Jan 2, 2019 · 29m · a16z
a16z Podcast | The Rise of the Quasi-IPO
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In this episode of the a16z Podcast, hosts Scott Kupor, Morgan Bender, and Benedict Evans analyze tech sector valuations using historical venture capital data to determine whether current market conditions reflect a financial bubble. By examining the rise of late-stage private growth rounds, or 'quasi-IPOs,' they demonstrate that modern valuations are supported by solid macroeconomic expansion, rational capital distribution, and structural changes in equity markets rather than dot-com style euphoria.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. How this is scored →
The host as informed peer 6.1 Guest teaching 4.9 Guest disagreement 1.6 The host pushing back 1.7
speaking balance: gold is the host, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 12:45 Challenging quasi-IPO threshold
Benedict directly questions the team's data methodology, arguing that price inflation makes setting an arbitrary $40 million threshold potentially misleading.
Hardest push from the host ▶ 13:50 Defending holistic data methodologyScott counters Benedict's methodological challenge by explaining that analyzing total stacked venture and public funding strips away threshold definitions.
Biggest teaching moment ▶ 22:26 Explaining liquidation preference mechanicsBenedict clarifies how corporate structure terms like 3x liquidation preferences mean headline valuation figures in press releases distort actual economic reality.
The host holds their own ▶ 11:15 Institutional mutual fund pressure analysisScott demonstrates high domain expertise by explaining how mutual funds like Fidelity and T. Rowe Price are forced into private late-stage rounds to beat S&P 500 benchmarks given flat revenue at public incumbents.
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 |
|---|---|---|---|---|---|---|
| Contextualizing Tech Market Data and Historical Comparisons | 5 | 3 | 1 | 1 | Scott sets up the context of the study and contextualizes $50 billion headlines like Uber against past bubble metrics. Benedict shares historical perspective on sovereign wealth fund orders during the dot-com era in a collaborative tone. | |
| Challenges and Methodology in Venture Data Collection | 4 | 4 | 1 | 1 | Morgan details the difficulties of compiling reliable historical venture datasets across public and federal sources. Benedict adds nuance regarding the lack of public financial disclosures for private tech companies. | |
| Debunking the Public Tech Market Bubble Myth | 5 | 6 | 1 | 1 | Benedict demonstrates that public tech market metrics and PE ratios show no bubble relative to user growth and internet revenue since 1999. Scott accurately synthesizes the macroeconomic argument regarding tech's expanding economic share without out-of-whack valuations. | |
| The Rise of Late-Stage Growth Rounds and Institutional Capital | 8 | 2 | 1 | 2 | Scott takes the lead as expert when prompted by Benedict, delivering a detailed breakdown of mutual fund benchmark pressures. He explains how flat revenues at public incumbents like IBM force mutual funds into late-stage private rounds to find growth. | |
| Defining Quasi-IPOs and Setting Funding Thresholds | 6 | 5 | 4 | 4 | Benedict politely challenges the methodology behind setting a fixed $40 million threshold for quasi-IPOs due to price inflation over time. Scott and Morgan defend the analytical framework by explaining that looking at stacked funding holistically negates arbitrary threshold distortion. | |
| Analyzing Funding Distribution by Company Age Cohorts | 7 | 6 | 2 | 2 | Benedict highlights how 55 percent of funding went to young startups during the dot-com bubble compared to 20 percent today. Scott adds crucial expertise by comparing the $150 million plus revenues of modern IPOs with $12 million revenue dot-com IPOs. | |
| The Reality of Seed-Stage Proliferation and Failure Risk | 7 | 5 | 2 | 2 | Benedict explains that while seed volume has exploded, it represents only 5 percent of total capital, creating much smaller fallout craters upon failure. Scott highlights an extreme hypothetical calculation showing Facebook needing a $50 trillion valuation to match Microsoft's public growth path. | |
| Liquidation Structures and Private Market Valuation Mechanics | 6 | 6 | 1 | 1 | Benedict educates on how structural deal terms like liquidation preferences alter true private valuations compared to headline figures. Scott validates the point and extends the idea by analyzing multi-year forecasting risk and market discontinuity. | |
| The Mobile Platform Shift and Expanded Industry Addressable Markets | 6 | 7 | 1 | 1 | Benedict details the massive shift from 1.5 billion PCs to 5 billion mobile devices, using WhatsApp's scale to illustrate expanded market opportunities. Scott connects this massive market expansion to why companies choose to stay private longer to invest heavily in R&D. | |
| Future Liquidity Mechanisms, Secondary Markets, and Podcast Conclusion | 7 | 5 | 2 | 2 | Scott outlines potential future liquidity solutions including secondary trading markets for early investors. Benedict humorously points out that standardizing secondary market trading simply describes a public stock exchange. |
Statements from this episode (20)
Evans: Sovereign wealth funds ordered 3x IPO free float in dot-com bubble
“I remember floating a company for which a Middle Eastern sovereign wealth fund put in an order for the whole of the free float with us and each of the two other banks on the deal, so they ordered three times the entire number of shares on the offer, and I reme…”
Evans: Outsiders cannot evaluate $1B private valuations without financial disclosures
“But if a company does a private round, Add a valuation of a billion dollars. You don't know what any of the financials look like. And so it's too easy sitting on the outside to say, well, that's a good run, but that's a bad number. You're actually, to be corre…”
Evans: Global internet population grew from 400M in 2000 to 3B
“There were four hundred million people online in 2000, and there are three billion people online now.”
