The Curious Case of the OpenTable IPO

There are the things that you carefully plan when it comes to an IPO — the who (the bankers, the desired institutional investors); the what (the pricing, the allocations); and the when (are we ready? is this a good public business?). But then there are the things that you don’t plan: like the worst financial crisis since the Great Depression… as happened before the OpenTable IPO. There’s even a case study about it.

And so in this episode of the a16z Podcast, we delve into those lessons learned and go behind the scenes with the then-CEO of the company — now general partner Jeff Jordan — and with the then-banker on the deal, J.D. Moriarty (formerly head Managing Director and Head of Equity Capital Markets at Bank of America Merrill Lynch), in conversation with Sonal Chokshi. Is there really such a thing as an ideal timing window?

Beyond the transactional aspects of the IPO, which relationships matter and why? And then how does the art and science of pricing (from the allocations to the “pop”) play here, especially when it comes to taking a long-term view for the company? What are the subtle, non-obvious things entrepreneurs can do — from building a “soft track record” of results to providing the right “guidance” (or rather, communication if not guidance per se) to the market? And finally, who at the company should be involved… and how much should the rest of the company know/ be involved? In many ways, observes Jordan — who got swine flu while on the road to the OpenTable IPO — “your life is not your own” when you’re on the road, literally. But knowing much of this can help smooth the way.

Show Notes

• The history of the OpenTable IPO [0:47]
• A discussion of pricing [10:09] and details around the IPO process behind the scenes [16:20], including mistakes along the way [21:02]
• Key takeaways from the IPO experience and advice for others [24:00]

Transcript

Sonal: Hi, everyone. Welcome to the “a16z Podcast.” I’m Sonal. Today we’re doing one of our war stories podcasts, where we have founders, makers, and operators share the story behind the story. And, joining us for this episode, we have a16z general partner, Jeff Jordan, who was president of PayPal at eBay before going to online restaurant reservation network, OpenTable, where, as the CEO, he oversaw the company going public.

We’re gonna talk about all that in this episode, focusing on everything from the relationship-building involved on the road to IPO, and the nuances of pricing and allocations, to the broader market context, and some concrete advice for entrepreneurs. And, last but not least, we have special guest J.D. Moriarty joining this conversation. He’s now SVP of corp dev at LendingTree, but was formerly managing director and head of equity capital markets at Bank of America, Merrill Lynch.

Background on the OpenTable IPO

Jeff: J.D. was the lead banker, the capital markets expert from Merrill Lynch on the OpenTable IPO. He and Harry Wagner of Allen & Company were the key — two keys who basically helped execute a deal in about the worst capital market situation in late…

Sonal: When was that?

Jeff: Late 2008, early 2009. A venture-backed technology firm had not gone public in a couple of years. The concern was that the window was closed, bricked-over, and the only exit path for tech companies was going to be M&A from then on. We ended up pricing at the nadir of the worst financial crisis since the Great Depression.

J.D.: I used to talk about 200 IPOs a year, and the only IPO prior to OpenTable in 2009 was a company called Mead Johnson, so a very defensive company, that type of thing that should go out in 2009 in consumer products.

Jeff.: They made, like, the floor wax or something right?

J.D: Yeah, exactly.

Sonal: Very far from this weird thing called OpenTable, which is not even a product you can physically touch.

J.D.: Correct. And so, you know, people tend to look at when an IPO prices — and you have to recognize that most companies take six to eight months to get there. From our org meeting to kick off the process where the bankers and the management team begin the process of preparation, our pricing was about eight months.

Sonal: I have to ask a really dumb question. Why do you need a bank? Like, why can’t you just directly IPO, bluntly?

J.D.: Actually, at one point, Jeff asked me early in the process, “Hey, why do we need to go see all these investors? Can’t we just do a $35 million IPO to four or five folks?” I think the way to think about the IPO process is, you’re not just doing the IPO. You have to take a two-year view towards, how do we get this to be a stable public company that can grow — and achieve not only the company’s goals, but the goals of the early investors, with regard to monetization over a long period of time? And oftentimes, as this deal showed, those goals are different.

Jeff: It is an interesting observation is — going public does not create liquidity. All the insiders cannot trade when you go public.

Sonal: Why is that?

J.D.: Well, a standard expectation [is] that the new public investors — taking a chance on this new company — is a 180-day lock up. That is kind of a market standard.

