(Transcript) Philippe Laffont, Bill Gurley, Jeff Sine Panel // 2013

Digging through my archives and wanted to share another Philippe Laffont transcript, this time of a panel with Benchmark’s Bill Gurley and Raine Group’s Jeff Sine. This is a rather unique panel, because while all three panelists are in tech, one focuses on early stage venture (Bill), one focuses on public markets (Philippe), and one focuses on advisory work (Jeff). A lot of gems in this one.

Transcript:

Moderator: You can see we’ve really narrowed the focus of this. It is to tech and finance. So we want to be real specific, etc. I’m really pleased, though, to have this group up here because, you know, often when you have one of these panels, you end up with a bunch of people who do almost exactly the same thing, just for different firms. But what we really have here is three folks who even though they’re all focusing on tech, and sometimes focusing at different stages of the same company, are in very different parts of the market. On the far side of me, is Bill Gurley, who is a partner with Benchmark, used to be Benchmark Capital, but after they got rid of their website, they decided that having two names was a bit too extensive. So they had to cut back. Next to him is Philip Laffont from Coatue Management. He’s one of the so called Tiger Cubs. Is that offensive? Is Tiger Cub, something that Tiger Cubs are okay with? Yes? Yes, you’re okay with that. Okay, I didn’t, I thought, oh, maybe that’s a bad word. So anyway, they are a tech focused hedge fund, but also one that has started to get into growth investing for private companies, opening an office in Silicon Valley. And right next to me, is Jeff Sine, who is co founder of Raine Group, which is a merchant bank which does advisory work on the Sprint-SoftBank deal, for example. They were working with SoftBank on that. But they’ve also got an investment group as well, former banker with UBS. I’m hoping this is going to be a good conversation among us. But I do have a specific question for each one of you that’s specific to you that I’d like to start with. And Bill, since you’re down there, I’ll start with you. When I look at your companies, one of them is Snapchat. I know you were the early stage investor in that not the lead of the last round? Can you explain to me broadly speaking, why Snapchat’s worth $800 million?

Bill Gurley: So the thing I would say that has become fundamentally true in the venture world is that when these social network-type plays have taken off and generated immense, you know, viewership very quickly, it has typically been associated then with a higher probability of a higher price later stage outcome. And that’s happened over and over and over again. And you combine that with what I would say is probably one of the loosest and most active late stage finance markets. And I think that’s, you know, the answer to your equation. We have some fundamental beliefs about why Snapchat’s working that I’d mentioned real quickly, which is just that a lot of younger people feel like Facebook’s — what we heard from people is that Facebook is LinkedIn to them. And what they mean by that is the permanence of it, and who can see it, and it’s their mother and their teacher and their neighbor. And they just wanted a place to communicate that didn’t have that element, that lack of privacy. And it’s one of the fastest growing companies we’ve ever seen or been involved with.

Moderator: Given that you did the original early investment, are you surprised by how quickly it’s grown? Both both in terms of users, but also in terms of value?

Bill Gurley: Absolutely. But it’s consistent with the network effect premise, you know, that these these types of applications, yeah.

Moderator: Let me move over. Philippe, one of your top holdings is his Apple, has been for a while. Though, you guys sold some shares in q4, part of your position. This question got asked yesterday of Mike Moritz. And so I’ll ask of you: are Apple’s best days in front of it or behind it?

Philippe Laffont: I don’t know. The stock reflects great uncertainty that the best days are over. The issue is that almost everyone has a smartphone and a tablet in let’s say the US and Western Europe. And when you start growing outside of the US and Western Europe, the profit per unit is much smaller. So most of the growth has happened. Apple needs to introduce new categories. We know they’re working on the TV, that could be a huge one, the watch seems like a bit more of a smaller one. The one thing that I wonder about is Google is so active with acquisitions. They just bought Waze to improve their maps. They acquired YouTube, they acquired Android. And Apple just seems like everything has to be invented there. And I just wonder, in a world where it’s so easy to invent new services now that you have two strong platforms, can Apple continue to afford to have this sort of we invent everything at home. And that gets me really worried.

Moderator: Interesting. Final question, Jeff, for you. We were talking about this a bit outside, that you’ve worked a bit on the Dell deal on the on the Silverlake side of this. Let me see how to say this best, leaving the money aside, do you think Carl Icahn would know what to do with Dell if he got it?

