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Sapphire Ventures On IPO Climate, ICOs And Why Some Don’t Need To Go Public

Jai Das, co-founder and managing director at Palo Alto-based Sapphire Ventures, has been involved in a number of tech IPOs since starting with Intel Capital at the end of the dotcom boom.

Some of the recent ones he was involved with last year were San Jose-based Nutanix Inc. (NASDAQ:NTNX), San Francisco-based Mulesoft Inc. (NYSE:MULE) and Irvine-based Alteryx Inc. (NYSE:AYX).

In the following TechFlash Q&A, Das talks about Silicon Valley’s ongoing IPO slump, alternative methods of going public and why he thinks some consumer-oriented businesses like Spotify, Airbnb and Uber don’t really need to do a traditional IPO.

This Q&A has been edited for length and clarity.

It seems IPOs are up globally, but not so much here in the Bay Area. Why?

Well, first of all, when you look at IPOs, you have to separate the consumer internet IPOs from the enterprise-oriented IPOs. People put all tech IPOs in a bucket, but they really are different in the way they go to market and become a public company.

Companies like Uber and Airbnb and Spotify don’t really need to go public. They have ample capital and they have huge brands that they don’t need to create with an IPO.

Enterprise-oriented companies that sell software and products to other enterprises sometimes need to go public because their customers will not buy from them unless they’re a public company and the CFO who is buying the product can see their financials.

For a lot of enterprise-oriented companies, the big reason for doing an IPO is really to create a brand among their customers. Also, they don’t always have as much capital available to them — not in the same way that consumer Internet companies do. Going public can help by giving them the stock that they can then use for an acquisition.

My gut says that this year you probably will have a little bit more of the enterprise-oriented IPOs going out. We know of several that are already on file. The question is how market volatility may affect that. I would say there’s a bunch of them that will come out in the next couple of months.

Do you think the recent market dips are going to be a problem?

It’s going to be interesting. I think the recent up and down that has happened was partly driven by algorithmic trading. It’s not really people trading.

The real question is whether the potential people who buy an IPO are really concerned. Are they going to participate? They may not get the kind of multiples on their investment that they would have expected, but a lot of public investors still have a lot of cash. They’re still looking for growth and there is not that much else available to invest in.

What do you think of some of the alternative ways people are thinking about using to go public? Spotify is doing a direct listing. Others are raising money for blank check companies that will take companies public through a buyout.

If you have a great brand like Spotify, Airbnb or Uber, a direct listing can absolutely work. They don’t need a bank. Consumer Internet companies with great brands will have no problem with that because it’s easy to understand their business model.

But laypeople don’t understand an enterprise software company that is selling, say, hyperconverged infrastructure like Nutanix, or an enterprise analytics platform like Alteryx. They really have to have a banker who can go and talk to the potential investors and explain what it is.

I think you will see more and more consumer companies thinking about doing something like what Spotify is doing, but I don’t think the enterprise-oriented companies will go that route.

What do you make of the boom in raising money last year through initial coin offerings that sold cryptocurrency tokens instead of giving investors equity? Do you think that will continue after the steep correction recently in the crypto markets?

A lot of entrepreneurs would love to have an ICO. Why wouldn’t you? It’s almost like getting free money. There’s no regulations. There’s no government. It may not last forever though because there is talk of regulating ICOs.

I think that people who want to build businesses for the long term are also thinking of the downside of doing an ICO. If it’s not successful, that might bring bad publicity and I think that is preventing some people from just jumping on the bandwagon.

But there is still a tremendous amount of interest and I don’t think ICOs are going away. Over time, they will be just another form of raising capital.

Governments around the world appear to be taking a much more critical look at crypto in general. Peter Thiel came up with one of his little aphorisms this month where he said, “Crypto is Libertarian, and AI (artificial intelligence) is Communist.” Because crypto is so distributed and hard to regulate, it was something that countries like China and some other parts of the world want to keep a close rein on it and are very wary of it. I’m wondering what impact that might have in the long run.

The governments are having a hard time putting a control on the cryptocurrencies. They want to regulate them to some extent, because there’s a lot of fraud and you really don’t know who’s buying them. There can be money laundering and all of that kind of stuff going on.

But I think that the concept of crypto will be adopted by some countries. They may even create a currency given by a central bank of a country that’s based on blockchain. I think that will happen in the next four to five years, if not sooner.

I think there are some Eastern European countries already trying to do it. So that is going to happen. It’s also likely that crypto will probably get regulated or banned by a lot of countries, including probably the U.S., at some point.

There’s a lot of things to overcome with blockchain. It’s not fast and you need lots of computers to create it. But those things will get solved.

Sapphire has a long history of investing in enterprise tech startups but you also invest in consumer-focused companies, right? What are you looking for from that side of tech?

We have invested in companies like Sun Basket and FitBit, and we are invested in a company called Livongo Health. Some of the consumer companies like FitBit and Livongo also sell to enterprise customers, with things like wellness programs, so that is an easy way for us to get in. But we are also going to look at where there’s new points of content being created, maybe around e-gaming and things like that.

And we’ll at some point also increase the DNA of the team to be able to kind of focus on these areas.

Is there a thesis that connects the types of consumer companies that you’re looking for?

No. You know, unfortunately, we are just like any other investor – we just look at numbers and see the trends. On the consumer Internet side, the trends that you look for don’t always have dollar signs attached to them, and that’s why we need DNA in the team that does that.

But we don’t really have any particular thesis. Since we are later-stage investors, we don’t tend to have that many theses other than saying, hey, that company is growing rapidly and has great traction.

Your latest fund was around $1 billion. In today’s landscape, with people raising $100 billion funds and $8 billion funds, how does that affect you?

That is a very good question. There are a couple of things to think about. One is that we want to really live and die by the return on investment and not on management fees. One of the dirty secrets is that the more money you raise, the more management fees you get.

Another thing is as you grow the size of the funds, to generate a 2X or 2 1/2X on that fund is harder and harder. So we have this theory that we will stay relatively around $1 billion or $2 billion. That’s kind of the right size for a growth-oriented fund.

I think, at some point, if you have a really large fund, your criteria kind of goes away in trying to make a return.

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