Sonal: The lock up period, right.

J.D.: There are certainly exceptions to that. And we can talk about things like the IPO discount, etc. But in order for somebody to take the risk of a newly public company, they expect certain things. Now, there are plenty of IPOs that have secondary shares, don’t misunderstand. But the early investors are locking up for 180 days. There is a period of time when the right way to think about it is, your true monetization is really down the road.

Jeff: Yeah. And so, if when the 180-day lockup expires, all the insiders and all the management team run to the floor of the stock exchange and try to sell all their stock, all the third-party — all the owners will disappear too. Because if the insiders don’t have any confidence in it, then why should I own it?

Sonal: I mean, just to give a little bit of a counterpoint, though. Obviously, market conditions change. If the company hasn’t gone public in, like, 10 years, and you have to get some liquidity out — or you’re a founder who has to give up a little bit of shares in the secondary market in order to, you know, loosen up your…

Jeff: We are in support of that, but if they try to get full liquidity on day 181, the stock price is gonna be, like, $2.

Sonal: Yeah, it’s the reality of how the market works.

J.D.: Yeah. We’re talking about the technicals of, how does that stock get to market? There’s another part of this, which is simply, when do you time the IPO? Fundamentally, we encourage people to — don’t think about the market conditions today. Think about, is this a good public business? And you have to answer that question first. And for most companies, you’re never gonna time the market.

Sonal: You can’t time the market because it’s clearly a long process. But then why do people talk so much about there being certain windows, in which there is an ideal time that, you know — like, a window can open and shut, and this is on a global scale of 10 years, 15 years, etc.

J.D.: This was actually — there’s a case on the OpenTable IPO. It’s at Stanford Business School now, taught in the “Formation of New Ventures” class. Andy Rachleff wrote it. And it basically says, should OpenTable go public now? The analysis said, there are windows in the IPOs. Yeah, they kind of come and go, and the best companies often open windows that were then previously closed.

Sonal: Interesting.

J.D.: So, the best companies can go out whenever they want. The good companies typically wanna wait for — till the investors are feeling good. The mediocre and bad companies wanna get out whenever they can. And what happens — when the window opens, the early people to go out — typically perform very well as public company stocks. And then, as more time goes by, and you get towards the end of a window, the companies that then are going out — kind of rushing, “I gotta get out or I’m going to miss it” — are typically not the highest quality companies, and they tend to underperform the market. One of the things that had us go was, okay, we think we’re a good company and we think we can perform in the market. We wanted to meet bankers ahead of time.

Sonal: And how far in advance did you do that?

J.D.: We started about a year and a half out or something like that.

Sonal: A year and a half?

J.D.: Just surgically, just with the bankers. We kind of orchestrated into one or two conversations. But before we did the formal bake off, where you select your lead bank — and all due respect, Merrill at the time, they were, you know — they were not the top of the pyramid, in terms of tech bankers. So we — because we were the only IPO, we had every bank [that] wanted to do it.

Sonal: So how do you pick?

J.D.: Goldman, Morgan, you know, just down the list…

Sonal: Yes, so how do you pick them?

J.D.: We got to know the people at the firm. And we put particular value in the capital markets function, because that is the function that interacts between the company and the investors. We wanted someone who we thought understood our business well, and we thought could represent our business well to investors.

Sonal: And by investors, just for clarity, you mean investors like institutional investors?

J.D.: These are institutional investors who invest in public securities. Typically, the largest ones are mutual funds, managing billions and, you know, billions of dollars. We were looking for tentpole investors who would go for a while, and we’d meet with them every six months or so. And they got to know the business. They got to know us. They got to — we’d developed a soft track record. Because they’d say at the first meeting, “What are you gonna do in revenue this year?” “Oh, we’re gonna do $70 million.” Then you come back six months later, “What did you do?” And we said, “We did $80 million.”

Sonal: Oh, you mean, like a soft track record of delivering results. It’s almost like quarterly reportings.

J.D.: Of performance, yeah.

Sonal: But they’re, like, informal — verbally.

J.D.: Yeah. Am I the kind of person who overhypes and under delivers? Or do I under hype and over deliver? Or do I tell them what’s good about the business and what’s bad about the business?

