Imran Khan: Why the IPO Market is Not Closed & Lessons From Taking Snap & Alibaba Public | E1194

1. 0:00 – 1:07

   Intro

   1. IKImran Khan0:00

      (upbeat music) I don't think IPO market is closed. I think the issue is companies don't want to go public because their expectations are too high. If you're building a company for a long period of time, and you have a good business, and you generate cash flow, you will create value. What is your IPO prices? It doesn't matter. I'm a big proponent that companies should go public earlier than later and... No, revenue multiple is a BS multiple. Why would-

   2. HSHarry Stebbings0:22

      Mm-hmm.

   3. IKImran Khan0:22

      ... somebody give a shit about revenue multiples?

   4. HSHarry Stebbings0:24

      Ready to go? (upbeat music) Imran, I am so excited for this. I've heard so many good things from Ash for quite a while now. So first, thank you so much for joining me today.

   5. IKImran Khan0:43

      Thank you for having me. You know, it worked out great. I was in London for some meetings, and I always watch your shows, you know, read your tweets, so great to meet you in person and thanks for having me.

   6. HSHarry Stebbings0:54

      Dude, it is so nice seeing this in person. But I wanna start, like, right in the meat of it, which is, like, we look at the IPO windows today, and everyone continues to moan, "They are closed, they are closed." Everyone said H224 they would open. It seems that was not right.

2. 1:07 – 3:56

   Analyzing the Current Closed IPO Window

   1. HSHarry Stebbings1:07

      How do you analyze the closed IPO window that we have today, Imran?

   2. IKImran Khan1:11

      So, I don't think IPO market is closed. So, I will take that view. I think the issue is companies don't want to go public because they have, uh, their expectations are too high. You know, I think what happened in... A few things happened, right? So when 2020 interest rate was very low during COVID, and 2021, all these companies raised money at a valuation that didn't make sense. If you look at in public market, you know, outside the big cap names, a lot of those names' valuation has corrected.

   3. HSHarry Stebbings1:45

      Mm-hmm.

   4. IKImran Khan1:46

      In the private market, that valuation didn't really correct. And so they want to go up public at a valuation that just doesn't make sense in a public market, right? I can buy, you know, companies that generating tremendous amount of cashflow at 20 to 25 times earnings. Gap earnings, not BS non-GAAP earnings, gap earnings. So, why should I pay for a company 50 times revenue multiple?

   5. HSHarry Stebbings2:11

      Mm-hmm.

   6. IKImran Khan2:12

      So, I think a lot of these private companies, their numbers are not there to justify the valuation that they raised the last round. So, that's problem number one. And so they're not setting, resetting their valuation expectations. I think the second problem is more systemic problem in market. You know, I think if you look at allocators, so that's like universities and pension funds and endowment, they are allocated, allocating a lot of money. And now it will change, and I think it's changing slowly, a lot of money in privates. And I think one of the biggest thing, that's a big trend in asset management in my view, is that allocators, people who are giving moneys, these are big pension funds and endowments, they are trying to reduce volatility of their performance.

   7. HSHarry Stebbings3:02

      Mm-hmm.

   8. IKImran Khan3:02

      And to reduce the volatility, a good way to go is invest money in privates, because there is no day-to-day volatility. And second, give money to this market neutral hedge fund. So if you look at l- these Citadels of the world, Millenniums of the world, they have become so big, right? Millennium cannot take any more capital and because people are chasing this market neutral fund. But the reality is when you avoid the volatility, it also create other problems, right? If everybody's chase the same ideas, it reduce the return. And, and I think that too many, too much money went to private market, and what problem it created, I actually don't think there is shortage of ideas in the private market, but I think there are shortage of talent to execute those ideas in private market.

   9. HSHarry Stebbings3:49

      Mm-hmm.

   10. IKImran Khan3:49

       And, and so, so people raise all this money with great views and themes, but they're not executing the way they should need

3. 3:56 – 7:08

   Should Founders Accept Lower IPO Prices or Stay Private Longer

   1. IKImran Khan3:56

      to.

   2. HSHarry Stebbings3:56

      So, if we just take those one by one, you said there about kind of founders resetting expectations and the companies maybe aren't ready for the public markets or the prices that they want to go out at. So, what would you do if you're the founders? Should they bite the bullet and accept that actually they will go out and they should go out and it should just be at a lower price than they'd like? Or should they consume the capital that is there in private markets and continue to stay private for longer?

   3. IKImran Khan4:20

      I think the valuation is a snapshot of a company's life, right? If you're building a company for a long period of time, you will... and you have a good business and you generate cashflow, you will create value. So, what is your IPO prices? It doesn't matter. You know, I think if you think about it, all these companies that are public, their stock goes up, goes down every day. Sometimes your stock goes up or goes down for the things that you do, sometimes your stock goes up or down for the things that you don't do, right?

   4. HSHarry Stebbings4:52

      Mm-hmm.

   5. IKImran Khan4:52

      I- interest rate goes up, your stock goes down. S- interest rate goes down, your stock might go up. That has nothing to do with what you have done. So, the reality is, you know, over obsessing about the valuation of your business is not the right thing to do, because at the end of the day, a founder job is to create business. What is the value of the business? That's the job of an investors. So, a founder who obsess with valuation, they're not doing their day job, which is building a business. So I think, you know, if you're a founder, and I think you should go public, I'm a big proponent that companies should go public earlier than later, and we can talk about it.

   6. HSHarry Stebbings5:29

      So, I, I hear you completely there from an investor perspective. I speak to a lot of founders and they say, "I get that. What people fail to understand is what the price is largely determines the morale within the company. And so if we go out and it's a crap price compared to what people thought it was or what employees had in their mind, it really is challenging for morale."

   7. IKImran Khan5:51

      I would challenge that in that case the founder failed to build a culture. Because I think if you look at some of the greatest companies, has been created in the public market. Look at Amazon. You know, Amazon...... stock was incredibly volatile, volatile in late '90s, early 2000s. But Jeff Bezos retained their great talent, you know. And Jesse worked at Jeff, uh, Amazon. His moral was not impacted. He was at Amazon, he helped build AWS, and now he's the CEO of Amazon, you know. If you look at Facebook, they went through tremendous volatility, you know, and two of them were existential threat for the business, right? Right after IPO, the whole mobile issues and then, um, couple of years ago, uh, th- their cost structure went completely, uh, different directions, but, you know, the team's still there. I think when you build a business, you need to really ask a question: are you hiring mercenaries or are you hiring missionaries? If you're hiring mercenaries, yeah, you have to care about your stock price and this mercenary is gonna jump as soon as, uh, your stock price goes down. But if you hire missionaries who believe in the company's missions, who believes in your leadership, I don't think the stock price make that big of a difference. And actually, if the stock price goes down and those employees leave, it's probably a good thing

4. 7:08 – 12:08

   Solving the Illiquidity Problem in Extended Private Markets

   1. IKImran Khan7:08

      for the companies.

   2. HSHarry Stebbings7:08

      I do want to address number two, which is actually kind of the shifting allocations of large institutions and endowments to privates. We mentioned that kind of the reduction of volatility that comes with that. The thing that also comes with that is a lot of illiquidity-

   3. IKImran Khan7:21

      Mm-hmm.

   4. HSHarry Stebbings7:21

      ... which is a big challenge. How do we solve the problem of illiquidity in private markets with the extension of private capital, meaning IPOs are so much further off, and the removal of M&As? There's just no liquidity.

   5. IKImran Khan7:32

      So I think that will change because what happened in last decade, there were a lot of liquidity. In 2021, 2020, there was a lot of liquidity and, and people thought... And by the way, last decade between 2011 to 2021 was great return for private equities. However, I think going forward is going to be very, very tough for a couple of reasons. Number one, all these institutions who gave money to privates, they are not getting their DPI, you know. So they will be much slower allocating more capital to private. And I think some of the private's story has not been told yet, right? So I think those are bad investment, people didn't write it down to zero or near zero, and that will happen over time, and then people will realize that it's not only a DPI issue, it's also permanent loss of capital.I don't think people are realizing that they have permanent loss of capital in many of their private investment, and that will happen. And third is, we lived in a s- historically low interest rate environment, so the private was great, but as the interest rate goes up, you can get better return in, you know, or decent return in public securities, you know, or fixed income and things like that. I actually think even with interest rate going down, we're not going back to 0% interest rate environment anytime soon. And then the fourth issue is that technology... And I think this is a really important problem, and I think a lot of people forgot about that, and I think people have to realize that why comp- as an investor perspective, and we can talk a lot more why, from a founder's and employee perspective, it's also important for companies to go public, but why it's really bad from an investor per- perspective to encourage companies to stay private very long, is this technology landscape shift every 15 years. So if you look at, you know, late '70s, early '80s, it was, uh, microcomputer. Mid-'60s was mainframe computer. If you go back in, uh, go after in mid-'90s was, it's in, all about internet. Uh, 15 years later, it was all about mobile app. Now we're talking about AI. So you might invest in a business based on a thesis, but 15 years later, that thesis is completely changed based on the world around you.