Jeff Sine: Well, I have a little history of Carl Icahn and I have a lot of respect for his financial acumen. And he definitely has a way of identifying pressure points in a situation. I remember years ago, he asked me to work with him on Time Warner when he was making his run on Time Warner. And he had no idea what the angle was on AOL. He had a strong idea about the balance sheet and about stock repurchasing and levering up. So, you know, and I told him, I didn’t mind being unpopular, but I didn’t want to be unpopular and lose. So I turned him down on that assignment. So, based on that experience, I haven’t talked to him about Dell. So I don’t know firsthand, but based on that experience, I think his power alley is really on balance sheets and finance and looking for pressure points. Which is actually not that different from a lot of other hedge funds who get involved in these public situations.

Moderator: Do you think he’s wrong about his math, because he’s coming up with very specific, well, specific’s the wrong word since he has a range, but he’s making, broadly speaking, an argument that $13.65, which is what’s being offered is in his word, stealing the company and is turning, and I think he referred to often as a Banana Republic this morning, and a new letter. It’s for those pressure points. You’re right, he understands balance sheets. Is he right? Is the company worth more than that? Or should the company be worth more than that?

Jeff Sine: Yeah, so I can’t comment directly on that, I guess the observation I could make is that, you know, the stock is trading at below $13 right now, I think. So it’s a fairly unusual situation. In fact, I can’t think of another one where you didn’t have a sell through situation where the price had actually passed through where the bid is sitting and the bid sitting at $13.65 right now, that’s where the deal is, and where you got where you got a turn down. So obviously, there’s an opportunity for anyone who agrees with Carl to buy stock and make a lot of money, and they’re not buying in droves right now. So you know, there is this math situation on these public deals where where you have majority of the minority requirements, where there’s a whole other dimension to the to the deal than simply the traditional fundamental value, intrinsic value, fairness, you know, Board approval, that sort of thing. And that’s what’s going on here.

Moderator: So let’s broaden this, let’s talk generally, which is, you know, as I said, the three of you generally are working in different markets. I’m curious how much attention you pay to each other. And I don’t mean specifically to one another, but at least to, so I guess so Bill for example, for you. Early stage investor, but obviously your companies get older, get more mature, either have late stage financings, maybe want to go public, etc. How much attention for example, do you pay to the hedge funds, whether tech specific or not?

Bill Gurley: So I probably spend more time than most in the venture industry, probably partially tied to my background. I was a sell side analysts before I got into venture and I had relationships that I brought with me, but I kind of fundamentally believe that, that one of the paths to exit for our companies is to sell them to the buy side. So knowing how they think about things is pretty, pretty damn important. I think Silicon Valley is way more — Silicon Valley’s performance is way more correlated with the NASDAQ than anyone admits, like when the markets are doing well, everyone thinks they’re smart. But it’s just a big, high beta business. And trends come and go, and how the different buyside players perceive things is really important. And then the other thing I would say is, Silicon Valley has a, they just fundamentally got it wrong. They don’t respect the intelligence level of the buy side. And there’s a lot you can learn, some of the buy side today with the sell side fading, we’re doing incredible work, like first, first level research, I’ve seen like 60 page PowerPoint decks. And smart CEOs will engage with them, even at a private level.

Moderator: Is that something you encourage your CEOs to do?

Bill Gurley: Absolutely. Absolutely.

Moderator: That’s interesting. And so for you, I guess, how much attention do you pay to — I know, you’ve gotten an office in Silicon Valley now. And you’re investing in private companies, but you’re not investing in an A round of a startup. So I wonder, you know, when Benchmark does a deal or somebody else does a young deal, or maybe a B? Are you guys following that neck and keeping tabs on that kind of what is it you’re looking for? When you, if you do that.

Philippe Laffont: Let me tell you something truthful. I pay a lot more attention to Bill than he pays to me. That’s a fact. The job of the hedge fund business is not as creative, but it’s a business at scale where you can buy a lot of shares, and you have to value the shares. But the companies in the public markets tend to be more mature. When you get involved earlier on in a company, the imagination aspect is a lot more interesting. You’re thinking about how could this company revolutionize and break the status quo and potentially displace an existing incumbent? It seems to me, not right now, but over the next 5-10 years, there will be a blurring between the people that are involved in the public markets, late stage, middle stage, early stage, because having that database of information… so for instance, what Bill knows about Snapchat probably has huge value to someone who’s trying to understand Facebook. And at the same time, if you know Facebook well and you’re like, wow, look, this version of Facebook in Korea has started doing something like Snapchat, shouldn’t Snapchat — I’m making it up, but… and so I don’t know how it’s going to happen, because all of us, we’re trying to do one thing well, and it’s already hard enough to do one thing well, but in 5 or in 10 years, there will be some firms that will offer all the services and we just want to make sure we don’t get squeezed out where…