Sonal: That is such a golden nugget, because it’s invisible to the world. When you see the outcome — the process behind the outcome is invisible, which is the whole reason we’re doing this. I didn’t know that. Why does that relationship that the capital markets expertise matters so much in the lead up to the IPO?

Jeff: We wanted it to be not a black box. One of the things other CEOs had told me who had done IPOs when I reached out, it’s like — somehow, you know, you do this roadshow, you get to the pricing meeting. They say, okay, we recommend the price is this, and then the shares just magically disappear. And we really cared about who got the shares. So, we wanted to have a vote in who got it, who got the shares.

And, because it was such a tiny offering, we wanted to concentrate the shares in that shortlist at a much higher level than what’s typical at the pricing meeting. You know, we — J.D. shared the spreadsheet, and we’re like, “No, no, no, we have to give these guys 10 times more.” And he’s going, “No, no, no.”

Sonal: Wait, so who voted in the — it was like the, you know, the bank, you guys thought…

J.D.: Well, typically, to Merrill’s credit, typically, the bank pretty much decides. They engaged in a dialogue with us. And that’s probably the biggest thing where we met in the middle, said, “Okay, I understand your rationale.” So, we had this very constructive dialogue around that. In many IPOs, that dialogue does not happen.

Sonal: That is such an artful, behind-the-scenes orchestration.

J.D.: It’s all a hangover from the ’99, 2000 period, when those allocations were truly a black box. And somebody said to me at one point, is there any innovation in the IPO market? And I said, the biggest change over the last 10 years is that it’s become more transparent. And that is more the norm today — that there’s genuine conversation around it. Now, I’ve seen the other side of it, which is a management team says, “No, it’s gonna be like this.” Ultimately, their vote is the vote that matters.

But I’ve seen scenarios where they make mistakes there too. What the OpenTable team did well is actually invest in not just the bankers, but actually the investors. The thought process was, the better they know our business. These are the people who are gonna have skin in the game and really own enough of our stock.

Sonal: Hold the tent up.

J.D.: And know where the business can go and hold the tent up in a difficult time. And so, Jeff essentially invested in that process, and I think it was critical. One of the debates we had was size of IPO. 

Sonal: Like, the amount of the initial public offering.

Jeff: The proceeds, yeah. And so we spend a lot of time doing analytics for companies on how big does your IPO need to be? What does your market cap need to be? How big do the proceeds need to be? And if you — if you just, sort of, look, it doesn’t pass the common sense test, right? Why does some portfolio manager at Fidelity, who manages billions and billions of dollars, invest in the OpenTable IPO, when the initial proceeds are only gonna be $37 million?

Now, ultimately, because it went well, we ended up raising just shy of $70 million in the IPO. And then, in September, we ended up doing a follow-on transaction that was $210 million. But the point was, why is it worth it to Fidelity, Morgan Stanley investment managers, T. Rowe Price.

Sonal: Yeah, so why is that? I wanna know.

J.D.: Because if you — if you invest the time to let them see where the business can go over time, they’re gonna leg into their position over time. You know, if we had been — we were in a lousy market. One expression we always use is, “In difficult times, our investor clients focus on the things they own, not those things that we wanna show them.”

Sonal: What do you mean by that?

J.D.: Meaning, new ideas. So, it’s just a risk curve issue. And Jeff made the point about great companies being able to go out in any market. Good and okay companies need to pay more attention to the investor risk curve.

The question of pricing

Sonal: Back to the notion of pricing. We had Lawrence Levy, who is a former CFO of Pixar on this podcast, and he’s the one who helped Steve Jobs take Pixar public. And one of the things that he talked about — how it was the biggest fight between him and Steve. And the reason was because, of course, he wanted to go high — because he wanted a big-ass IPO, like Netscape at the time. And he was on the heels of that. And Lawrence was like, “No, no, you wanna deliver some returns for the investors.” And there was sort of this dance back and forth. How did you guys sort of do that dance?

Jeff: Yeah. A lot of discussion.

Sonal: Is that a euphemism for fighting?

Jeff: No, no. There’s a lot of discussion. You know, our at IPO market cap was $450 million, roughly. Raising proceeds of just under $70 million.

Sonal: The IPO size was $70 million.

Jeff: Now, I’ll be the first to admit, did it trade, kind of, too well? Yes.

Sonal: So why is it bad if it trades too well?

Jeff: There’s too much of a pop.