   6. HSHarry Stebbings9:50

      And how does that change then if you're public versus private?

   7. IKImran Khan9:52

      So from a private investor perspective, it's great because you get your liquidity and you move on. And from a public market perspective, I think the key thing with the public market is, public market gives you daily feedback. It's like, you know, having a child. I don't know, I have a 10 years old and 14 years old. When they live in your home and mom and dad shelter them, it's great, but when you go to college and you go to real life, you know, you are not that special. You're like another s- boy or another girl and you got to fight it out in the world. And when you go to a public market, you know, you are not sheltered by three or four venture capitalists. You are, in a public market, everyday investors saying either you're doing great or you're doing bad. And that force you to make right decisions, you know? And if you're a great CEO, you know what? You are, you are seeing what's changing around you. It gives you currency to make acquisitions. It helps you to pivot your business in a public market. And I think some of the greatest success stories in public market is these guys, they pivoted, you know. I, I always tell people, you know, people always say that, "Oh, I cannot do great things in private market." And I look at it, okay, let's look at some of the best thing happen in last 25 years, and that was done by the public market companies. AWS was created by a public market company, the entire cloud business, you know. The three biggest cloud providers were public company when they started it. If you look at, uh, iPhone, that fundamentally changed and was created by a public company. If you're talking about AI, GPU, it was created by a public company. So everybody says that, "Oh, I need to be a private company to create thing." That's, I call it a complete BS.

   8. HSHarry Stebbings11:24

      I think people always, always, always forget also, Shopify went public at 700 million.

   9. IKImran Khan11:28

      Yeah, amazing business.

   10. HSHarry Stebbings11:29

       Amazing business.

   11. IKImran Khan11:30

       Amazing business.

   12. HSHarry Stebbings11:31

       (laughs)

   13. IKImran Khan11:31

       So, so I think great founders bring great team and great team can execute, you know, stock goes up, stock goes down, they execute. But the thing is that I think if you talk to all the CEOs that I know who are public market CEOs and historically private market CEOs, if they come to your show, they will say they became a better company for being a public company. Because public market investors think about the business sub... because there's so many players. When there's so many players care about your business, they are looking at your business in so many different ways-

   14. HSHarry Stebbings12:05

       Mm-hmm.

   15. IKImran Khan12:06

       ... they're telling you things that you and I are gonna see.

5. 12:08 – 20:44

   Will Revenue Multiples Reinflate or Is This the New Normal?

   1. IKImran Khan12:08

   2. HSHarry Stebbings12:08

      So, I sit with a lot of 25 to 35-year-old investors, and we've only seen the last 10 years, say, of the kind of macro landscape. And a lot of them are saying, "Oh, my God! Look at the revenue multiples that we're getting. I mean, this is, this is impossible to make our business work." And my question to you is, is this actually just a reversion back to what normal was and we lived in a grossly inflated, maladjusted time? Or actually, will we see revenue multiples reflate and (laughs) s- happiness return?

   3. IKImran Khan12:40

      No, revenue multiple is a BS multiple, right? Like, why would, uh, somebody give a shit about revenue multiple? So, when I look at a business, so let's say a business does $100 revenue, and they're losing money. If I look at that business and said that, "Okay, they, uh, have a sustainable growth path of, let's say, 25%." So over a decade, that $100 will become $1,000 because if you grow 25% in a decade, it's 10X return. And we think that the incremental margins are 50%, 60% of that business, so that business in a decade will do $500 million profit. Then I know that market trades at 17 times earnings. Let's say this business trades 17 times earnings or 20 times earnings, so then that business is worth, you know, 500 times 20 is $10,000, you know. So now, I have to look at it, what is my required rate of return to invest in that business? And I'm willing to underwrite a revenue multiple based on that. And that's why we look at revenue multiple. But the challenge is not all... very few businesses, and this is why I think one of the most important thing to look at it, what is the gross margins of that businesses? Because if a business has 20% gross margins, you know, giving them rev- revenue multiple is a l- crazy thing to do. You can, but it has to be very, very low revenue multiple, because when you start with 20% gross margins, you know, ultimately, gross margins is very hard to control. It is what it is, you know. Maybe you can get a 100 basis point, 200 basis point improvement in a cost. But the people cost is very easy to manage. So when a business that, uh, starts with the low gross margins, it's really hard to give high mul- high multiple on a business, right? When I was an IPO analyst at Google, you know, w- I had a buy rating on the stock and that, because Google had a very high incremental margins. So you can look at the business, so what we didn't know at that time how big that search business could be, and can them maintain the search market share. Like, I was thrown out of... It's a true story. Uh, Google went public, and, uh, I had a buy rating, and I went to BlackRock New Jersey office. And these investors were big Yahoo! shareholders. And I was pitching Google, and they got really mad at me. They said, "You don't know anything, because people will come to Yahoo! for content and they will end up searching. Why do I need to go to a w- webpage that doesn't have any other content, just only for search? They're gonna lose search market share. And look at the CapEx they're doing. They're spending like a drunken sailor. Why would you..." So the conversation got really heated, and I was literally thrown out. You know, a year later, Google went up, I don't know, I forgot, 100% or so, and those two guys were fired from BlackRock. But the whole true story is that was the debate, that we didn't know how big the market is, and why they're spending so much money on CapEx. But the reality is the business had a very, very high, uh, you know, uh, gross margins, that contribution margins were very, very high. So, I think the reason you give revenue margins and, and, uh, I think, uh, revenue multiple, and I think that's, it's totally fair to look at SaaS business that way, because SaaS business, you know, many of the SaaS business has very high gross margins, and they have a very, very high profit margins at a steady state basis, so you can predict the cashflow based on the contractual revenue, so unless there's a disruptive software comes out. It's makes sense to our revenue multiple. But a delivery company, you know, or a consumer company giving revenue multiple doesn't make a lot of sense.

   4. HSHarry Stebbings16:05

      For me, it's always like, what's the growth rate? What's the gross margin?

   5. IKImran Khan16:08

      Right.

   6. HSHarry Stebbings16:08

      And when we look at those two, there's this generation of companies that are actually a real question mark, which is your Dropbox, your Box, your Twilio. I'm not selecting them out deliberately or maliciously.

   7. IKImran Khan16:19

      (laughs) .

   8. HSHarry Stebbings16:19

      But just a generation of Fastly, of SaaS companies that are in that low, low growth/flat growth, and not actually as good SaaS margins as SaaS ideally has. What happens to this plethora of, mm, SaaS companies?

   9. IKImran Khan16:35

      So first of all, staying with the theme, I think it was the right thing for those guys to go public. And the reason I say that it's the right thing for them to go public was because number one, I think if you ask them, they will tell the company became stronger, you know, because they're a public company be- and they adopted their business many way. Like, I don't think the margins that Box and Dropbox is generating, if they could have generated, if they just stayed private. Because the growth was slowing, they were forced to look at the business and run the business better. And I don't think if you look .......................... If you have a loo- there is absolutely nothing wrong with a business that's growing slower, you know, and, you know, probably the market size small. Not everything gonna beat Google and Facebook, that's totally okay. But if you have a business that is growing slower, but relatively steady, I think you should focus on improving your margins, be more ca- cautious on cost, uh, drive more efficiency in the businesses, return capital to the investors, right? Because if you, if you're generating profit and you can't deploy the capital, you should return capital to the shareholders.

   10. HSHarry Stebbings17:39

       But there is a challenge, which is when you accept slow growth as the new norm, suddenly you really get hit with price. You know, we saw Salesforce, I think they missed earnings by like 100 million, or a small insignificant amount given the quantum of revenue that they have. But it was really the acceptance from them that their growth rate was now, for the second quarter in a row, slower, and they were moving into a period of actually just continuous slow growth.

   11. IKImran Khan18:03

       So let- let's going back, you know, you said, Imran, everything you're saying, you're talking about investor perspective, which is true. By the way...I will be the first person tell you in your podcast, my loyalty is to my investors who gave me money.

   12. HSHarry Stebbings18:16

       Right.

   13. IKImran Khan18:17

       I would never give money to an investors who goes out publicly, talk about, "Oh, no, we stick with the founders." No. Because your fiduciary responsibility, legally, is to your investors who gave you money, is the guy who manage money for a fire track, you know, fire, you know, uh, uh, uh, uh, fighters or who manage money for the teachers. Your, they give their pension money to you. Your responsibility is to help them so that their pension is funded. You going out telling that, "Oh, I support founders and I don't care about my LPs," that's completely BS and that's not right thing to do, because you are taking money from people who have, you have responsibility to them. They're counting on you. So I have no problem saying that my res- my responsibility, my loyalty is to my investors, you know? And obviously, I want the founders to do well and I will help them. But at the end of the day, people who give me money, I have fiduciary responsibility to them.