Moderator: So you don’t think it’s a trend like, you know, you think about the dot com era where you had — now it’s a little bit different, but you — actually maybe some hedge funds, who started doing quasi venture capital investing, you saw some traditional private equity buyout firms who start doing it. So you don’t think this is a trend that’s kind of sparked by the fact that you had a handful of companies which decided to stay private later, the Groupons, Facebooks of the world, and obviously there’s others now, so you think this is something that’s a sea change, not not something that’s cyclical?

Philippe Laffont: I think it’s a sea change, because the information knowledge, this is, I mean, I’m repeating a lot of things that Bill’s said before, but now when you’re internet company, you only need to raise maybe 5 or 10 or 20 million, you don’t need to raise a billion dollars to create a fab. So that’s the first thing going on, you need less capital. And the second one is you catch the ramp up like Snapchat seems to be catching, you can go so big, so quickly, that the time it takes is compressed. So it feels to me that these are trends that are here to stay. And that over the long run, the best firms will be the one that either through partnerships or directly are able to address every side of the market.

Moderator: Jeff, for you, you guys, a lot of your work is obviously advisory work, but you also do have the investment fund, how did those two businesses inform each other? You know, does the investing side, which is more, you know, young private companies… does that have any impact on how you understand a… I don’t know, SoftBank deal or, you know, years ago WME deal? How do those two things work together? Or are they separate businesses under the same umbrella?

Jeff Sine: So the answer has to be both, that you have to have the discipline of having separate management, we’re accountable to LPs in each of our funds. So we have a hedge fund, a venture fund and a late stage Growth Fund plus the advisory business, merchant bank model. The thesis though, is we just focus, we target one area. And we target on a global basis. So I’ll give you a particular example, which is one of our portfolio companies in our late stage fund is a messaging company. It’s called TextPlus. So in the realm of Viber, and WhatsApp, but there’s also a whole world out there that’s also playing in this world. So there’s two Asian companies Kakao and Line that are actually bigger than any of the American companies, and really leading through content strategies, gaming strategies. And so if you kind of look at the world, and there’s a lot of telecom integration, there’s, you know, they’re, they’re kind of frenemies of the telecom industry. So you really do have to understand things like line charges and connection charges. The business models are similar, but not but distinct in a lot of ways, some of them are more ad supported, some of them are freemium models, some of them are really communication utilities. And then, you know, none of these companies are close to going public, I don’t think. So ultimately, they’re all looking to be bought out some stage by a strategic so you have to come at it from the strategic perspective to understand what are these companies add to a large strategic player in terms of where they’re going? So they all do come together at some point.

Moderator: You know, I asked about intersections on that side, I wonder for you, you’ve had some, some battles with hedge funds over the… are hedge funds, from your perspective, getting that, you know, the term activists on the tech side, are they getting more active? Are they getting and I hate say this, but I guess probably, from your perspective, more problematic?

Jeff Sine: Well, some of my best friends run hedge funds. And by the way, the the term I think, obscures a lot of differences and styles and strategies and techniques and so forth. So it’s always dangerous to label anybody. But I think if you want to talk about activist, obviously, we saw a lot of that around the Clearwire deal. Not so much the Sprint side of it. And I do think that and you know, you’ve seen Michael Wolfe here, and Dan Loeb around around Sony. And, you know, I’d say those, that’s a hedge fund that kind of trades very carefully, and very softly, and gets paid paid very well for their work. They added a lot of value to all the shareholders of Yahoo, I would argue, but, you know, there’s other guys who I think are maybe not as adroit and adept at what they do. And, you know, there is a, definitely, at least this is my personal soapbox. I think there’s definitely something about signaling among hedge funds through the press, especially when you have these majority the minority situations where relatively small group of shareholders can control outcomes on big public deals that the SEC ought to be looking at. But, you know, that’s sort of the average, I think behavior, the hedge, you know, you don’t see as many IPOs anymore. So to the extent hedge funds are participating, these late stage pre IPO rounds, that’s really just a substitution of capital, you know, that we used to see coming into the IPO more.

