Fireside Chat, Interview
Imran Khan: Why the IPO Market is Not Closed & Lessons From Taking Snap & Alibaba Public | E1194
- Imran Malik argues the IPO market is not closed; the primary barrier is that private companies hold unrealistic valuation expectations based on the 2020–2021 low-interest-rate environment, which failed to correct downward in the private sector.
- Malik contends that companies generating cash flow should prioritize going public earlier rather than later, as a business's value creation over time matters more than the specific IPO price point.
- He dismisses revenue multiples as a "BS multiple" for most sectors, arguing they are only justifiable for SaaS businesses with high gross margins and predictable long-term profitability, citing Google's high incremental margins as a valid example of revenue-based valuation.
- Malik suggests that companies with low gross margins (e.g., 20%) should not command high revenue multiples because their margins are difficult to control and improve.
- He asserts that founder obsession with stock price valuation distracts from the core job of building a business, noting that public stock volatility is often driven by macro factors like interest rates rather than operational performance.
- Regarding employee morale, Malik challenges the idea that low IPO prices are destructive, arguing that companies with "missionaries" (believers in the mission) rather than "mercenaries" will retain talent regardless of stock price fluctuations, citing Amazon and Facebook's historical volatility.
- Malik identifies a systemic shift where institutional allocators (pension funds, endowments) are over-allocating to private markets and market-neutral hedge funds to reduce volatility, leading to capital overcrowding, reduced returns, and a shortage of talent to execute private investment ideas.
- He predicts a slowdown in private market capital allocation as institutions fail to achieve sufficient DPI (Distributions to Paid-In Capital) and face permanent capital losses from investments that are not written down.
- Malik warns against the long-term risks of staying private, noting that technology paradigms shift every 15 years (e.g., mainframes to internet to mobile to AI), and public markets provide daily feedback necessary for pivoting and survival.
- He cites AWS, the iPhone, and AI/GPU development as major innovations that originated from public companies, refuting the notion that significant disruption only happens in the private sector.
- For slowing-growth public companies like Box and Dropbox, Malik advises focusing on margin improvement, cost efficiency, and returning capital to shareholders rather than chasing growth.
- Malik clarifies that his fiduciary duty is to the investors (LPs) who provided capital, not the founders, stating that any fund manager prioritizing founders over LPs is either clueless or dishonest.
- He argues that while private companies like Stripe can provide liquidity via secondary sales, relying on this model long-term is unsustainable and problematic if existing investors must continuously mark up shares.
- On the M&A market, Malik disagrees that it is entirely "shut" due to Lina Khan's regulatory approach, attributing the freeze primarily to mismatched seller and buyer valuation expectations.
- He believes the regulatory scrutiny for M&A is concentrated on the top 20 large-cap companies, while 1,980 other public companies face significantly fewer hurdles for acquisition.
- Regarding the failed Wiz-Adobe deal, Malik suggests that a significant breakup fee (e.g., $1 billion) can mitigate the risk of a blocked deal, but warns against selling at unsustainable valuations (e.g., $23 billion for a company requiring massive growth to maintain) because SaaS multiples eventually compress as growth slows.
- Malik rejects Bill Gurley's view that IPOs should be priced to perfection, arguing that intentionally leaving money on the table (a "pop") builds goodwill with new investors and ensures better aftermarket demand.
- He explains that IPO pricing is a trust-based process where the book build relies on 90% conversion rates of roadshow meetings for high-quality deals, with price targets set based on this demand.
- Regarding lockup periods, the standard 180-day period is designed to manage market oversupply and protect banks, though Malik notes that pushing for short lockups signals a lack of long-term conviction.
- He argues that private investors possess asymmetric information only for the long term (10+ years) due to their ability to evaluate founder pivoting capabilities, but public market investors are better equipped to manage short-term (1–2 year) public market risks.
- Malik opposes the tax on unrealized capital gains, characterizing it as a dangerous precedent that could destabilize illiquid asset classes like farmland and real estate without meaningfully impacting the wealthy.
- On AI CapEx, he believes incumbent spending is an "arms race" necessary for survival, comparing Google's early heavy investment in CapEx against Yahoo's lack thereof to Google's eventual dominance.
- He views current AI demand as potentially unsustainable, warning that companies like Amazon risk building excess capacity if demand flattens, similar to the post-2020 e-commerce slowdown.
- Malik asserts that while an AI narrative aids valuation, a business can succeed without it if it focuses on long-term sustainability, productivity improvements, and a "missionary" employee base.
- Reflecting on the Alibaba IPO, Malik highlights the strategy of simplifying the investment thesis for global investors by framing Alibaba as "eBay plus Amazon plus PayPal" for China.
- He details a creative transaction during the Alibaba buyback where he offered global investors shares with no lockup to overcome their fear of a Facebook-like IPO drop, a move that cost the company zero additional dilution.
- Malik advises institutions with China exposure to remain cautious until there is greater predictability in regulatory environments, which currently hinders valuation consistency.
- Regarding his time at Snap, Malik attributes success to hiring and empowering a sales team to educate the market, noting that the company grew from zero to $1.6 billion in annualized revenue over four years.
- He identifies three key traits of great founders: deep customer understanding, unshakeable conviction, and high pain tolerance to endure negative market sentiment.
- Malik admits that growing Snap too fast created high expectations and operational stress, and he would have invested earlier in a direct-response business to smooth out the growth curve.
- He maintains that Snap is fairly valued today given Evan Spiegel's unique ability to combine product innovation with a massive install base.
- Malik believes public market investors should avoid deep involvement in early-stage private deals (Series A/B) due to differences in required skills (access vs. public analysis) and recommends limiting public market crossover activity to deals with imminent IPO timelines.
- His biggest mistake has been overestimating his ability to predict consistency in changing contexts, emphasizing the need to account for long-term variable shifts in investment decisions.
- Malik's primary investment shift in the last 12 months involves assessing the "context window" for AI beneficiaries, distinguishing between companies that will benefit immediately versus those that will do so in 4–5 years.
- He critiques the industry for focusing on gross returns while largely ignoring after-tax returns, noting that frequent fund rotation often results in poor net performance for clients.