Ep7. The Great IPO Debate, Tesla Robotaxi vs. Uber, & Tech Check | BG2 with Bill Gurley & Brad Gerstner - BG2Pod with Brad Gerstner and Bill Gurley Recap

Podcast: BG2Pod with Brad Gerstner and Bill Gurley

Published: 2024-04-18

Duration: 1 hr 18 min

Summary

The episode dives into the current state of the IPO market, discussing how the revenue thresholds for going public have shifted dramatically. It highlights concerns about the decreasing number of public companies in the U.S. amidst a landscape of growing private equity-backed firms.

What Happened

Brad Gerstner and Bill Gurley opened the episode reflecting on the recent solar eclipse, which sparked a sense of awe and spirituality among those who witnessed it. They then transitioned to discussing the current market climate, noting the increasing tension due to inflation, rising interest rates, and geopolitical concerns, despite some positive trends in M&A activity. Brad emphasized the importance of understanding these dynamics as they impact investor sentiment and market volatility.

The conversation then shifted to the IPO landscape, with Gerstner and Gurley analyzing the significant decrease in the number of public companies in the U.S. over the past two decades. They highlighted how the average revenue required to go public has surged, with Philippe Lafont's assertion that companies now need to have at least a billion dollars in revenue to consider an IPO. Gurley expressed his belief in the benefits of going public sooner, arguing that it encourages better performance and broader investor access to innovative companies.

Key Insights

• The number of public companies in the U.S. has dropped from around 6,500 to about 4,000 in 20 years.
• Current market dynamics are creating a challenging environment for IPOs, with higher revenue thresholds needed to go public.
• The debate on IPO readiness highlights a shift in what constitutes a viable public company.
• Gurley believes that going public earlier can enhance company performance and provide more opportunities for retail investors.

Key Questions Answered

Why are there fewer public companies in the U.S.?

The number of public companies in the U.S. has decreased significantly, from around 6,500 to about 4,000 over the last 20 years. This trend is concerning because, despite more innovation and an increase in startups, the number of firms going public has not followed suit, suggesting structural changes in the market.

What is the current revenue requirement to go public?

Philippe Lafont mentioned that companies now need to have a billion dollars in revenue to go public, a stark contrast to earlier times when lower revenue thresholds were acceptable. Gokul echoed this sentiment, suggesting that unless a company is on track for $700 million in revenue, it risks underperforming in the public markets.

What are the implications of going public later?

Gurley argues that going public sooner is beneficial for companies as it raises performance standards and increases accountability. He believes that the longer companies stay private, the more potential gains they miss out on, limiting retail investors' access to innovative companies.

How does the current market volatility affect investor sentiment?

Brad highlighted a legendary investor's drastic reduction in net exposure from 80% at the beginning of 2023 to zero currently, reflecting growing concerns about market stability. The upcoming election and ongoing geopolitical tensions contribute to this increasing volatility, leaving many investors feeling nervous.

What role does M&A activity play in the current market?

Despite the challenges in the IPO market, Brad noted a surge in M&A activity with significant deals being pursued, indicating that liquidity is heating up. He mentioned various rumored deals and pointed out that this M&A boom contrasts with the dwindling number of public companies, raising questions about the future landscape of the market.