   14. HSHarry Stebbings19:10

       Right.

   15. IKImran Khan19:10

       So any investor who says that, they are either completely clueless or they're not being honest with themselves. But going back, why it's right for founders to go public? I wanna say that, listen, if you have a company that doesn't have any liquidity for their employees, that's not good for the employees. Number-

   16. HSHarry Stebbings19:25

       But like, if- if you're a Stripe-

   17. IKImran Khan19:27

       Mm-hmm.

   18. HSHarry Stebbings19:27

       ... why on earth would you go public? You can provide liquidity to your employees and your investors in the form of secondaries. You cannot be in the public spotlight in terms of expose all your financials and not have the scrutiny of being a public company, and there's ample supply of capital that wants to buy into your business at a great price.

   19. IKImran Khan19:41

       Yeah. The question is how long it'll last?

   20. HSHarry Stebbings19:44

       I think years.

   21. IKImran Khan19:45

       Yeah, and maybe you can do it, you know, for years, you know. The thing is that, uh, that's the cycle gonna go on. But I think, uh, as I said, over time, I don't think it's a great look when your existing investor marking up that existing deal to give employees the, you know, liquidity. I'm surprised that investors are not, like allocators are not asking the hard questions. The reality is, you know, I actually don't think Stripe needs to go public, but if Stripe is a profitable business and buy back their shareholders, m- you know, stock, or return, you know, b- and buy back employees' stock, that's fine, you know? Like, listen, there's a lot of great companies who were private for a long period of time. Cargill is a private company and that's lot of time, and there's nothing wrong. If you're a private company and you don't wanna people's pay, like don't wanna deal with public market, I think that's an honorable thing to do, if you make your business profitable and pay it back to other people money. But constantly going raising money to give your employee liquidity and to run the business, that just,

6. 20:44 – 26:12

   Is the M&A Market Stalled Due to Lina Khan's Policies?

   1. IKImran Khan20:44

      you know, I hate to say that, that just doesn't feel right.

   2. HSHarry Stebbings20:46

      So the alternative to that is, you can also sell the business-

   3. IKImran Khan20:49

      Yeah, you can sell, so-

   4. HSHarry Stebbings20:50

      ... at M&A.

   5. IKImran Khan20:51

      Yeah, you can sell the business.

   6. HSHarry Stebbings20:51

      Uh, M&A is pretty much, uh, Lina Khan seems to have really put an iron fist on the M&A market. Do you agree that the M&A market is shut in a Lina Khan environment?

   7. IKImran Khan21:01

      Listen, I am not super fan of Lina Khan and, you know, I fundamentally believe overregulation is bad, uh, because I think that America became a great country because it empower entrepreneurship, it empower small businesses and people do that. And, and the thing is that, at the end of the day, you know, when you give the decision-making or capital allocation, and this is, you know, for the people who are allocating the capital or running the business, taking it away from them and giving it to bunch of people who never built a business, never run a company, but they're more of a bureaucrat, you know, government officials for a long time only lived in Washington DC. America's a big country and bunch of people in Washington DC making the decision, I don't think that's a good outcome for the country and that's not the way the country was s- meant to be created. So I'm fundamentally disagree with overregulations and some of the things that Lina Khan has done and the potential I, I think is, is flawed. But saying that, I actually don't think the M&A market, you can blame ... I think people has a reason to blame everything and right now there is, and I look at it in Twitter all the time, they like to blame her everything. I think the problem in M&A market is also the same thing. This ... And it's changing. The seller expectation is too high. When a public company is trading 20 to 30 times earnings multiple, they cannot afford to pay out 50 times revenue multiple to buy a company. And then you don't see private to private mergers because all the valuation is messed up, all the cap table is messed up, so you cannot do that either. So that's also play a pretty critical role.

   8. HSHarry Stebbings22:32

      I get you, but Figma put the biggest thorn in the M&A market, which basically said, "Listen, there is a huge chance that after 18 months of grueling process, you will then be blocked." And then for a business like Wiz, I w- we do not wanna take that risk. It is a very, very significant downside if it doesn't happen for the morale of the company, and actually, it's not worth the risk if after all that time we can. And so, the fear of it being blocked made it such a dangerous activity to engage in.

   9. IKImran Khan23:02

      Yeah, but not everything is Figma and Wiz, right? So if you're selling into Google, if you're selling into Facebook-

   10. HSHarry Stebbings23:07

       (laughs)

   11. IKImran Khan23:07

       ... or selling into Adobe, but, you know, if you look at the NAS-, uh, I think the US public market, I think, what, there's 2,000 companies over $2 billion market cap. So yeah, so top 20 companies will have lot of scrutiny. And honestly, in many cases it probably makes sense to have high scrutiny on the top 20 companies, you know. Uh, but other, you know, 1,980 companies probably not gonna have a lot of difficulties acquiring deals. So I think blaming everything to Lina Khan is probably not fair either.

   12. HSHarry Stebbings23:41

       No, listen, and you've seen your Loom sell to Atlassians for $950 million.

   13. IKImran Khan23:45

       Yeah.

   14. HSHarry Stebbings23:45

       You've seen your Clearbits even sell to HubSpots for $150 million.

   15. IKImran Khan23:48

       Yeah.

   16. HSHarry Stebbings23:48

       It is the mega acquisitions which really draw the scrutiny, for sure. I am just interested though, when, when we think about, like you've tweeted before about Wiz and actually why, if they did walk away, maybe it was a mistake to walk away. What was your thinking and reasoning around that?

   17. IKImran Khan24:02

       The risk of going through the transaction is that it get blocked, you know, but like I think Figma's case that the break, uh, breakup fee was pretty big.

   18. HSHarry Stebbings24:10

       A billion?

   19. IKImran Khan24:11

       A billion. And that's, you know, mm, it's free money. (laughs)

   20. HSHarry Stebbings24:16

       (laughs)

   21. IKImran Khan24:17

       So, so if you have a big breakup fee of like a billion dollar for a profitable business, you know, your employee might moral might be low, but you know, listen, a billion dollar you can give people good bonus and everybody will be fine, you know. And, uh, so, so if you have a good breakup fee, listen, every situation is different and I don't have all the facts. It's probably not the worst risk in life to take, you know, for, you know, get a ... That kind of breakup fee. But I think that, the reason I, I tweeted about that is, I think if you look at, let's take CrowdStrike, you know. Like, CrowdStrike before, before the incident was trading at 20 times run rate revenue, and it is a world-class company, you know. And so the valuation that Google offered, and remind me, I think it was reported number-

   22. HSHarry Stebbings25:03

       23 billion it was.

   23. IKImran Khan25:04

       23 billion dollar. So they have to do 1.2, 1.3 billion dollar revenue to achieve, and, and have to maintain the growth rate to achieve that snapshot value. But you know, that's not a sustainable value, because something always happen, because you know, ultimately SaaS businesses trade seven times revenue multiple.

   24. HSHarry Stebbings25:20

       Mm-hmm.

   25. IKImran Khan25:20

       Right?

   26. HSHarry Stebbings25:20

       But they would have been there in 18 to 24 months.

   27. IKImran Khan25:23

       Yeah, but you know, the thing is that once you go public, you know, your growth rate gonna slow, so your multiple is going to compress, you know. And along the road you're going to take dilutions, right? Because when you're growing that fast, you know, you end up raising more money. So listen, when you're growing really fast, you know, Jack Ma used to say, and actually said, that when they're babies, cats and tiger look same, but a cat never become a tiger. So when a business is very small, it's very easy to look at the business saying that, "Hey, this is could be a great business." And in a ways very much could be. I, I, I don't know, but the reality is, you know, how many times we have seen that every 50 companies we look at that's growing and we think that will become a tiger, only five of them become. So if you have to play the probability game, I didn't say that guarantee that it's gonna, they're gonna regret, but there is a high degree of probability that that may not be the right decision.

7. 26:12 – 29:29

   Should IPOs Be Priced for a Pop or Perfection?

   1. IKImran Khan26:12

   2. HSHarry Stebbings26:12

      That's probably my favorite quote that we've had on the show, by the way. That is fantastic. I love that. Um, oh, I want to go to the pricing of the IPO, because, you know, we've had Bill Gurley on the show a couple of times before, and he's spoken quite, uh, strongly about how we leave too much on the table with the pricing of the IPOs. And actually the pop shows that actually employees and early ambassadors didn't optimize and actually left money on the table. How do you think about pricing below to leave room for a pop versus pricing to perfection to make sure full value extraction for the early investors and early employees?