Moderator: But you, ultimately for you, you know, if you’re doing that round, if you’re doing the the pre, you know, if you’re doing say, the Uber round, you know, that pre IPO round, you need, I mean, you’re looking at that, though, that there’s going to be an IPO that you’re really you’re not replacing, you’re postponing it, whatever it is, 8, 12, 15 months, or am I wrong about that? Or… guys, how do you view that?

Philippe Laffont: Yeah, the way we look about it is in the public markets, we look for stocks that can double in five years. So that would be a 15% return, which would be twice the sort of long term returns of the market. On the private side, against the lack of liquidity, our bogey is more like a triple in five years. And so it’s all about sizing up the market. So you take an Uber in an example, you say, well, where could the company be in seven or 10 years, work your way backwards, and see if you can get to a valuation that satisfy your returns. And sometimes it will. And sometimes it happens. But the one thing I wanted to say is a lot of people always say, My God, but look at this company, this is the craziest round, we in 2000 —

Moderator: — I may have written that once or twice…

Philippe Laffont: Yes. We in 2004 by Tencent, which is an Asian, large Asian internet companies, that stock went public at $6 and went down to $4, we bought some more, and we sold it at $10. And we felt like champs, and today the stocks at $330.

Moderator: How do you feel about that now…

Philippe Laffont: I wouldn’t be here if I’d held on to the stock. I would be on vacation. And so there is something about these tech companies where sometime when you catch on to winner, a lot of incredible things can happen. And so we sort of think we want to get a triple in five years, but you have to throw in a little bit of like, option value. What if this company could become much more?

Moderator: Is your expectation usually that you’re going to also buy at the IPO? Is that your expectation going in originally, my job is to change, but…

Philippe Laffont: It’s the expectation that we would tell the entrepreneur. But, the reality, and we will tell him that right after what I just said, is at the IPO, you have to make a new decision. And if the IPO, let’s take the case of Facebook. Imagine Facebook had gone out at $20. And the stock today is a $27. People would have said incredible IPO, the stock’s up 35%. But instead went out at $39. And now it’s $27. It’s the same incredible company. So a lot of it is the perspective, but as a prospective investor, you have to decide what decision do I make at that price?

Moderator: Bill, for you, what’s your thought about kind of this this new, you talked about the fact that it’s a very easy late stage, fundraising environment, both because you know, because you’ve got folks coming in from upstream, but also you’ve got a lot of big, you know, late stage firms, you know, “venture firms,” the IVPs of the world. What’s your sense about what they’re doing to your portfolio companies incentives? I know you like your companies to go public, you want IPOs rather than M&A? Do you care that it’s possibly being delayed 12, 15 months?

Bill Gurley: So I’m gonna try and say a bunch of things real quick. So the number of people entering that market is phenomenal. Because it’s not just the public guys coming down. It’s expansion nature of the late stage targeted fund market themselves. A lot of the early stage venture funds have added growth funds, there’s corporate strategics that are now participating, they always get it wrong, they always come in at the wrong time. We use it as a contrary indicator. And so there’s just a lot of money, and then the low interest rates, I think affect it as well. And then in the valley for the past 10 or 15 years, there’s been a anti IPO sentiment that I think was started by Larry and Sergey, and Zuckerberg really got behind that. And that meme was spread. And so I don’t think, you know, and so yes, IPOs have been pushed out. It’s one of the reasons the late stage guys, or the buy side is reached back. There’s also an allocation issue, you can get 80% of a round if you lead it, but no bank is going to give you more than 5% of an IPO. So you can get a bigger stake than you ever would at the IPO if that’s what you’re interested in. And so, yeah, I mean, it’s interesting. I don’t think delaying an IPO forever is in a lot of companies’ best interest. And it’s a very complex problem.

Moderator: Are you surprised companies are doing it at all now just because you’ve got such a good public market, and, you know, we’ve seen what’s happened in the past where there’s been environments where basically, you know, nothing can get out.

Bill Gurley: Well here’s the irony, which is we have an incredible public market. Yet if you went around and asked a bunch of entrepreneurs in Silicon Valley, they’d tell you that it’s not any good. Like, because there’s so much rhetoric around this meme that the IPO market’s broken, which it’s not. You know, we had 22 IPOs in venture backed IPOs in last quarter. And the only time it’s been at a pace that materially different than that is late 99, which is completely unsustainable. So the only thing you could possibly want is a mania that’s going to blow up in your face, because there’s no like, you know…

Moderator: I think people want that. By the way, as a reporter I want that even more.