J.D.: It means the company didn’t get as much money as they could have if they had a crystal ball and knew what…

Sonal: Right, because the whole point is to get capital to continue growing and building the business, I get it.

J.D.: Correct. You don’t wanna leave a lot of money on the table. Now to be clear, when you end up floating a small amount of the business, you kind of compound this problem.

Sonal: Why is that?

J.D.: Go back to the point around the Fidelity’s and T. Rowe’s needing larger position sizes — they recognize that the two events that they care about are the distribution of shares at IPO, the allocations which we went back and forth on, and the first day of trading. And then these stocks become very, very illiquid.

Sonal: They’re in the public market, how do they become illiquid?

J.D.: Because the float is only $70 million.

Jeff: And we convinced people that it was an interesting stock to buy and hold. That meant we had no daily trading volume.

J.D.: So, if the stock was trading around $30 a share, there were days when it was trading, literally, 2,000 shares. 2,500 shares.

Sonal: Not many people moving money.

J.D.: Correct. And so, you can get these huge gaps. So it did trade “too well.” That’s a balance that we’re always trying to strike.

Sonal: Yeah, so from your perspective, Jeff.

Jeff: Yeah, I know. So, when we — the original documents had a $12 to $14 price range. I think we updated it to $16 to $18 over the course of the roadshow, because the roadshow was going well. The first two investors said, “I want a full allocation.” So, it quickly became a hot IPO. We ended up being oversubscribed, 20 to 1, 25 to 1, something like that. So, we probably could have run it up into the mid-20s easily.

Sonal: But you guys priced it at…

Jeff: We talked to the market to 22, and we priced at 20. And most management teams — board CEOs are gonna grasp for that last dollar. I think the OpenTable team collectively was very thoughtful about the fact that, this is just the IPO. I care about the next two years.

Sonal: Did you guys — tell me the truth. Did you guys have, like, a magic number in your head before you start those pricing discussions? Like, did you think in your head, you know what, when I go to sleep at night, I want $25 when this thing goes on the market?

J.D.: No, we didn’t, you didn’t. Part of our strategy was, we’re gonna do a teeny, little IPO. And then if it went well, we were gonna do a pretty big secondary. And so, the company was much more focused on “make the secondary successful” than it was “make the IPO successful.” Part of making the secondary offering successful was, you needed a couple of deep pocket people in the IPO, even though it was a teeny, little IPO. So, one of our leading shareholders ended up being whittled down off of Fidelity.

And so, when we say, “Will, invest out of your $10 billion — whatever it is — fund, $4 million. And he’s like, ‘I don’t have the time to read your earnings release at that level.’” But we convinced him to come in, because then, in the secondary, he was able to back up the truck, and he got what he wanted, which was a larger ownership allocation. His IPO allocation was, what — 5% of 70, so $4 million, some number like that.

Jeff: Yeah, and one of the things that made the add-on so much easier is because everybody knew that we could have priced well above $20. When we priced at $20 that, I think, built some real goodwill between the management team and the investors. 

Sonal: That you guys are willing to be thoughtful about the long term.

J.D.: And we ended up optimizing for who got the shares, not the price they got the shares at. And I would do that again in a second. I’d advise management teams to do it like crazy, because as a CEO managing a public company, you don’t want people who are in and out on momentum, hot money — because you’re spending, then, all your time literally marketing to new investors, “Please buy my shares.”

There are multiple reasons to want a small — from my perspective, to want a small handful of tentpole investors who buy and hold your stock. One is, they buy and hold. The other is, it just makes your life easier. I mean just…

Sonal: Because you’re only, like, talking to a pool of four to five people?

J.D.: Yeah, I’ve got a handful of owners, and most of them — I actually said, “How do you want me to work with you? You own a lot of my shares. Do you want me to call you after every earnings call?” And they’re like, “No. I’ll listen to the call.” Almost all of them were just like, “Nope, I’ll reach out if I need anything. Thank you very much.”

Jeff: In the first year and a half, there was a period where we dealt with the momentum crowd coming into the stock.

J.D.: Late.

Jeff.: And it was challenging.

J.D: That sucked.

Jeff.: Because we essentially went from, you know, the projected — keep in mind, when we’d gone public, in 2009, the projected top line growth in the business was 20%, from an analyst perspective, just under 16% to 20% depending on what the analyst — it was always a high margin business. And then it was when you went to 40% top line and 40% margin, that’s when every momentum investor came in. And so, that was one of the things that I think became more challenging to manage.