   3. IKImran Khan26:43

      So I have great respect for Bill Gurley. He's a very, very smart guy. Um, incredibly talented. But this one thing I think he... I don't agree with him, you know. Uh, I think he's over-focused on one-day stock pricing. Uh, now listen, if the stock doubles, that's obviously bad, but between 20% and 50%, you know, and just over-focusing on that, uh, I think it's misguided. And I'll tell you why. So number one, my guiding principle is whenever you bring a new investors, you want them to make money. You never do create a situation that, you know, they come in and they lose money, because you're building new relationships, you know. I think any times you're trying to build a new relationship, my philosophy is give them more, because it's a start of a relationship. So when you're going to a public market, you are building a new relationship with a new group of investors who doesn't really know you that well, and they're getting to know you. And, uh, so fine, you give them a little bit more upside, so, so be it, because you're building goodwill. Because, ah, one day, you know, as in your public life, you're gonna have a bad day and you want that, build that goodwill. So that's how relationship builds and that's the way I think about life in general. Don't be over transactional. The second reason is, the reason I call it misguided, I think people don't necessarily understand how public market necessarily... I'm not saying about Bill Gate- Gurley, but people who get over-focused on it, is that when a company go public, they sell a very small percentage of the company. So even with the pop, whatever the money left, on a grand scheme of thing, percentage of dilution is pretty low. The other thing is that when a company go public, because they sell a small percentage of the company, most investors cannot buy their full position. So let's say you are Fidelity and a company is going public and you're doing a $200 million IPO. Fidelity will get, let's say 15, one five, 15% of the allocation. That's going to be a very high allocation. That's a $30 million. The amount of money that the Fidelity PM manage, that's not a, not a lot of stock. So they need to buy the stock and aftermarket to build their position. And so if the stock is, if you give them a discount, they can pay up more so that they can dollar with an average their price, right? If they're buying the stock at the price that it doesn't go up, only goes up 10%, they cannot dollar with it average, so they will not gonna go buy the stock. So you're gonna have a supply bel- that, you know, uh, demand imbalance. They will probably sell the stock and actually your stock going to cradle and that's going to create more problem for your company than, you know, leaving some money off the table.

8. 29:29 – 36:41

   How the IPO Process Works

   1. IKImran Khan29:29

   2. HSHarry Stebbings29:29

      Can I ask a stupid question, but I think the show s- thrived because I ask questions that people don't know, but are maybe too afraid to admit they don't know. How does the process actually work? So say I am the founder of Whiz and I want to go public in 24 months. I say I want to go public and I go and see a load of big institutions. How does that buy book building work and who sets the price? And just take me through that.

   3. IKImran Khan29:51

      At the end of the day, the entire capital market in the United States and globally probably, but in the United States, was built on trust, right? You know, people give you money when they trust you. When they give you money, they give you their trust, because they don't... No matter what you disclose, they don't know everything about your business. They don't understand every risk about your business. At the end of the day, they read all the documents which you... They believe that you disclose everything and they trust you. That's why they're giving you capital. And that's why when the trust breaks, you know, it... Jamie Dimon, you know, in 2007, when I became JP Morgan Managing Director, he said, you know, that, that was the time the financial crisis was happening, the two bears turned-... hedge fund went bankrupt, you know. And I was a young MD, I didn't really understand the consequences of that two hedge fund going bankrupt that ultimately triggered a lot of different things. And he said something very good, "It takes 100 years to build trust, but one year to- one day to destroy all the trust that you built." And it stays with me. So, so the reality is, you know, if you think you're gonna go public, you should go build relationship, tell your story, show your performance over the years, that, "Hey, I said that, I did that." That builds trust, and that's a good business practice. But that has little to do with IPO. The, the IPO process as you go through this two, you file a document, people read it, and then you go through this two weeks grueling road show. You do 60 meetings and, or so, and after those meetings, people read your prospectus. They may or may not know, know you from past, and they met you, they do their own analyst call, market research, and then they put indication that they want to buy the stock, you know? And if an IPO is good, usually 90% of the meetings that you have one-on-one on a good IPO will convert into an order.

   4. HSHarry Stebbings31:40

      90%?

   5. IKImran Khan31:41

      90%.

   6. HSHarry Stebbings31:41

      Wow.

   7. IKImran Khan31:41

      A good IPO. And, um, bad IPO could be thir- uh, if it's less than 50, it's gonna be hard to do an IPO.

   8. HSHarry Stebbings31:48

      What sort of percent was Alibaba? What sort of percent was Snap?

   9. IKImran Khan31:51

      I don't remember the exact numbers, but yeah, we're- both were pretty close to 90%.

   10. HSHarry Stebbings31:55

       Wow.

   11. IKImran Khan31:55

       Yeah, they're very high.

   12. HSHarry Stebbings31:56

       Have you had one that was incredibly low?

   13. IKImran Khan31:58

       Yeah, uh, as in my banker career, yes, and we had to pull the IPO.

   14. HSHarry Stebbings32:01

       (exhales)

   15. IKImran Khan32:02

       You know? And, and that happens, you know? And it happened because the business is bad or it happens because the market is bad.

   16. HSHarry Stebbings32:07

       And then, and then they set the price with that bid?

   17. IKImran Khan32:10

       So the way the pricing works, you know, there's three w- kind of different IPOs, right? Traditional IPO, um, auction IPO that Google did, and, uh, I think somebody else did, uh, and then direct listing that few companies did. But let's talk about traditional IPO, because that's the vast majority of it. So once you file it, you know, based on the comps, based on some of the public feedback that you hear, the company with the partnership with the banks, you know, set the price range. And then you go to the road show, and then based on the demand, either you hopefully raise the price range, uh, because if the price range going down, that's a bad thing. Uh, uh, uh, so you start with the price that you have a 98% conviction that you can price it at that range, and then you go up from there. And that depends on the demand and the feedback you get from the investors. And basically, you ask them what is their price target on that company is, right? And if the pri- and, and this, this a little, little game happens, nobody really, you know, sometimes they share a price target that's way too high, sometimes they share a price target that's way too low, depending on who has the power. But that's how you come up with the price target based on the demand you see in the market. If the book is ten times covered by high-quality investors, ten times covered with, let's say you're selling 100 shares, there's 1,000, you know, shares demand high-quality investors, you know that you can potentially raise the price.

   18. HSHarry Stebbings33:35

       Mm-hmm.

   19. IKImran Khan33:35

       But you have to look at the what is the price target of this company could be, at least in near to mid-term, and at what price people will continue to buy. So if you ha- set the price at too high, nobody gonna buy the stock, and then, you know, all these people who bought the stock, they will sell the stock.

   20. HSHarry Stebbings33:53

       I remember when Instacart IPO'd. People said, actually, uh, the distribution of the buy book showed that it wasn't an in-demand IPO. There wasn't a concentration of one or two great names with larger concentrated positions, and that distributer- distribution across several names suggested that it wasn't a hot or in-demand IPO. Is that a true characteristic? Is concentration a characteristic of quality?

   21. IKImran Khan34:17

       Yes, because you, it's- the thing is that the concentration comes from, like, if you give Fidelity a million-dollar allocation, they will dump the stock, you know? They might disagree with that-

   22. HSHarry Stebbings34:30

       Mm-hmm.

   23. IKImran Khan34:30

       ... but, you know, a million dollar... You know, ul- ultimately if you have to think about it, if you're a portfolio managers, right, you're owning 30 names, 40 names, 50 names, 60 names, whatever the number is, right? And you are managing a lot of money and large, these large funds. So if you give them a small, very, very small allocation, it doesn't move the needle. So then either they have to buy more, so that it moves the needle, or you have to sell it out. Not just... Because there's so many names you can track and so many names, you don't want to own bunch of names that then you're buying- running an index fund, right? You know. But if you're really an active portfolio managers and you're trying to generate return, you have to size them and you have to have a understanding, "Okay, is this stocks gonna go X amount and it will generate XM- Y amount of return for my fund?" So they have to get a certain amount of size for them to care about that position, so that they can add more.

   24. HSHarry Stebbings35:24

       Mm-hmm.

   25. IKImran Khan35:25

       And that's why the pricing mechanism comes into the play.

   26. HSHarry Stebbings35:28

       I'm so enjoying this. So we said about kind of the M&A versus the IPO optionality in terms of liquidity. The thing that people forget though is the lock-up period.

   27. IKImran Khan35:36

       Mm-hmm.

   28. HSHarry Stebbings35:37

       And there's different lengths of lock-up period, correct?

   29. IKImran Khan35:40

       Right.

   30. HSHarry Stebbings35:40

       What determines the different length of lock-up period first?
9. 36:41 – 38:48

   Does Private Market Insight Give an Edge in Public Markets?

   1. IKImran Khan36:41

      the rush?

   2. HSHarry Stebbings36:41

      (laughs) So I, I, I completely get you, um-My question is, and I often think about this, is we've seen a lot of investors believe that because of the information they have from the company historically over the last 10 years being private, they have asymmetric information and can manage that position much better in public markets than maybe their LPs can who don't have that information. I hear that and I understand that logic, but I also think they've understood that company in a environment which is private. And in public markets where you have activist investors, where you have shores, where you have a huge additional amount of variance, which make it a very different environment, you do not actually have asymmetric information because of the changing landscape. Which side do you sit on?