Bill Gurley: Anyway. So the one thing I would tell you that concerns me is, there’s so much money chasing it that we have firms proactively coming to the companies we work with, and demanding they take money and making up excuses for taking money. Large secondary sales, take your burn rate way up. And I think it’s foolish to think that those actions won’t then have impact on how people act later down the field, that it won’t change motivation, that having a higher burn rate might be over risking the situation. And I think that’s how the circles, you know, self correct over time.

Jeff Sine: Yeah, I was just gonna say, I mean, there is a, I think, a good reason to delay the IPO decision for a lot of the companies that are sort of in this network effect mode of accelerating growth and winner takes all, maybe see themselves as consolidators, in the space where the three and four players might have a product, but don’t really have a company, but you know, could accelerate the number one player. You hit the pause button when you’re going public, you know, especially if there’s an acquisition, that’s going to require pro forma financials. So a lot of times companies will seek private capital, so they don’t have to hit the pause button, because time is critical. And, you know, the urgency of a lot of these businesses is, I think, higher than it was even in 1999, to really leverage that network effect.

Moderator: Okay, so you mentioned that a bunch of early stage firms have raised growth funds, some call them opportunity funds, or overage funds. And a lot of them are really, okay, we’ve got, we did something at series A, and suddenly this thing has exploded, and we don’t want to get diluted, and we legit, you know, you’re what, a 250 million fund? [400]. You’re 400, okay, but even so some of these rounds, it can get a little difficult to participate pro rata. Why have you guys not raised something to cover you for when you, and if you don’t use the money, you don’t use it. But if there’s a deal, so you know…

Bill Gurley: There’s a famous, I don’t know if he really said it, but there’s a quote attributed to Warren Buffett that there’s a fool in every market. And if you don’t know who it is, it might be you. And I think that having discipline in finance is really important. And so if you know what you’re good at, and you’ve had good returns from doing that, getting greedy and expanding, could lead to you discovering who is perhaps. And so I, it’s just we’ve decided to focus. That’s it. By the way, I wanted to say one more thing on the IPO, I was, I saw Jed York in the room. So I was I have an analogy, there’s another issue to this public thing, which is you want a CEO who’s not afraid to play at the next level. So imagine an NFL Draft, where the number one quarterback candidate, you know, the day before the draft, calls a press conference and says, You know, I just don’t want to play on Sunday, because they track every metric, you know, they analyze every pass. It’s just so hard to work under that spotlight. And I’m just not going to do it. I’m going to go play in the minor leagues. No one would want to back that guy. No one, you know, compare it to RGIII, right? He shows up, I’m ready. I’m ready to play tomorrow. And I’m looking forward to leading this team. Those are two very different… and so I always like to point to Jeff Bezos, Marc Benioff, Reed Hastings… never once complained about being public, never worried about being public. They saw it as part of the playbook to get to the next level. So I think there’s another element, which is you don’t actually want to back people who are afraid to be out there.

Moderator: For you, when you’re looking at some of these companies, how do you view that the CEO, and something Bill’s talked about before is this concept that you’re most, not most, but a lot of these companies get created by somebody who’s effectively a product person, that’s where it starts, because they had an idea they were able to build a product. And then they de facto most likely become CEO or still CEO? How do you, when you look at CEOs and the company you’re potentially going to invest in, a potentially still private company? How do you figure out if that person is a good CEO, or just a really, is somebody who has a really good idea?

Philippe Laffont: Well, that dovetails into what Bill was saying. I think there’s a big difference between being public and controlling your company. And a lot of the people who don’t want to be public, they’re confusing it with the control. They say, I want the entrepreneur to keep control. And if I go public, I’m gonna lose control. There’s actually a number of companies that have gone public with dual voting stock. If the entrepreneur turns out to do everything in a great way, you’ll find that there’s absolutely zero discount between the controlling shares and the non control shares. In fact, Google’s had a plan now to offer some non voting shares shares, I don’t know exactly what’s going on. But the company is striving, nobody really cares. You look at companies where there’s quasi control, Oracle, Microsoft, Salesforce.com, Facebook, nobody cares. These are great entrepreneurs and stuff. So I think at the end of the day, you make a bet on the person. We’re a little bit less concerned about if there’s voting or non voting share who controls what. Over the five or seven years, if you come and play every Sunday, you’ll achieve your business plan over the long run.

