, of course, the biggest beneficiaries from two of the biggest IPO’s in history.
But, I also want to call out two other winners.
They invested in both companies at the seed stage.
YC cut a check to Airbnb for $20K, in exchange for 6%, the equivalent of $2.2B at yesterday’s close (dilution included).
Many passed on Airbnb in the early days.
You can read two articles that YC published this week. First one on Airbnb, written by PG. And the second on Doordash. written by YC Partner, Paul Buchheit.
The Customers
I believe that, overall, consumers have won because of these two companies. If you look at the customers on both sides of the marketplaces (drivers/restaurants+eaters and hosts+guests), it’s a win-win overall.
It’s worth taking note that this is very difficult to do successfully, especially at scale, and across so many unique markets.
4. Are We in a bubble?
Stay with me, people.
It’s the natural question to be asked, especially by those who do not know the business mechanics to the degree that early stage investors, and of course, the founders, know them.
It was the first question that popped up, in several of my text threads with friends about the IPOs this week. “Okay, DoorDash was huge. I bet Airbnb will be too. Do we think we’re in a bubble that is about to pop?”
The reality is, global equities did hit $100T for the first time ever this past week.
So, it is fair to consider the rising valuation (revenue multiples), both in the public markets and private markets. But, Airbnb in particular has had a rollercoaster of a year. They had to lay off 25% of their employees (they kindly vested all shares). And got hit very hard by the impacts of Covid in 2020:
Now, check out their valuations over the last 12 months, including yesterday’s IPO:
5. Is the IPO Process Broken?
The “conspiracy theory” answer is, that the folks on Wall Street are the real winners who have been gaming the IPO system for years. If the “Silicon Valley Mob” comes after me, I blame my friend Sergio for opening my eyes to this possibility.
Bill Gurley openly discussed this topic recently (see video below), showing data that the top two banks underprice IPOs the most.
Let me explain why they would do this, in the simplest way possible (correct me if I’m wrong!):
I’m a banker. I go on a road show to price the shares. And decide on $70/share.
But, in actuality, I know the price will open to the public at $100/share.
The $30/share delta essentially gives me (and my fellow suit-by-day, Patagonia-vest-by-night, investment banker buds) a 30% discount on buying shares in the pre-public allocation.
Reminder: retail investors (plebeians) do not have access to buy at the $70 price-point. They have to wait until the (almost inevitable) marked up price at $100/share.
This is to the bankers’ advantage. And the bigger the delta they can create between the pre-IPO price and the IPO price, the better for them. In a sense, the delta is their target. But that delta, as was the case yesterday with $ABNB, is the very reason many retail investors are not able to invest in the IPO.
This is the argument for a Direct Listings (what Spotify, Slack and a few other brave souls have done).
Here is Bill talking through the problem with IPOs today, in far more detail than I can:
Anyway, let’s get back to the business fundamentals.
6. Conviction + Resilience
Brian Chesky on the early days:
On June 26, 2008, our friend Michael Seibel introduced us to 7 prominent investors in Silicon Valley. We were attempting to raise $150,000 at a $1.5M valuation. That means for $150,000 you could have bought 10% of Airbnb. Below you will see 5 rejections. The other 2 did not reply.
The investors that rejected us were smart people, and I am sure we didn’t look very impressive at the time.
You can read the the actual email screenshots of the 7 Rejections, here. He closes the article simply reminding founders to have conviction: “Next time you have an idea and it gets rejected, I want you to think of these emails.”
Early investors also had to have conviction.
Reid Hoffman, who led Airbnb’s Series A, via Greylock, said:
They came to Greylock’s offices on a Sunday to meet me. Literally two minutes into the pitch, I told them, “Look, I’m going to make you an offer to invest. Let’s make the rest of the session a working session.”
What happened in those two minutes to convince me? Part of the entrepreneurship game is deciding what league to play in. There’s the junior league, the varsity league, and then there’s the big leagues. Generally speaking, as investors and entrepreneurs, you want to go after ideas where, if you succeed, it transforms an industry or even the world. Those two minutes showed me that Airbnb’s founders wanted to play in the big leagues.
Reid also attributes his quick conviction due to the fact that no one knew networks and marketplaces better than he did (can’t argue with him there — see: LinkedIn).
The full article is worth a read: Airbnb Reflections.
Finally, DoorDash’s founder wrote out his thoughts on their founding story.
It’s a refreshingly humble viewpoint, with many lessons, not the least of which is having both conviction and resilience:
7. Celebrate!
At this point, I do think it’s worth taking a moment to celebrate these wins. While not everything about these companies is perfect, I do believe that pushing the evolution of humanity, through technological innovation, is a worthwhile cause.
Service Fee jokes aside, this is a moment to take a step back and observe the shifts technology is creating amongst mankind. To build a big company changes an industry; to build a category-creator shifts humanity. I do think the best is yet to come.
Giving Airbnb “Super Hosts” the ability to buy pre-IPO shares was one way of giving back to their community. Another was simply celebrating the users (hosts and guests) this week, instead of themselves.
Let’s take a moment to celebrate these huge accomplishments.
8. What’s Next?
It is up to the builders and visionaries to decide.
As one of my “internet friends,” Justin Welsh, says:
The future belongs to those who build online.
What’s the next company to make a big splash in the public markets?
Only two ways to find out:
Wait and see.
Build the future that you want to exist.
One final thing I do agree with right now:
A Quote I’ve Been Pondering:
It's not the team with the best players, but the players who make the best team, that win.
How did you feel about this week’s post?
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Thanks for reading this far. If you enjoyed this week’s post, please do forward along to a friend or two.
And until next week, enjoy this week’s sponsored content: Google — Year In Search 2020.
Cheers,
Brendan J Short