Sonal: And momentum investors, you mean, like hedge fund people?

Jeff: Not just hedge funds, but in many cases, it is. That’s a broad stroke. Ultimately, they’re investors who just care that you’re gonna beat the quarter. 

Sonal: Yeah.

J.D.: I mean, it was so interesting, because there were a handful of investors, before the IPO, who were tracking the business. So, I was told that Fidelity — Will does not do IPO pitch meetings. Will walks into the meeting and spent the whole 60 minutes there. Dennis Lynch at Morgan Stanley does not do IPO meetings. Dennis was early. He was waiting for us when we got there. You’ve got those who you’re like, “Okay, they’ve done their homework, they get it, network effects, everything else.” Dennis can tell you what three private companies he wants an IPO allocation in today, for five years from now.

Sonal: Because they have a strategy, they think about it.

Jeff: They have a strategy. The other guys, you’ve just blown away six quarters and said, “Oh, my god, I need to latch on to that sucker.”

Sonal: Yeah, get me into that.

Jeff: It’s like, “Where were you when it was $20? You’re buying at $110 now.” They’re the guy that will jump in, but they also jump out. That’s when stocks freefall.

Behind-the-scenes IPO process

Sonal: Tell me about any behind-the-scenes fights or discussions that you’ve had with your team. Like, were there disagreements? I mean, you might — you’re saying this, but were there parts where you guys were like, “We can’t agree on the pricing that these guys are discussing with us. We can’t agree on the timing.”

J.D.: Not a ton. The board gets involved at a few steps along the way. One is, I involve them in the selection of bankers. They were there.

Sonal: Is that a best practice, that you advise people should actually involve their board in that?

J.D.: I did. We did a bake-off. We had, like, six people, and we tried to do “wisdom of the crowd.” No one was allowed to say who they liked and didn’t like, and we got a ranking one to six. And it was unanimous. We did a subgroup that got — went deeper than the rest of the board, the IPO committee. Then the board also gets involved in things like, okay — do you launch the roadshow? And what’s the price? Almost all of the decisions — the process is being run by the management team. And so, in our case, it was CFO, Matt Roberts, and myself. And we insulated the entire rest of the company from it.

Sonal: Wait, so you did not involve the rest of the company? It’s just you guys?

J.D.: No, they’re out there back in San Francisco building the business.

Sonal: Building product.

J.D.: We’re spending two and a half weeks running around the country.

Sonal: Is that typical? Is it the CEO and the CFO that you typically want in the room?

Jeff: Yeah. And in fact, one of the mistakes that we see companies make periodically is one, building employee expectations towards an IPO too early. And two, involving too many people. If you think about it, one of the things that larger companies, private equity-backed companies tend to do well, is they value the option value, they get themselves ready to go. But guess what? They’ve also got more resources at the company to do that.

Sonal: Wait, can you break down what you mean by option value? That’s a very loaded — those are two very loaded phrases in our business.

Jeff: Sorry, the preparation, the preparation phase. And with venture-backed companies, I think you have to be mindful — and the boards are mindful of the fact — of the distraction that you can create through the IPO process. And so, what Jeff and Matt did was say, “You know what, this is going to be borne by us. Everybody else, do their job.” Everybody else was focused on doing their job and managing the business. Go back to when we were talking about the odds of it being a lousy market, that we might say, “You know what, this is not our year to go.” We’re there. So, it would have been a huge distraction.

Sonal: One of the things we haven’t talked about is that, you know, in a lot of cases, the IPOs involve novel technologies that are not familiar to the market, and you’re essentially selling a new way of doing things. Now, it’s very familiar to us, to actually book our reservations online. But how do you think about involving other key, like, technical people to help sort of educate, or is that the CEO or the CFO? Don’t you feel frustrated as a founder, that my CFO can’t represent this that well?

J.D.: I had a very good CFO. Matt Roberts did a fantastic job. He actually was the one who orchestrated almost all the IPO till the roadshow. But if your CFO can’t tell the story, you need a new CFO.

Sonal: Well, that’s why I’m asking, you’re honestly, when I think of a CFO — no offense to all the CFOs out there — I think of number people who are just sitting there with, like, spreadsheets.