   3. IKImran Khan37:19

      I think they're both right, you know, d- depending on your duration, right? Because they do have... You know, if you have a management company that you have 10 years of history and you understand that how their ability to execute in difficult environment, if you have that understanding, that ability to pivot, you know. Great founders are great... are very good at pivoting. Because if you think about it, all the great business, where they started and what they became is very different business. Google started as an enterprise search business. Netflix started as selling DVDs online, not even rental. You know, Amazon started as a bookstore business. So, uh, now look at all these businesses, where they generate most of their money. It's completely different businesses. So a- and so I think the great founders are great at pivoting. And so the, the, the risk with the business is, any businesses, is not... Either you obviously have a near-term risk, which everybody knows. The asymmetric understanding about the business that helps you to create long-term return is that, that is you cannot quantify financially, is that a group of people, so their ability to navigate difficult environment.

   4. HSHarry Stebbings38:26

      Uh-huh.

   5. IKImran Khan38:26

      And that's very powerful.

   6. HSHarry Stebbings38:28

      Mm-hmm.

   7. IKImran Khan38:28

      But that's not gonna pay any dividends in the short term. So I think Sequoia is right, that they have that information and they don't, if they wanna take a 10 years view, I think that's totally fine. But in a one to two years basis, they're probably, as you... You are right, they're probably not gonna be better than a public market investors who knows how to manage public market risk much better than a private market investor.

10. 38:48 – 41:30

    How Would a Harris vs. Trump Administration Impact Market Sentiment?

    1. IKImran Khan38:48

    2. HSHarry Stebbings38:48

       So before we move into Snap and Alibaba, which I, I can't wait to discuss, I do just have to ask, when we look at the political environment today, it does have an impact on markets. So forgetting anything around the markets, 'cause I don't wanna wade into that, (laughs) but just purely on market and market reception, how does a Harris versus a Trump administration change public market health sentiment?

    3. IKImran Khan39:11

       Gosh, there's so many inputs, right?

    4. HSHarry Stebbings39:14

       If I were to push you to say who would be better for public markets?

    5. IKImran Khan39:16

       I would not b- bite that question. But hear what I say, but I think-

    6. HSHarry Stebbings39:21

       (laughs)

    7. IKImran Khan39:21

       ... for businesses and for the economy, low regulation is better. Uh, I, I never said... People get mad at it. I'm not saying no regulations. I think regulations are good. But we need the regulations to be smart.

    8. HSHarry Stebbings39:33

       Could the changes to unrealized cap gains actually happen?

    9. IKImran Khan39:37

       It m- makes me laugh that when people talk about un- uh, unrealized cap gain in, in the private market context, you know, the, the entire, uh, the entire venture capital world is so small, it doesn't really matter. What it... But people are not realizing that... Think about it, like, okay, what happens to the farmland? Are you gonna charge, f- tax the farmers? What happens to the real estates? People who own all this real estate, they are illiquid. Are they gonna charge them an unrealized cap gain, so they have to sell their real estate? You're gonna destroy the real estate market. Honestly, taxing on unrealized cap gain on Amazon is least of our problem. Unrealized cap gain tax on a headline is not a good idea. Just some of the example I gave it. It's nothing to do with tech, nothing to do with, uh, Jeff Bezos or Elon Musk. It's, there's a vast amount of wealth is owned by average American, so you cannot go to this vast ama- amount of Americans and charge them unrealized cap gain, to a farmers or to a... or, or, or a retiree, you know? So, so then you have to say, "Okay, that's not the intention. We're gonna exclude all these things." And then also asking that, are you setting up a dangerous precedence? Now we are doing that to, to go after a small group of people and, you know, and then we'll say, "Okay, let's say, you know, it sounds very popular that we're going after these 20 people who are ungodly rich." You know what populism argument to make and say, but are we setting up a dangerous precedence? Like, well, now we're going after 20. Now, next we're gonna go 2,000, then we're gonna go 200,000. Where does it e- en- end start and where does it end? So I think when you have to think about the policy is that, one, are you setting... You know, what sometimes feel right could set very dangerous precedents. And that's when we need to be very, very careful about that. What is the unintended consequences of those things?

    10. HSHarry Stebbings41:20

        I completely agree with you. I, I, (laughs) it did make me laugh though, 'cause a lot of my American friends say, "Europe excels in stifling in- innovation." And I'm like, "Well, uh, you seem to be doing a pretty good job with this innovation

11. 41:30 – 48:56

    Imran on the Growing Gap Between CapEx Spending and Revenue in AI

    1. HSHarry Stebbings41:30

       on tax system." And I do want to just discuss kind of CapEx spend by incumbents and then the chasm between CapEx spend and revenue, which is vast now. You know, I had David Khan on the show from Sequoia, who, uh, you actually kind of quote-tweeted one of his, uh, and it's the $600 billion question in AI he references. How do you feel about the large chasm between CapEx spend by incumbents, now supposedly 600 billion, and the lagging revenue that we see, which is very, very significant and widening?

    2. IKImran Khan41:59

       Listen, I think one of the thing that happened with internet, you know, or tech in general, is that people always underestimate how big these businesses can be. Not for the companies, but how it will change the economy. I think people get too focused on technology cuteness, you know, how cool this tech is. I think what's important is not how cool the tech is. What's important is, is this technology improve productivity or not? Because at the end of the day, what is a GDP? GDP is number of people who are producing inside your, you know, map, right, in your country. So ultimately, the higher productivity will drive higher GDP growth. So if the technology improve productivity, that has incredible an opportunity to unleash value. So US GDP is what, 25 trillion or something like that, or 30, 30 trillion. So 5% improvement is 1.5 trillion.... of economic value creation. So, so the big question to really ask is that, is AI going to create 5%, 10%, 15% productivity improvement in the economy that can unleash so much the value? I would, sitting here, you know, I don't have, you know... I would say that's reasonable because how much productivity was n- created by internet? Definitely more than 5%, 10% to the society.

    3. HSHarry Stebbings43:15

       I 100% agree. I think it goes back to a question, like we said earlier, on duration, one.

    4. IKImran Khan43:19

       Yeah.

    5. HSHarry Stebbings43:19

       And then I think it's kind of like, um, uh, an arms race in the way that the incumbents have to spend.

    6. IKImran Khan43:24

       You have to because what's at stake is if you don't spend, your business goes to zero. So, look at Google versus Yahoo situation, right? So, what happened? Google spent the CapEx, Yahoo didn't, you know. That was... Uh, again, I was an analyst at that time, I was Google's IPO analyst, I covered Yahoo since 2002 and it was a heated topic among investors.

    7. HSHarry Stebbings43:45

       What, Yahoo's lack of spend versus Google's spend?

    8. IKImran Khan43:48

       Yeah, people were loving Yahoo because they don't spend that kind of money. 60% of their EBITDA was translating into cashflow, but Google was spending in so much money on CapEx, you know. And people just couldn't figure out, like, "Where is the ROI?" But 20 years later, we see the ROI, you know. So, so same thing, you know. You know, like, when I worked on Google IPO, we had this analyst meeting. As part of this, uh, IPO, you go meet the CEO. So, there were, like, 20 analyst, you know, who, from different banks. Uh, we went to see Larry, Sergey, Eric Schmidt and I remember one thing that really stood out. Along the ride, like, listen, this is 20 years ago, so I don't, I can't say word by word. But basically, Larry said that the most transformative thing Google did was the A- AOL deal. Because AOL, they gave them 95% revenue share when AOL search box was powered by Google, you know. That's why AOL Search, you know, was powered by Google, there's the sign and all the Google powered, the search on the back, and Google gave them 95% of the rev share and I think 5% of the company's warrant.

    9. HSHarry Stebbings44:54

       Wow.

    10. IKImran Khan44:54

        And Yahoo walked away from it because saying that this Google gon- never gonna make money. But Larry said, one another at that meeting, that that was the most transformative deal because that put Google on the map. People saw Google name and built Google's brand and then people went to google.com, you know. So, so I think... Sometimes, you know, you, you gotta make the decisions.

    11. HSHarry Stebbings45:15

        You said Google before, you said Amazon before, both are protecting incredible cloud businesses. They have to spend to protect their cloud business. Zuck, and th- that's their cash cow, Zuck has a cash cow in, you know, Instagram and News Feed, which is not a cloud-based cash cow. How does Zuck not having a cloud-based cash cow change how he can behave?