Evans: US online ad and e-commerce revenue grew to $350B
“Revenue in the U.S. From online advertising and from e-commerce has gone from, I think, something like fifty billion adjusted for inflation in 99 to three hundred and fifty billion now.”
Evans: Public tech companies are not in a valuation bubble
“There is no bubble. There's no valuation. There's no inflated valuations in public companies.”
Evans: Tech companies now IPO too late for public investors
“And it used to be that they go public early on the curve, and there's way more growth to come, and now they're going public when they're almost at the end of the curve, and so if you buy it in the IPA, well, you've kind of got all it's ever going to be.”
Cooper: Mutual funds must buy late-stage private assets to beat benchmarks
“I'm Fidelity, or I'm Wellington, or I'm, you know, T. Rowe Price. I've got to be able to beat my S&P 500 benchmark. I can't do that by buying, you know, kind of large cap incumbents in the public market. And so an option for me to actually buy growth is go dee…”
Bender: Historical tech IPO transaction lower bound was $35M to $40M
“The lower bound of what come, what technology companies have IPO'd at with regarding to transaction size is roughly, you know, 35 to forty million dollars.”
Evans: 55% of dot-com bubble VC went to companies under two years
“55% of all the money in the bubble was going to companies that were less than two years old.”
Cooper: Modern tech IPOs have $150M+ revenue versus $12M in 1999
“Coupled with four and a half year time to IPO for a company, so you've got kind of massive risk both on the public markets and the private markets, whereas now at least we have kind of much better distribution of funding, as you talked about, kind of only 20% …”
Evans: Seed round volume grew 7x but remains a fraction of VC
“So one of the numbers we came out with is that the number of one to two million dollar rounds has gone up by over seven times in the last decade, but actually the amount of money has gone up much less. So it's still only about a billion dollars in 2014 went in…”
Evans: Startup failure costs $1M today versus $40M in 2000
“In 2000, if that failed, that was 50 to a hundred people, and 20, 30, forty million dollars gone. Today, exactly the same product. Is a hundred grand, 500 grand, a million dollars, three, four, five people who are out trying to get a good job at Google and Fac…”
Cooper: Structural market shift concentrates tech returns among private investors
“It does illustrate, I think, a longer-term structural change, which is that the returns to many of these companies, you know, to the extent there are returns that can be much more likely concentrated among the private investor class versus the public investor …”
Evans: Deal structure distorts headline private valuations compared to public markets
“When you put money into a private company, on the other hand, particularly at these late, with these late stage deals, you have a bunch of what tends euphemistically to be called a structure. Around it, which means you have things like liquidity preferences, a…”
Cooper: Discontinuous private markets force investors to price multi-year execution risk
“Private markets are discontinuous, right, which is there are, you know, unlike a trade, a public trading market where there is a price, obviously, that's published on a, you know, entirely throughout the day and overnight, part of what people are doing when th…”
Evans: Mobile shift expands computing market from 1.5B PCs to 5B smartphones
“We're going through a kind of generational shift from the PC being the dominant computing platform to mobile being the dominant computing platform. And that comes with it a shift from there being about one and a half billion PCs on earth to four or five billio…”
Evans: WhatsApp processes 50% more messages than global SMS with 40 staff
“WhatsApp going to seven or eight hundred million users with a team of 30 or 40 people, and WhatsApp doing 50% more SMSs than the entire global telecom system, sort of 50% more messages than the entire global SMS system with 30 or 40 people”
Evans: Modern tech market ceilings expanded 100x over prior generations
“The opportunity that would have topped out at a half billion dollar company 15 years ago is now topping out at a fifty billion dollar company. You know, the scale of the business that it's possible to raise is so much bigger, and therefore the hyper growth per…”
Cooper: Tech corporate M&A is surprisingly weak given incumbent cash balances
“I would have expected at this stage of the cycle to have a more robust M&A environment, which, you know, we've talked about in prior posts and others about, you know, whether it's activist shareholders or other things that potentially are making it more diffic…”
Cooper: Secondary trading markets will emerge to supply VC liquidity
“I think the other thing that, you know, is potentially likely to happen over the next several years is potentially the establishment of a more, you know, fundamental secondary trading market for not just employees, which we see today, but potentially also earl…”