Jan 2, 2019 · 44m · a16z
a16z Podcast | On Recent IPOs and Comparing Private vs. Public Valuations
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of the a16z podcast, host Sonal Chokshi and Andreessen Horowitz partners analyze the fundamental differences between public and private market valuations using Square's IPO as a primary case study. They break down valuation methodologies, investor time horizons, IPO mechanics, and structural deal terms like ratchets to offer tech founders a realistic framework for going public.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. The host holds 22.5% of the talking time here. How this is scored →
The host as informed peer 2.2 Guest teaching 5.2 Guest disagreement 1.0 The host pushing back 2.7
speaking balance: gold is the host, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 21:07 Scott rejects dumb money framing
Scott Cooper bluntly dismisses narrative claims that late-stage crossover investors like Fidelity are dumb money, asserting they are among the most sophisticated financial investors in the world.
Hardest push from the host ▶ 19:01 Sonal challenges public discipline premiseSonal refuses to accept Nicole's framing that public scrutiny is purely beneficial, pushing back with the counterargument that quarterly public scrutiny forces harmful short-termism.
Biggest teaching moment ▶ 3:42 Nicole reframes objective facts in valuationNicole corrects Sonal's assumption that financial valuation is an objective mathematical outcome, explaining how different investors select or discard entire frameworks like DCF or revenue multiples.
The host holds their own ▶ 19:01 Sonal identifies public short-termism riskSonal demonstrates sharp domain insight by pointing out how public earnings cycles undermine long-term innovation in new business categories.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The host as informed peer | Guest teaching | Guest disagreement | The host pushing back | Why |
|---|---|---|---|---|---|---|
| Analyzing Square's Valuation and Public vs. Private Expectations | 2 | 5 | 1 | 4 | Sonal asks why valuation multiples are not objective facts given that they rely on financial numbers. Nicole explains that public investors rely on different methodologies and forward projections rather than fixed formulas. Sonal pushes back further by asking if lower pricing implies private investors were wrong. | |
| Forward Credit, Historical Precedents, and Market Conditions | 2 | 5 | 1 | 3 | Sonal suggests that executive track records dictate public valuation premiums. Scott reframes this by discussing how Jack Dorsey's dual CEO role specifically impacted investor willingness to grant forward credit. Nicole adds context regarding broader risk-off market conditions. | |
| Demystifying IPO Terminology: Pops, Pricing, and Beat and Raise | 1 | 6 | 1 | 2 | Sonal asks for a lightning round on IPO jargon like the pop and beat and raise, acknowledging she learned some terms the prior day. Scott and Nicole educate her on the delicate balance underwriters strike between underpricing and leaving money on the table. | |
| Public vs. Private Markets: Motivations for Going Public | 3 | 4 | 1 | 4 | Sonal challenges Nicole's assertion that public market discipline is advantageous by pointing out that public scrutiny often induces short-termism. Scott outlines key motivations for going public, including acquisitions and liquidity. | |
| Late-Stage Private Capital, Investor Dynamics, and Ratchets | 2 | 6 | 3 | 2 | Scott forcefully rejects the notion that mutual funds and late-stage investors like Fidelity are dumb money, clarifying that they are highly sophisticated financial investors. He explains how ratchets work as downside protection compared to traditional VC anti-dilution. | |
| The Art and Science of Private Valuations | 2 | 5 | 1 | 3 | Steve McDermott joins and explains that private valuation is more art than science due to extreme growth rates and subjective assumptions. Sonal insists on finding a formula, but Steve details why qualitative assessments prevent standardized pricing. | |
| Breakdown of Valuation Methodologies: Multiples and DCF | 2 | 6 | 0 | 1 | Nicole breaks down DCF, revenue multiples, and EBITDA multiples, showing how multiples function as shorthand for DCF. Steve adds how hyper-growth companies like Amazon make cash flow modeling complex. | |
| Evaluating Software-as-a-Service (SaaS) and Revenue Quality | 3 | 5 | 0 | 2 | Sonal brings up historical SaaS valuation dynamics and potential misalignment with accounting rules. Steve explains that predictable, recurring contractual revenue earns a premium multiple compared to transactional revenue. | |
| Long-Term IPO Evaluation and Market Takeaways | 3 | 5 | 1 | 3 | Steve explains why evaluating an IPO based on first-day pop is meaningless, pushing evaluation to post-lockup earnings performance. Sonal asks whether judging a company after one earnings call is fair, and Steve clarifies that multiple quarters are needed. |
Statements from this episode (14)
Square's IPO priced below its final private round and triggered investor ratchets
“You have an IPO that prices at a price that's below where the last private round. It also happened to have this, you know, feature that we've all talked about before, which is this concept of a ratchet, meaning, you know, in basic terms that the kind of invest…”
Public market investors do not anchor IPO valuations on prior private rounds
“Public investors aren't actually anchoring themselves on previous rounds of valuation, and they don't have visibility into what the business looked like at that, at those points in time, and also what the business forecast looked like at that point in time.”
Public investors lacked a unified valuation framework during Square's IPO
“There is no formula, and there was a wide range of understanding and a wide range of beliefs among investors on even how Square should be valued from valuation framework.”
Public markets ultimately valued Square as a payments business at IPO
“And I think what we saw is that, folks, at the end of the day, everyone had their debates. People came to the table with different You know, ways of it analyzing the business and their different viewpoints. And I think what one is something that reflects what'…”
Jack Dorsey's dual CEO role likely reduced Square's forward valuation credit
“It may have been in the case of Square that kind of this dual CEO role for Jack Dorsey might've had some impact on, you know, to kind of the earlier point, just, you know, how much forward credit do we want to give to the company? And do we believe that, you k…”
Companies should deliberately underprice IPOs to ensure positive initial trading momentum
“You know, for better words, momentum does matter in the market. So, you know, all things being equal, you do want to leave some money on the table so that actually the initial trading out of the gate is positive as opposed to, you know, we had a recent deal, n…”
Public companies execute M&A easier due to daily stock price valuations
“If you want to be able to make acquisitions, it's still much easier to make acquisitions as a public company. And the reason for that is because you at least get a report card every day about what the price of your company is worth.”
Andreessen Horowitz advises startups to reach $1B market caps before IPOs
“So in general, kind of, you know, our bias for our companies is, look, you want to get to a certain minimum size, and typically that's probably a billion dollars plus of market cap, where you're going to have enough heft that the institutional community is act…”
Late-stage mutual fund investors like Fidelity are not 'dumb money'
“I really find it very hard to believe when, you know, other, when people talk about fidelity and others as, you know, dumb money or not knowing what they're doing, right. These are some of the most incredibly, you know, sophisticated Financial investors there …”
A 2015 Fenwick report found only 30% of late-stage deals included ratchets
“By the way, I think Fenwick and West came out with a report yesterday that it's only about 30% of the deals actually that have this ratchet in it.”
Annual revenue growth exceeding 50% places public companies in the top tier
“When you look across the public landscape, you're growing at 50 plus percent is, puts you in the very top tier of public companies.”
Public investors evaluate companies on shorter horizons than private investors
“So really one of the very big differences that private investors think about is, is looking out over a much longer term time horizon to look at a normal, a steady state business versus Public investors that, you know, may look out 12, 18, maybe 24 months in so…”