    12. IKImran Khan45:35

        So if you look at AI, current cash cow is obviously cloud because all these guys are using the cloud businesses and, by the way, they're making great money. If you're Amazon, if you're Google, if I were running those businesses, my biggest concern would be now that, Hey, I know the demand is not a problem, that I have the demand, so I should be building it. You know, it's a, uh, but the risk I'm taking is that this demand is not sustainable, so right now that five years later, this demand gonna diminish dramatically, and then I'm gonna get stuck with all this capacity I built.

    13. HSHarry Stebbings46:07

        Mm.

    14. IKImran Khan46:07

        You know, and look, that happened with Amazon in 2020, right? They built massive capacity thinking that the COVID buying patterns is the patterns gonna sustain post-COVID. It didn't, and they had huge margins pressure. So, there is more than, you know, reasonable chance that this could happen, that we are seeing pretty significant demand and at some point demand gonna stabilize or flatten. I don't know if it will or not, only time will say, you know. I'm not saying that. But that's the risk they are taking and that's the risk you have to analyze, that all my customers who are asking for this demand, do they have the power to pay me in a long term? On Meta's case, you know, or, and for others, I, I look at AI, I think, you know, people focus too much on LLM. But I think, okay, what are the areas that L- AI going to unleash value? At least, you know, I'm not the smartest guy, I'm the finance guy, but, you know, I see humanoid, humanoid robots, you know, create tremendous values, uh, I see self-driving car create tro- tremendous value, I create better recommendation engines create tremendous value, better content can drive tremendous... you know. So things like that, right? You know, uh, defense, I think AI gonna play significant role defense. So there's a l- a lot of cate- categories at work. So LLM is just a browser. In my mind, there's, like, LLM is not different than the browser. Like, obviously it's very different, but it's the entry point to what you wanna do. And what Facebook's case, you know, the opportunity, or Snap case and others, the opportunity is, is this AI can help you drive better engagement, better content, better recommendation and that drive, you know, you can show less ad and make more money. So, so that's, uh, obviously has value.

    15. HSHarry Stebbings47:55

        It absolutely does have value. I completely agree with you. You've taken many great companies public. Can you be a public company today without an AI story?

    16. IKImran Khan48:03

        Yeah, it c- it's all about valuation, right? You know, uh, you know, I think if you have an AI story, you know, and it can translate into cashflow, obviously. I think, again, valuation is a snapshot, you gotta think about the long-term sustainability of the business. So if you don't have an AI story, trying to tell a, a story, you, you open yourself lot of risk, you know. At the end, if I were the CEO, I would just manage expectations, right? Tell the business what it is today, and if you do AI, great, your stock gonna do well. But ultimately, it's all about the valuation and if you have a great group of em- Valuation doesn't matter, you know, it only matters when you sell, you know. So if you're not selling your business because you have a good business that you believe in, you have an employee base who are missionaries, you know, who believes in the company's cause and gonna build a good business, and if you continue to execute, valuation will take care of itself. So, why focus on day-to-day valuation?

12. 48:56 – 55:48

    How Imran Landed the Alibaba IPO

    1. IKImran Khan48:56

    2. HSHarry Stebbings48:56

       I, I do wanna touch on, you mentioned Google quite a few times, but you also took Alibaba public. How did that come to be? I know this was earlier in your career, but how d- how did you come to take Alibaba public?

    3. IKImran Khan49:05

       So Alibaba is after Google, you know. So, um, you know- (sighs) It's a funny story. So, you know, I'm an immigrant. I came to this country, uh, uh, as an immigrant, and I believed early days that, you know, I lived in, you know, I came from Bangladesh and I saw th- this internet thing is not a US thing. Ultimately, you know, it's gonna empower everybody, you know? It empowers people in the rural areas, that we are seeing that. That was my belief in 2002, 2003. And so to me, at that point was number of people, and what's the revenue per- person you can generate on the internet transaction? That gonna create your internet economy. So I was really interested about the global opportunities of this internet company. So in 2004, I go to China because they have a billion p- plus people, and internet is very nascent. So I took a group of investors to, uh, my clients, uh, public market investors, to go visit all these Chinese companies and, uh, Alibaba was one of the company, but that was private at that time. The only reason we wanted to meet with them because Yahoo made that investment and all of my clients were interested in Yahoo. And so I met Joe Tsai, who's the co-founder and now chairman of Alibaba, uh, in Shanghai and we really hit it off, and over time we became friends. And in 2010, I became very bored with my research job, you know? It was the same day, we covered the same company's stock to the same clients. I'm like, "I need something more to do with my life." And, and I was like, "Hey, should I go to move to China?" Seems like a lot happening. My wife was working for L'Oreal and Joe's like, "No, why don't you go become a banker and help these companies?" And then three days later he called me, said, "Hey, can I introduce you to some banks?" And that's how I end up going to Credit Suisse to run the internet banking. So Joe not only made the introductions, but then also, you know, when I became a banker, he hired me to help buy back 20% of his stake from Yahoo, uh, help finance the transaction.

    4. HSHarry Stebbings51:00

       What was that process like?

    5. IKImran Khan51:01

       That was a pretty wild M&A.

    6. HSHarry Stebbings51:04

       Te- te- tell me about it.

    7. IKImran Khan51:05

       I think it's the day Carol Bartz got fired. You know, Carol Bartz was the Yahoo CEO, she got fired, uh, and, you know, so the new CEO came in and, and I might be getting a little wrong here. It's a while ago. So that, that time we approached Yahoo said that, "Hey, listen, we're gonna buy back 20% of our stake. We're gonna pay, uh, $14.40, which is I think valued at $40 billion. So you're gonna get $8 billion or so cash." So that's great for Yahoo. You can return the capital to your shareholders and, you know, at first they didn't. But after a lot of negotiation, we had to come up with the price. Uh, and, and at that time, Yahoo went through a lot of problems, you know, themselves. So, so we bought back the share, uh, and then we had to go raise the money, raised $8 billion to buy back that 20% stake.

    8. HSHarry Stebbings51:48

       Was it an easy process?

    9. IKImran Khan51:49

       It was difficult process, but it was like not ... It was difficult in a sense, like, you know, getting Yahoo to do anything was tough. Uh, and then raising capital was tough in a sense there were a couple of issues. In, uh, in 2012, Facebook went public and the stock literally just went down 40%. (laughs)

    10. HSHarry Stebbings52:05

        It tanked.

    11. IKImran Khan52:06

        Yeah. And so when we decided to go raise money from the, uh, private market, investors were not interested, you know? They were like, "Look at Google, look at Facebook that went down 40%. I don't wanna put Alibaba." You know, and then also some of the investors were concerned about the whole Ant Financial issue with the corporate governance. So the way we solve it, this was the most, one of the most creative transactions, and I, I'm very proud of it. And, and, and, uh, because all ... I was a new banker and all bankers were against me doing that. Uh, basically, Joe and I talked about it and, and he agreed on it, obviously I cannot do it. I said, "The whole issue is the lockup," right? Because all these investors were concerned that, "Hey, we bought the Facebook shares, Facebook went public, I have six months lockup and the stock went down 40%. I don't want that situation." So we looked at Alibaba, I said that, "Listen, this is gonna be a $25 billion transactions and the amount we are raising..." Right? So $8 billion transaction, 4 billion is debt, so that's not a problem. You know, two and a half billion dollar is a common stock that came from the Chinese investor, so that was not a problem. So the really issue is we are raising $1.75 billion from global investors who are not ... you know, who are concerned because of the Facebook situation. So we looked at it and said, "Look, and it's gonna be a $25 billion public IPO. Who cares if we sell eight, 9% of that offering to e- to in- to a group of investors who we know will have to buy more at the IPO and give them no lockup?" Because we know we can go to Fidelity saying, "Hey, I'm gonna give you $200 million, but by the way, this company gonna go public at a $25 billion offering." The offering size is 25 billion, and the market cap gonna be much higher based on the trajectory. You probably wanna buy two and a half billion dollar and there's no way you're gonna get two and a half billion dollar allocation. So this is your way to get 2 billion, 200 million, and if you're worried that stock gonna go down like Facebook, there's no lockup. You can sell that same day. But we're comfortable because we knew that a company that size, they will have to buy it or, you know, at the post-market, even with the IPO allocation. So that lockup, while it was incredibly valuable to investors who bought that security, had zero cost to company. So it was a very creative transactions. So we give them the no lockup, you know, and they were fine doing the deal, you know, but the cost to company was zero.

    12. HSHarry Stebbings54:29

        That's a pretty transformative IPO to be part of. What were the biggest lessons for you from being part of that?

    13. IKImran Khan54:35

        I think the biggest lesson is simplify the story. So one of the thing that Jack and Joe did, they simplify the stories, right? Because, you know, the challenge for the global investors is they don't use Alibaba, they don't know Alibaba. Like, what is Taobao, Tmall, all this thing is, right? And so ... But, you know, the story was positioned very simply that, "Hey, it's a China consumer play and they are the eBay plus Amazon plus PayPal of China." So it's a ... You know, the, one of the biggest thing that a lot of the founders makes or CEOs makes, they use a lot of jargon and, and if it takes-... a portfolio manager more than 30 seconds to understand the story, they will never gonna work, do work on that.