J.D.: Different CFOs can have different styles. The investor has to trust them. And then that’s what the investor is looking at. “Is the CFO telling me the truth, know what’s going on in the business?” And how does that play?

Sonal: Is there one thing that you’re like — I want every CFO to have this, from both of your perspectives?

J.D.: Integrity, attention to detail.

Sonal: That too.

Jeff: That’s true.

Sonal: The market wins that too. My mom with her, like, 15 Snapchat shares wants that too. I mean, we all want that.

Jeff: We often ran into management teams that wanted to have too many people on the road. Three people is, sort of, the outer number, and…

Sonal: Who is the third, by the way, when it is not the CFO and the CEO?

Jeff: To your point about — it depends on the business. To your point around technology. Periodically, if it’s a highly technical business, you might suggest you have that person there for Q&A, but you don’t want to have the distraction. You wanna have dialogue. Most investors expect CEO, CFO, dialogue. So when you get to the CFO question, we can tell which teams are gonna need a lot of preparation, and it’s seldom both CEO and CFO. And then we just — we hit him with questions. These are the types of questions you’re gonna…

J.D.: It was the CEO, in my case. He just doesn’t wanna say it loud here. You’re in a different city every night. You’re doing, like, seven meetings a day, hour-long meetings a day. And the thing they stress more than anything is — give exactly the same presentation, and answer every question exactly the same, because of regulation, FD, fair disclosure. Literally, they said no, no, no, don’t be playing around with giving that slide two different ways. You give that slide one way.

Sonal: You’re like a robot.

Jeff: We did it 42 times in, like, two weeks.

Sonal: Oh my god.

J.D.: All in different cities.

Jeff: You get really tired of hearing your own voice.

Sonal: Yeah, I can imagine.

Jeff: And if you don’t, I’m not sure I wanna work with you.

J.D.: No, it’s unbelievable. One really helpful thing is, the OpenTable core customer included bankers living in New York, Boston. Earlier in my career at eBay, none of those owners would use eBay.

Sonal: Interesting.

J.D.: Unless they happen to be collecting something because, you know, time is much more valuable to me than money, and e-Bay was a cost-saving thing.

Sonal: It strikes me that that’s actually one of the challenges, because OpenTable, then, is a consumer business. It’s one of the challenges of enterprise-facing businesses, and especially SaaS businesses, where the financial model is also not as familiar for people to talk about. 

So, I wanna talk about the bumps in the road now, and the unexpected things that happen. I mean, there’s a lot you’re doing in the road up to the IPO — a lot of prep, clearly. But despite all your hard work, unexpected shit happens.

J.D.: It happens in every one. I wasn’t at eBay at the time, but I believe Amazon launched their auction competitor on — during either the IPO in the secondary, and Yahoo launched their auction competitor on the other one.

Sonal: Oh man.

J.D.: We had two big ones. One is, we got our obligatory patent troll lawsuit. That happened while we were on the road. They wait until you’re on the road, point of maximum leverage.

Sonal: Of course, they do.

J.D.: And file.

Sonal: They can get their money, get you out of the way.

J.D.: So, I get the call, you probably, you are saying, “Oh, by the way, you just got served.” You’re like, no. So that was one. The other one was a little more self-inflicted. And it turned out, no one had done an IPO for a long time, including the SCC, our accountants, and our attorneys. And our attorneys, at the last minute, update the filing, you know, they keep — it’s very formal. They update the filing the night before, and the SCC gets it, and they say this is approved, and you’re ready to sell the next morning. So, after a bottle of wine that night, when you have the price.

Sonal: And you’re, like, relaxing.

J.D.: We’re trading the next morning and I wake up a little early for — like, 3:00 a.m. Yeah, I mean, you’re just wired. Go to the gym. I’m working out, I open up my smartphone and see …

Sonal: Was it a Blackberry at the time?

J.D.: It probably was a Blackberry at the time, because this was 2009. “Offering on hold.”

Sonal: Why? What happened?

J.D.: Turned out the attorneys had — when they did the last turn, had attached the wrong attachments. The SCC approved something…

Sonal: Human error.

J.D.: …that we actually knew was erroneous. And so, if we started trading on an erroneous document, there’s a chance the SCC can say, “No, no, no, you have to unwind all those trades. Go start over.” Now, you’re just like, it’s in every newspaper. The business section in America. We’re going public today. Now we’re not going public.