Moderator: Fair enough. Gentlemen, I want to be able to have plenty of time for Q&A. Let’s the other side of IPO, obviously, is M&A. And you know, it’s interesting, and we talked about two of the, the two big tech deals this year, which is the SoftBank-Sprint deal, and also the Dell deal. But in general, this is across markets. This isn’t just a tech thing, but it applies to tech too. M&A has been surprisingly sluggish in 2013, like it wasn’t 2012 and 2011. And in each one of those years, I have written the same story at the beginning, which has been based on surveys and talking to not you necessarily but folks. It’s going to be a banner year, everything’s right, right? We’ve got a good stock market, companies have crazy amounts of cash. You’ve got, you’ve had a good, you’ve got good private companies, etc. All the conditions are right. What’s gone wrong? Or maybe not what’s gone wrong. But why are we not seeing more deals? Why do I know of the two biggest deals this year and their obvious?

Jeff Sine: Well, I do think there are very few contrarians in corporate boardrooms, large companies. And I do think that when economic conditions are strong, when doubts are low about the future, when the international markets are stable, and basically when capital markets are available. Those are the kinds of environments when boards tend to make big decisions about the future and take risk and step up and do consolidating transactions. We have not had one of those markets for a long time, even though as Bill said, the capital markets in some respects are strong, even the high yield markets are coming back. But you know, certainly the international climate is questionable. We haven’t had long term periods of stability in the financial markets in this country. We still are kind of digesting the hangover of the financial crisis here in a lot of industries. So I don’t think we’re kind of at that point where in corporate boardrooms, people are feeling chippy, and willing to make big bets. They’re still conserving capital, they’re still buying stock back at record levels. And that’s the prevailing sentiment. Now, the time when they start to get chippy and start to feel like it’s time, would probably be exactly the wrong time from the value creation point of view to do big deals. Obviously, the best time to do big deal is when values are suppressed.

Moderator: Well, the values are very high right now. I mean, values are high. I wonder, is part of this in the tech market. You know, you think of big tech M&A deals over the last six years, and maybe not even, you know, huge $20 billion, do you think of some of the better VC backed exits, you know, which might be enough 500 to a billion dollars, it seems like a lot of those, and maybe these just get written about more, but a lot of them ultimately not worked out well for the acquirer. You’ve ended up with whoever the founder was leaving not thrilled. Some have been good, but you’ve had a bunch of ones that haven’t succeeded terribly well. I just wonder, is there any sense that, for some reason, big tech acquisitions don’t necessarily work out most of the time, and it’s a lot of money to spend if you’re taking that sort of chance?

Jeff Sine: Well, I don’t think you’ve seen transformational deals in the industry. You know, since what, you know, Compaq, and HP. So that whole category of deals is sort of, you know, I think got a bad reputation. You could say SoftBank and Sprint was a transformational deal. It was, but for the most part, you know, you’re talking about large, important acquisitions to fill in, you know, product gaps or fill in market gaps. And you’re right, sometimes they work out sometimes they don’t, but I haven’t seen any bet the company deals in a long time.

Bill Gurley: I push back a little bit. I mean, I think, you know, YouTube, obviously, is something that people view as a really successful billion dollar acquisition. I think, if Facebook had not bought Instagram, their stock would be a lot lower than it is today. And I think Waze was a pivotal asset, because that UGC network is so hard to actually get established and once it started, it could have shaped the industry very differently had it landed it at Apple.

Moderator: How do you advise your entrepreneurs when there is an acquisition offer, leaving if he can’t, but leaving the money aside when it comes to this issue of you know, cultural fit? Is this going to work? Or is your product gonna ultimately, you know, be screwed up for lack of a better term? How do you advise them?

Bill Gurley: Well, the cultural fit thing I find the founders in the management team are the ultimate deciders on. And their company means a lot to them, and they, they literally don’t want to sell it to someone who they don’t feel good about. And so that just kind of naturally plays out. You can’t sell a company that doesn’t want to be sold. And then you know, the other thing, just on whether you take a bid or not just, a lot of it comes down to, you know, looking in the eyes of the founder, the entrepreneur, and whether they want to stay on the field or not, and occasionally offer encouragement to do so. We were able to do that in the Yelp round, and bring in some elevation to help provide some secondary so that they could say no to an acquisition, and that worked out well for the founding team and for us. So occasionally…

Moderator: Actually, let me ask the secondary thing. You brought it up, and I’ve written about it a bit lately. Is there a, limit might be the wrong word, but you know, the theory of secondaries, not necessarily in that in the Yelp situation, but the theory of secondary, I guess Snapchat might be example is, you know, you don’t want the founders to be worried about, for lack of better term, paying the mortgage. But it’s obviously gone well, well, past that, unless you’ve got one of those houses up the hill there.