    14. HSHarry Stebbings55:16

        It's the same as an investor.

    15. IKImran Khan55:17

        Yeah, you got-

    16. HSHarry Stebbings55:17

        It's like a VC.

    17. IKImran Khan55:18

        ... you gotta keep it, the stories simple so that it gets you interested, and then they will do the work.

    18. HSHarry Stebbings55:23

        And that's why analogies can be helpful. People often discredit Uber for X, Airbnb-

    19. IKImran Khan55:29

        Right.

    20. HSHarry Stebbings55:29

        Actually, it can sometimes really help simplify the story of Airbnb for Y.

    21. IKImran Khan55:32

        Yeah, then you understand, then you can do the work, right?

    22. HSHarry Stebbings55:34

        Yeah.

    23. IKImran Khan55:34

        Nobody does the work based on that narrative, you know, I don't think anybody bought the stock because it's a China consumer play and things like that. But it got people interested to do the work. So, I think the simplifying story is important.

13. 55:48 – 59:03

    Should We Continue Investing in China Given Current Uncertainty?

    1. IKImran Khan55:48

    2. HSHarry Stebbings55:48

       I have a lot of LPs, uh, and I speak to a lot of LPs, and they have existing China positions, and they have no net new forward China positions, and they go, "I don't know what the fuck's gonna happen in China and I don't know what to do with my historical and then moving forward." If you were to sit down and advise me as a big institution with a historical portfolio in China, and then capital allocation decision of whether we should continue to commit to China, what would you say?

    3. IKImran Khan56:13

       The challenge in China is, you know, again, what drive valuation? Consistency and predictability. So right now, there is no predictability on regulations, right? So it's hard to invest. This is why I think that regulations could be very challenging, primarily when there is no predictability. So I think it's hard, you know, till we have more visibility of what gonna happen with the regulations, what gonna happen and, and, and that those things will be more of a consistent pattern.

    4. HSHarry Stebbings56:38

       Moving to Snap, i- i- it's an interesting kind of role shift, because then you were chief strategy officer with Ev at Snap and you took the company from nought to 1.6 billion in revenue.

    5. IKImran Khan56:49

       Annualized revenue, yes.

    6. HSHarry Stebbings56:50

       That's pretty fucking nuts.

    7. IKImran Khan56:51

       Yeah. It, it, it's like, I can't take too much credit for that because Snap had a good product.

    8. HSHarry Stebbings56:56

       You're not a VC.

    9. IKImran Khan56:57

       Yeah.

    10. HSHarry Stebbings56:57

        If you're a VC, you'd say it was all me.

    11. IKImran Khan56:59

        (laughs)

    12. HSHarry Stebbings56:59

        Um, the question is for me from that, first off, actually one, working with Ev, Ev's a hailed product mind, what are your biggest lessons from working with Ev? What makes him so good?

    13. IKImran Khan57:09

        He has deep understanding about his customers, very, very deep understanding of his customers, you know, and, uh, and that makes him so special. Uh, so he understanding customers very well and s- and then the second and third thing, I, I think this is actually true for every great CEOs, one, they understand their customers, number two, they have deep conviction because the reality is return is a function of, you know, uh, quote unquote "risk," you know? And, you know, and the, the reason I say quote unquote "risk" is that everybody thinks it risky, but you don't because you have the conviction and that's why you can underwrite that, and, m- that most people don't do it makes you special. So Evan, from day one, had a very deep conviction on his product and, you know, like, the lenses acquisitions that we acquired, you know, Evan looked at the product and he knew exactly how people are gonna use the product, you know? We finance guys, I'm like, "Why are we paying so much money for this deal?" But he had a very good like r- or with maps or with stories, like, you know, when Snap, Evan launched stories, you know, like everybody was like, "Why are you creating stories? Isn't that, that like anti- you are trying to do?" But he had a deep understanding how his consumers, how his customers, you know, used the product and, and, and he was able to build a product and he has a very deep conviction on it ad- and the other third thing I think what makes great f- founder is your pain tolerance. And adding is, is true for founders, it's true for investors, it's true for a lot of people, uh, because the reality is you're rarely gonna be right overnight. Right? When you take and make a bet, primarily when you're running a business, you know, it takes time for your thesis to play out, and during that time you take a lot of pain because everybody talks negative about you, everybody talks, you know, you are, you are, you are doing wrong things. So you gotta take a lot of, uh, uh, you gotta have a lot of pa- pain tolerance. But he is a wonderful human being, you know, um, he's a great friend, uh, and I'm very grateful that he took

14. 59:03 – 1:05:32

    Biggest Regret from Your Time at Snap

    1. IKImran Khan59:03

       a chance on me.

    2. HSHarry Stebbings59:03

       When you reflect back on your time, you mentioned some incredible, uh, product additions, improvements. What did you do that you wish you hadn't done?

    3. IKImran Khan59:11

       At Snap?

    4. HSHarry Stebbings59:12

       Mm-hmm.

    5. IKImran Khan59:13

       One of the things, I think we grew too fast, too quickly. You know? I think, you know, if you look at in January 1, we did zero revenue, you know, uh, on January 1, 2015. Uh, Q4 of 2018, so four years later, our annualized revenue was 1.6 billion. Today, Snap will do, what, 5 billion plus minus revenue, you know? It's, uh, so in '14 they had almost no revenue. So in 10 years, their revenue went from zero to 5 billion plus. So the challenges, and this is actually a good lesson for all the CEOs, and again, I think, I, I don't think I wish or shouldn't, but that it created a lot of stress, you know? So I, I don't regret of doing it, growing so fast, but the thing is that when you grow really fast, couple of things happen. Expectation goes out of hand. Everybody always expect you to grow that way. (laughs) Uh, second is, it's like when you run really fast, you know, i- i- at some point, you know, it, it start hurting, right? So, so when you grow a little bit more deliberately, you can control those pains.

    6. HSHarry Stebbings1:00:16

       0 to 1.6 billion in revenue is enormous. What did you do very well that allowed you to grow revenue as successfully, as quickly?

    7. IKImran Khan1:00:24

       I think the decision where I probably contributed is hiring sales team and ramping, and good people, and ramping them quickly, and empowering our sales team to go take those meetings that everybody who wanted to meet Snap and educate them. So that was the first part, right? Educate people because most people didn't even know how Snap works. They saw their children use Snap. They didn't know how Snap works, you know? Just educating the world because when you're not telling your story, somebody else is telling your story and so there's a lot of misinformation, there's a lot of misunderstanding. So we had to build a team who went and educate the world. So that was the first two years and that probably took us from 0 to 400. So in 2015, 20- 2014, I think we did 2 or 3 million. 2015 we did 50 and 2016 we did $400 million annualized revenue. And this is not AR, full year revenue. And, and from there, we need to automate the business.... and this is where we need to build self-service advertising platform, this is where we need to build attribution, this is when..." And, and a lot of the things that are still happening. And that's just, you know, it takes time. So, uh, so the, one of the challenge was, you know, hindsight because I went from z- zero to 50, 50 to 400, it was so intoxicating that, you know, if, if I were to go back, I would do the exact same thing but probably start investing in bringing small businesses, building DR business much earlier, you know, so that, you know, it would smooth out the growth rate.

    8. HSHarry Stebbings1:01:53

       And DR business is?

    9. IKImran Khan1:01:55

       Jerk response.

    10. HSHarry Stebbings1:01:55

        Jerk response business. Okay, and you would have done that earlier?

    11. IKImran Khan1:01:58

        I would done a little bit earlier.

    12. HSHarry Stebbings1:01:59

        Things break when you move that fast.

    13. IKImran Khan1:02:01

        Yeah, or you ignore things, because you feel like things are working. Because the thing is that, as you're growing business, because the reality is, when you're growing that fast, you're driving that expectation higher, so you constantly have to think about it that, "How I'm going to maintain that growth?" So one of the thing that, you know, zero to 400, 400 to a billion, we should have planned that in 2000. I should have planned it, no, there's no one to blame but me, in 2015, to get to 400 to a billion, a billion to three billion, right? So that's something, you know, but you're growing so fast and you're distracted, you know, you, you didn't get time to plan all these things, so.

    14. HSHarry Stebbings1:02:39

        Do you think they're fairly valued today?

    15. IKImran Khan1:02:41

        I think Evan is one-of-a-generation founder, you know, and, uh, and the user (00:02:08) is incredible. And, uh, so I think people continues to misunderstand him.

    16. HSHarry Stebbings1:02:54

        What do they misunderstand about him?