Sonal: Well, what did you guys do?

J.D.: Our attorneys sort of start — all the attorneys on the deal, just start trying to get the SCC on the phone. And so, we ended up delaying the opening, finally right as the market opened the SCC, “Oh no, you’re blessed again.” And so, then started trading an hour or two later.

Jeff: But we did have a delayed open. We had a significantly delayed open. Not unlike Facebook’s delayed open, just a different outcome.

Sonal: So just, like, 10:00 a.m. instead of 7:00 a.m. kind of a thing.

Jeff: Yeah. If you’re on the New York Stock Exchange, you’ll typically open closer to the 9:30 start, and on NASDAQ, they have a — they always have somewhat delayed windows. We were very delayed.

J.D.: We were very delayed.

Sonal: And that is time — a case where time is literally money. It’s, like, ticking away if you’re not…

J.D.: Yeah. Now you know I’m obsessed with Hamilton.

Sonal: We both are.

J.D.: One song says, he walks the length of the city. They had me show up about a half-hour after trading has started, so I don’t walk into a potential disaster. That’s, like, four or five miles, just through the city. It starts trading well. He goes, you’re in good shape. You can go home. And so, I walked back.

Sonal: Wow, you know what I mean.

J.D.: And then I walked across. And then I was just like, oh my god.

Sonal: What about that whole “ring the bell” thing? Didn’t you guys wanna, like, be there when they’re doing that whole thing?

J.D.: We didn’t end up having it the same — we had delayed.

Jeff: Which, by the way, is the weirdest thing, because it’s a soundstage on Times Square.

Key takeaways and advice

Sonal: That’s amazing. Okay, wrap up and takeaways, relationships matter, timing matters. But, while I understand your earlier point, that you can’t time the market itself, the context — the broader environment — does matter. And how do you, sort of, look at back then — that was 2009, and now, 2017? It’s eight years later? What are some of your views on how IPOs have changed given this context?

J.D.: So, a couple of the things that are big takeaways from the open team have actually been somewhat formalized in the market. And so, one of my big takeaways from this transaction was, what the team did well was invest in the process, be ready to go. They valued the option value of being ready. They invested in that, and then were able to respond to an open window, essentially. The other thing that Jeff highlighted was spending time with the public investors, long before that 45 minutes to an hour-long meeting when you’re on the road.

Well, post the JOBS Act, that second part has been somewhat formalized. You can do that more easily today. It’s called “testing the waters” meetings. Now, some management teams probably place too much value on it. To your point, you weren’t going and meeting with a cast of thousands. You were meeting with a narrow group of believers.

Jeff.: A half dozen. A half dozen.

J.D.: All right. And so, what I tell people is, beyond a certain number you hit diminishing returns. It is particularly helpful for a unique business that you don’t think you can get a full appreciation for in that one-hour meeting. And so, it’s a business-to-business discussion, but have a discussion with your bankers around whether the “testing the waters” meetings have value on a relative scale for you. But that’s something that the market has enabled with the JOBS Act. Layer that into your timing equation.

I think the other piece of advice I’ve given people is, time the IPO for your business and your team — your team, including your board and investors. Don’t time it around the market. Time it around the right time for your business. Think about the scale that you need to be at to be a public company. One of the questions we get is, you know, what market cap is too small? Well, below certain thresholds, we just shrink the number of investors who will buy the deal. And that’s not a good leverage thing for the company.

Sonal: But there are small-cap IPOs out there that are okay?

J.D.: There certainly are.

Sonal: In fact, that seems to be a growing trend in some ways.

J.D.: Yeah, there certainly are. I think that you have to think about — how unique is the business? If there are four public companies that give an investor the same exposure, and three of them are of decent market cap, and you’re going to be the very small one, you better offer something different. OpenTable was certainly unique, and thus, way more leeway from the market.

Jeff: There’s also, I mean, you can go public too early. You can go public too late. And if you want a multiple, you wanna be a growth stock.

Sonal: Why does that matter to be a growth stock?

Jeff: You get a different fundamental valuation and a different set of investors who are willing. If your growing investors can say, “Boy, if they keep that up for five years, look at that envisioned future. That’s wonderful.” You’re not growing, they look at it and say, like, “It ain’t gonna get any better than this.”