Bill Gurley: You can write rhetoric to either side of this argument.

Moderator: Well, how do you how do you judge it, though? I mean, how do you or I mean, do you ever get concerned when you see either see these deals or involved and say, Man, that’s more money than they should, I don’t want they should have, but it could skew the alignment.

Bill Gurley: Yeah, so I think seeing the word should…

Moderator: From an alignment standpoint…

Bill Gurley: … It says they don’t deserve it. But um, yeah, I think it kind of goes back to my RGIII comment. If there is a founder who’s saying, I’m not going to sell a share. I’m crazy. I’m gonna go all the way. I want to back that founder. And so anytime it’s not that, it’s less, you know, less down. And look, you know, it every, you’re getting into, like behavioral science and a whole bunch of issues around individuals. But taking too much money off the table, theoretically, could impact alignment and drive.

Moderator: Let me ask one final question to each of you, then do some Q&A, which is, I know, from experience that when you ask investors, and maybe you’re a little bit different, because I know you talk about this more, when you ask investors, you know, where are you looking at, particularly somebody like you, either get no comment or not a straight answer, because that’s giving away, that’s giving away the secret sauce. So let me ask the opposite, which is, within your general, within tech, I guess you could say broadly speaking, or areas you’ve historically invested or could have, where are you intentionally not looking? In other words, where are there things that you just have a bias and say, I don’t want to touch that, broadly speaking, because it does X? Is there anything? That you’re just soured on?

Philippe Laffont: I understand you’re saying this to, therefore triangulate where we are looking.

Moderator: There’s a lot of verticals, I’m asking you knock a couple out.

Philippe Laffont: I’d rather tell you exactly where we are, because we’re very transparent. I think it’s investing in tech is so simple. It’s all about like coming up with big ideas. And whenever someone pitches us a tech idea that I’m like, wow, this 10 minutes, I can’t understand, it rarely turns out to be a monster idea. So basically, tech is most interesting in the consumer side. And it all starts with the fact that within a very short period of time, we’re going to 500 to five gigabits at home. So who’s going to provide the five gigabits? We make a bet that the cable companies are going to win, and that the fiber or very small Verizon FiOS and stuff, it’s very small. And that Google’s fiber project, it’s only there to annoy people enough to force them to continue to invest. So we think the cable companies are really well positioned. In the cell phone business, it’s the same thing, an LTE phone is four times the speed of a three and a half or 3g phone. So we like the tower businesses, because you’re going to need so much more spectrum, you’re going to need to have more towers to connect. So anything related to broadband. The theme that we don’t like as much anymore is the people that make smartphones and iPads. I sort of feel — [interruption: you mean Apple?] — Samsung would be another one. Just because look at the room here, everyone has a smartphone, everyone’s an iPad, yes, and iPhone six or seven is gonna come out, but it’ll replace the iPhone four or five, feels more like a replacement market. But content. We love content. Because if everybody has a screen, the first thing you do is more content. So whether it’s a Spotify on the music side, or whether it’s a Netflix, but even Time Warner, for instance, it’s fascinating. And I’ll stop with that. The economics of movies are disastrous. You have to plunk down $200 million, and you have no idea if the movie’s gonna work. Now let’s go through one of these shows where you have five seasons of 12 episodes. You put three episodes, each episode is 5 million bucks. Either the episode works and it’s great. Or if it doesn’t, maybe you offload it at a cheap price to Amazon or Netflix. And there’ll be a small group of people that we want. And if it turns out to be great, they’re much cheaper to produce. So there’s a lot of good things going content. So we would say content, mobile, broadband, yes. Hardware and anything related to PCs, No.

Moderator: You mentioned content, you obviously have a big, decent sized Time Warner position, I must ask the selfish question, which is, when you ultimately get timing shares, which you will at some point in the next six, eight months are you going to dump them as fast as possible or are you going to hold?

Philippe Laffont: Because you work for Fortune, I will say that we love print media. There you go.

Moderator: That’s a dumping at the minute they get it. Well, I’d like to ask this, but we don’t have that much time. So yeah.