    17. IKImran Khan1:02:56

        There's a very few people who know how to build great product, and he's one of them, and he has the skill to r- that, that sometimes when you build a great product, you don't have that install base. He has the install base. So, so I think with Evan, you're getting that install base and a track record of building great product. So that's why I think it's a mistake to underestimate Evan.

    18. HSHarry Stebbings1:03:14

        How did the 200 million Alibaba investment come to be?

    19. IKImran Khan1:03:17

        So Joe was a big fan of Alibaba from day one.

    20. HSHarry Stebbings1:03:20

        Of Snap?

    21. IKImran Khan1:03:20

        Oh, so Snap, sorry.

    22. HSHarry Stebbings1:03:21

        (laughs)

    23. IKImran Khan1:03:22

        Uh, jo- a big fan of Snap from day one, and when Evan offered me the job, you know, I went to Joe for his advice that, "Hey, should I take that job?" He said, "Absolutely, you should take that job. E- Evan is a great founder." And, and he said something that is very hum- humbling. He said, "Listen, if the company works, you're gonna look great. If it doesn't work, all the blame will go to Evan because it's his company. So what, what are you upset or worried about?" I'm like, "Okay, when you say it that way." (laughs)

    24. HSHarry Stebbings1:03:50

        (laughs) I absolutely love it.

    25. IKImran Khan1:03:51

        Buck stop with him. (laughs)

    26. HSHarry Stebbings1:03:53

        That's fantastic. So how did that correlate into the 200 million? So Joe calls you one day and says, "Hey, I want to formalize this."

    27. IKImran Khan1:03:58

        So once I invest, uh, joined, you know, um, I told him that I joined, he said, "Listen, we would love to invest." So, that's how.

    28. HSHarry Stebbings1:04:05

        I love that. (laughs) That's, uh, and then, and then in terms of the Snap IPO process, how was that? 'Cause Snap is a unique beast in terms of the story to public markets that I always think, you know, you need to understand your audience when you're selling a story. It's a different audience to a venture investor audience when you're selling Snap to public markets investors. How did that go down in the IPO process?

    29. IKImran Khan1:04:25

        It was relatively easy just because, number one, you know, we had developed a relationship with public market investors in advance, you know. They were in our cap table, so Fidelity invested, T. Rowe invested, so they knew the story, they knew our numbers, they saw the ramping, so, so it's not like they were not familiar with it. So that's one thing. And second thing, uh, with Snap, you know, while many of them didn't use the product, their children used it. 100% of the children used it, you know. The true story is, when the day I got the call to go meet Evan for the job, you know, uh, I was not a Snap user. True story. I was 35 I think at that time, to be 2014. Yeah, so I was 37.

    30. HSHarry Stebbings1:05:05

        How was the interview?
15. 1:05:32 – 1:11:16

    Quick-Fire Round

    1. IKImran Khan1:05:32

       person in the world.

    2. HSHarry Stebbings1:05:33

       Listen, I've, I've loved this conversation. I wanna do a quick-fire round, so I say a short statement, you give me your immediate thoughts. Does that sound okay?

    3. IKImran Khan1:05:38

       Sounds good.

    4. HSHarry Stebbings1:05:39

       So what do you believe that most around you disbelieve, Imran?

    5. IKImran Khan1:05:42

       The biggest thing is, I, like, I'm a big believer that market likes to make fool of the, fool of the greatest number of people, you know. So everything that everybody believes, you know, take it contr- at least question that belief, you know. Uh, uh, and that's the right thing to do. You know, sometimes, you know, people are right, but in general, market likes to make fool of the greatest number of people.

    6. HSHarry Stebbings1:06:05

       What do you make of the large institutions and crossover funds all coming way early into private markets now?

    7. IKImran Khan1:06:10

       I think it's a mistake. I, I think public market investors should not go deep into private investment. You know, I think it's fine to invest... Listen, when I was... I've been in the business for now 24 years. Early days, nobody would do it, and then, like, in 2007, the first deal I saw crossover was, uh, MercadoLibre IPO. Believe it or not, I, I was the IPO analyst, I took MercadoLibre public.

    8. HSHarry Stebbings1:06:38

       No way.

    9. IKImran Khan1:06:39

       Yeah.

    10. HSHarry Stebbings1:06:39

        I didn't know that. Marcos is a friend and he's a great dude.

    11. IKImran Khan1:06:41

        Yeah. Great dude. Uh, $800 million IPO that raised $90 billion, uh, market cap. Phenomenal CEO, uh, and another example, great business built in public market. On that deal, that was in 2007, August of 2007, and General Atlantic, which is not public market, but, uh, Tiger came in. They wrote, they were a anchor investors on the deal. They wrote a, you know, check, and I think they signed a lockup, you know, and that's totally fine. I think that's a really, really smart thing to do. Uh, I encourage other public market investors should do it. I think that's a, you know, if I had the means, I would do it. Uh, I think that's a good strategy because, you know, you are really leveraging your core skill.Then, you know, people start going into the companies that would go public within 12 months. Somewhat fine, you know, because you can analyze the business. But then all these guys start doing, you know, series A, series B, series C, and I think this is why it's bad, because I think everybody has their core strength. Somebody who's good at real estate investment is not good at technology investment. Somebody who's good at technology investment is not very good at investing in industrial or biotech. Somebody who is seed investors are not the greatest public market investors. We know I give it a c- because then... And so that's, I think, thinking that you are a great public market investor makes you a good private market investors is, is a wrong thing. Second is, the model is different, you know? Because if you think about what makes a great private investment and investor is access, judgment, and conviction. So you need to have a lot of access to a lot of deals. Public market investors don't have time for that-

    12. HSHarry Stebbings1:08:19

        Mm-hmm.

    13. IKImran Khan1:08:20

        ... you know, to go run around. So then you're not managing your own book, right? So, so then you're hiring people who doesn't... may be good, may not be good. So that's... I just don't think that works either. So, so I just think, to me, if you're truly a good public market investors, you know, guys like Steve Cohen or Ken Griffin or, uh, you know, uh, those guys, you know, uh, they do private as a hobby, but they don't build a private business. (laughs)

    14. HSHarry Stebbings1:08:47

        (laughs) Listen, I, I totally agree with you. It's why we don't do a lot of things. And I think Danny Rimer said to me very wisely on the show, "The biggest lesson I have for you, Hari, is keep the main thing, the main thing."

    15. IKImran Khan1:08:55

        Yeah. Focus matters.

    16. HSHarry Stebbings1:08:56

        Yeah.

    17. IKImran Khan1:08:57

        The one biggest lesson I learned in life from some of my biggest mistakes is lack of focus.

    18. HSHarry Stebbings1:09:03

        What was your biggest mistake?

    19. IKImran Khan1:09:05

        There were times I overestimated myself, you know? And, you know, and I had probably the same situation that sometimes things look good in a context and you have to think about that same context not gonna look... is cons- is constant, right? Con- context is changing all the time. So, so when you have to make a decision... and this is going back to the CapEx decisions, you understand the decision at this context, it makes sense, but you also have to think about the two years, three years, five years, 10 years later, that context will change. So when you're making a long-term d- investment decision, you gotta all be r- and that... and you know that you're gonna get stuck with that, you know, decision, you have to be very comfortable that you are okay with that as the context change at different variables.

    20. HSHarry Stebbings1:09:51

        What have you changed your mind on in the last 12 months?

    21. IKImran Khan1:09:54

        You know, I'm looking at the world... I'm a big believer in AI, you know, and, uh, and so I really looking at each businesses, you know, are they are beneficial of AI or they are... they will be challenged by AI-

    22. HSHarry Stebbings1:10:09

        Mm.

    23. IKImran Khan1:10:10

        ... you know? And that's probably one way I'm changing. And then I'm also... the companies that will be beneficial of AI, I also need to trying to get this context window right. Right? Because some companies might be beneficiaries of AI, but that may not be in two years, in four years. So you have to think about those businesses differently than the companies that will be benefited immediately. So you gotta get that context window right. But I think, you know... I think AI is as important as internet.

    24. HSHarry Stebbings1:10:37

        Final one for you. What question are you not asked that you should be asked more?

    25. IKImran Khan1:10:42

        So in my business, you know, everybody focus on return, but nobody really ask about after tax return.

    26. HSHarry Stebbings1:10:48

        Mm.

    27. IKImran Khan1:10:48

        You know, this is going back, you know. Uh, I look at so many funds, you know, they're... you know, they're just constantly in and out and, you know, after tax return is terrible, you know? But I think, you know... I, I... it blows my mind if I do 100 meetings, uh, probably one or two meetings I get where clients ask you about what's your after tax return.

    28. HSHarry Stebbings1:11:06

        (laughs) Listen, Imran, I've absolutely loved having you on. Thank you so much for putting up with my wide array of discussion topics.

    29. IKImran Khan1:11:13

        Great. It was fun.

    30. HSHarry Stebbings1:11:13

        You've been a fantastic guest.

Episode duration: 1:11:16