Sonal: And it does seem like the best technology companies are like that.

Jeff: Oh, yeah, it’s — you want to have the perception you’re a growth company, which actually means you have to be delivering growth results. And typically, growth rates decline over time. We were in the teens — year over year growth rate, according to the analysts’ models — when we went out. That’s not really a strong growth company. Then we increased growth in the 30%, 40%. That was a growth company. So if you wait too long — but too early, if you’re not ready to be a public company, you can — you know, your business is unpredictable, you know, a bunch of things there. So there is this element of, okay, the biggest timing is from the company’s perspective, not from the market’s perspective.

Sonal: That’s a really great shift in mindset. So, just one quick thing then. You mentioned results. And that is obviously, like, the quarterly results, the earnings calls, and the whole song and dance that goes around that. How do you manage that?

Jeff: So, well, two thoughts, one is on the timing of going out. When you go out, you don’t want to miss the first x quarters — [don’t know] how many x is — but you wanna be highly confident you can exceed the expectations that your investors have. So, I usually counsel CEOs, before they go out, have something in your back pocket. We had two or three initiatives that we tested at small scale, that we knew were gonna work and add to the business. So, I was highly confident.

Sonal: But isn’t there a tension, though, that — of course, you wanna make your numbers and I get that’s important for the market confidence in you as a company. But it’s also very frustrating, because — a criticism people say about IPOs is that, then, you’re now wedded to this ridiculous quarterly measurement of innovation.

Jeff: I think that’s whether you will allow yourself to be or not. The pressure is there to conform to investor expectations. You know, “Oh, my god, I’m gonna miss their number.” That’s the most oft-cited reason for not wanting to be a public company. Look at Jeff Bezos. He’s run the business exactly as he wanted. He told investors exactly how he’s gonna run it. He’s been completely consistent with that. And some of his investors bought in his IPO. They’ve stayed with him, what? 20 years now. And so…

Sonal: I actually heard some statistic just yesterday, because of its anniversary, that some of the people who got the early IPO, they might have only spent, like, $100, and it’s now worth $64,000.

Jeff: So, part of it is, what investors did you recruit? And then how do you communicate with them? So, we had an interesting early question. Do we give guidance? Do you just say, “Next quarter, we think we’re gonna do revenue of x and earnings of y.”

Sonal: Isn’t that what analysts do?

Jeff: Well, analysts do that. But often the company gives a range, and that helps the analysts cue in on the range. If the company doesn’t give it, you’re leaving the analysts to come up with their own numbers. I called — tough question — [should] I give guidance. I called the three largest holders, and I said, “Should I give guidance?” All three said no. I go, “Why?”

Sonal: Why?

Jeff: And they go, “Well, we want you to do what’s right in the strategic long-term interests of the business. If you give guidance, there’s gonna be pressure for you not to do what might be right, with new learning.” And it helped that our business was highly predictable from outside. You know, it’s not one of these, like, did we close the last deal on the last day of the quarter? You know, the diners are being seated by the millions. And so, the law of large numbers kicked in. It was very predictable.

J.D.: With great metrics. Like, you guys invested in explaining the metrics that matter to you as a management team. Periodically, we hear people get this mantra of no guidance, and they interpret it as no communication. They’re two very different things. Right? You were not signing up to a quarterly number. But it was fine because you were giving some much transparency as to what drives the business.

Jeff: Right, they can build their model.

J.D.: They can build their model.

Sonal: Okay, so any last parting thoughts?

Jeff: Taking OpenTable public was one of the most interesting things I have done in my business career. And part of it was I — turns out, in my career, I’d never done a financing. So, for my first financing to be taking OpenTable public, in May 2009, at the depth of the financial crisis.

Sonal: The worst time.

J.D.: It was an amazing learning experience, and there’s a lot of emotion into it. I think I was more exhausted — I ended up with the swine flu at the end of the process.

Sonal: Swine flu. I haven’t heard that phrase in a while. That totally ages that time again.

Jeff: It was the height of the craze on that too. Not only is the whole economy coming to an end, but we’re all gonna die. And so we knew it was a problem. We’re walking around with bottles of Purell. But we shook 400 hands. Your life is not your own.

Sonal: Thank you for joining us in this podcast.

Jeff: Thank you. Thank you, J.D.

J.D.: Thanks, Jeff.

Jeff: It’s good to see you.

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