Audience Question: Hey Bill. What are the ideal conditions for a company going public, not in terms of the public markets, but the companies you look at. Like are they a certain size, in terms of margins, reflections… we’re rising market. You talked about the Tencent example, which of… how do you figure out when to sell a stock that’s done really well for you?

Bill Gurley: I’ll go first. I think it’s somewhat dependent on how competitive the industry is. I think if you’re in a competitive industry, the incentive to be public first is really high, because you can get out and control what I call the bully pulpit. But you can define the metrics that matter. I mean, this is sales versus the three other SaaS based sales, you know, companies that came along afterwards. And we’ve seen a little of it with Zillow, Trulia that were, I’m on the board of Zillow. And there’s just, there’s an inherent advantage to being the leader, as you come out of that gate. That doesn’t mean you can be reckless, like you have to have a good CFO, you have to have your financials in a good place, you have to be able to be Sarb-Ox compliant within a year. So you have to have prepared for being there at that moment in time. There’s a lot of people who walk around the valley that think you need $100 million revenue run rate to go public, which is far from the case, a lot of companies go out in the 10-15 range. But you need the gumption of the team to get there. If you’re going to go out at that lower value, I think you do need more proof of profitability. If you’re gonna go out and tell the world that it’s okay to lose $30 or $40 million, you probably need to be at a higher run rate. But the SaaS world is is an amazing thing right now. So anyway, that’s how I think about it.

Moderator: I should ask now, I’ve got a panel coming up after this saying is there an enterprise bubble. Is there? Or is there a SaaS bubble?

Bill Gurley: So here’s what I would say. And, he may be a better person to talk about this. But the SaaS companies have convinced the buy side that GAAP financials aren’t the right thing to look at, which is okay, and maybe they’re right, maybe they’re not. [Moderator: Private equity did that too]. But here’s the problem. They don’t have an agreed upon set of alternative metrics that are well scoped and well audited and checked out. So they’re all creating their own rhetoric and their own narrative around their own metrics that are somewhat similar. And it leaves a lot of room for error. That’s what I would say.

Philippe Laffont: So to… on the enterprise side, I totally agree. And I think the problem is, everybody thinks one of these company might become Microsoft. So let’s say they all have market caps between five and 10 billion, but one might have a market cap of 200. So everyone’s playing like lottery. So everybody bids up every enterprise companies saying, Well, you know, I just own a little bit, but there’s a 10 x chance. Yes, there’s a 10x chance, but there’s a gigantic chance that it turns out to be a -80% chance too. And so there’s a little bit of that going on. Also, a lot of these stocks have small float, they’re not well held by institutions, they’re stocks that are driven by retail, maybe Salesforce.com would be an exception. And so it’s very difficult to say what the true value like, I don’t know what the true value of Workday, I think the float is 10%. Does that really, you know, create a real price? On to your question of how do you know when to buy and sell? Originally, we thought that valuation was 100%. So you have to buy a 12.2x earnings, and you have to sell at 17x earnings. I found that this doesn’t work as well, I don’t know why, to me is you buy the companies that you think absolutely have the winning hands, and you let them play it out. And if you’re patient investor, you may get 100% return in one year, and then it’s flat for two years. And then you get another 50% in year four. So you have to create a fund, where you don’t expect all your horses to win every race. We need to have multiple horses, different people do well. So let’s take a case like Apple. Apple, to me, it’s in a transition. It could become great again, or maybe not. Is it going to come with a new hardware category? Or is it going to wake up and say Wait, I can’t let Waze and all these other great companies… Apple could buy Netflix, Spotify and 10 other private companies and you wouldn’t even see a dent on their cash balance. You know, they could afford it in six months. And then there are companies like Intel, like I wouldn’t buy Intel at any price, because we have a view that in time, iPads will replace most of the notebooks, intermix a lot of your notebooks. You’re moving to cloud, you don’t need as many desktops. They’re very threatened. And there, I feel valuation is going to be a counter indicator to it.

Moderator: We got time for one more. We have one more? If we don’t, we’ll just move on. Yeah.

Audience Question: This is kind of a broad question. Take a company going public, and this is from your perspective, you’re trying to sell a company, might be a great new idea. But Philippe, when it comes out to the market, you say it looks just like Millennial Media, which is like Groupon. How do you reconcile that?

Bill Gurley: Done. Get out I guess.

Philippe Laffont: With a nice bottle of red wine. That’s how.

Moderator: That’s a very good way to end. I want to thank the panel a lot. Thank you guys for coming.

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