Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, superluminal blazars, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

In today’s post: The Great IPO Debate: there is a lot of room for improvement in IPOs, but today's direct listings favor VCs and elite private investors while disadvantaging average investors; clothes with built-in energy storage; bowling-ball sized black holes; influencer marketing and authenticity on social networks; designing a compensation scheme for investors to align with client outcomes; and lots more below...

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Stuff about Innovation and Technology
I was back on CNBC’s Squawk Alley this week discussing the long-term upside for Netflix along with the controversial state of the current IPO market and the clash between private and public investors' opinions on valuation and governance. The public markets are open and ready for companies to come public, and like always those companies need to be transparent about their potential paths to profitability so investors can do their analysis and ask the right questions. I also made a brief appearance this week in this article in The Information titled “Troubled IPOs Raise Questions for Future Deals” (which reminded me of this interview I participated in on high private valuations in The Information from way back in 2016).

Speaking of the IPO market, here is my new post, The Great IPO Debate, on the various elements that should go into the process of selecting a traditional, bank-led IPO versus a direct listing. Although a firm like NZS Capital would benefit from more direct listings, I believe in most cases, for the foreseeable future, companies should choose the traditional bank-led route. I also believe there is significant room for improvement in the IPO process and welcome the dialog, debate, and spotlight on this important topic. Here are the main takeaways that I dive into in the post:

• Shedding light on the IPO process is a welcome start to gathering more data and better aligning outcomes for companies, investors, and employees.

• Hundreds of millions of dollars are NOT being left on the table on the day of a traditional IPO. The cost of a traditional banker-led IPO is approximately 2% dilution to existing shareholders, which is less than most growth tech companies issue in equity every year.

• Direct listings make sense for a very small number of special situations that have already raised excess capital, typically at higher levels of dilution.

• Direct listings are not as democratic as they might appear, and tend to advantage a small number of elite late-stage VC and public market/strategic investors.

• Management teams miss out on a lot of constructive dialog with future public investing partners if they forego a traditional IPO roadshow.

• Traditional banker-led IPOs have lots of room for improvement: all constituents should be allowed to sell on an IPO and lockups should be eliminated or managed differently; commissions could be lower; greenshoes could be eliminated; share allocations could be more transparently auctioned.

• Management teams considering an IPO should do the work to understand their options and choose either a direct listing or traditional IPO based on their unique situation. Management teams are in the driver’s seat on IPOs! Contrary to some opinions, you are not a dumb chicken if you decide a direct listing isn't the best choice for your company.

Laser printing graphene superconductors onto fabrics creates flexible, washable textiles that can store energy without the need for batteries. “In a proof of concept, the fabric supercapacitor was charged by a washable solar cell, with stable performance for 20 days. It also remained stable and efficient in mechanical, temperature and washability tests.”

Uber is opening up its platform to employees and outsiders aiming to become an AWS of logistics and transportation. This comes along with a broader push to become “the operating system for your everyday life” including investing in more cloud kitchen virtual restaurants exclusive to Uber Eats food delivery.

If authenticity matters for the value of a social network – and I might argue it’s the only thing that matters – then peak Instagram* is already in the rearview mirror. The WSJ reports on the rise of influencer marketing on the app: “On a typical day, 421’s staff of about 30 workers churn out dozens of posts from more than 100 Instagram accounts with a total reach of around 300 million followers—more than celebrity Instagram stars Beyoncé and Kim Kardashian West combined. Advertisers on these sites pay by the eyeball—an estimated $373 million on influencer marketing in the U.S. and Canada in the first quarter of 2019, according to Instascreener, which tracks marketing on Instagram. About $265 million of that was on Instagram, up 62% from the same period a year earlier.” Instagram co-founder Kevin Systrom appears to agree: “The thing I’m bummed about is Instagram feels less authentic over time because of it.” (*I was last on Instagram in June 2012, so consider my knowledge of the platform slightly dated.)

A detailed New Yorker article on the uniquely addictive teen social app TikTok highlights its “primary selling point is that it feels unusually fun, like it’s the last sunny corner on the Internet.” No doubt this is in part because all political discourse is banned by the company’s Chinese parent ByteDance, especially if that discourse threatens the delicate social order of China. As long as the censorship is disclosed and transparent, it’s not all bad to create these “Disneyland” social network experiences (as I’ve called them in the past). Ironically, real-world Disneyland Hong Kong is seeing a massive drop in attendance because of political protests, but Disney CEO Bob Iger discusses his glass-half-full view on China (eight minutes into this video).

After Amazon straight up ripped off a shoe design from maker Allbirds, the sustainable shoe company’s founder graciously responded: “While he’d prefer that Amazon not copy Allbirds’s design at all, he’s encouraging the brand to borrow freely from his company’s eco-friendly supply chain practices, including some of the sustainable new materials Allbirds has invented.
“Given what I know about manufacturing, there is no way you can sell a shoe for that low while taking care of all of the environmental and animal welfare considerations and compliance we take into account,” Zwillinger says. “Amazon is stating that it wants to be a green company. It should be taking steps to make their products more sustainable.”

ZestFinance is partnering with Freddie Mac to help home buyers obtain mortgages by going beyond the current, shamefully-flawed credit score system that’s in place today in the US. “The ZestFinance software would parse a consumer’s financial history to analyze trends including borrowing and income. Mortgage applicants who could benefit include those who have a low credit score, high debt levels or other red flag but have other positive characteristics...”

This 35-minute video from Stripe’s developer conference titled “The Future of Payments” is insightful with respect to how quickly a payments market can change technologies and user behavior. (The video I am referencing is most of the way down the linked page.)

Some interesting data on video habits from 45M connected smart TVs and 200M connected devices: 26% of homes with connected TVs are still exclusively watching linear TV, 30% are exclusively streaming, and 44% shuffle back and forth between the two.

On the heels of last week’s news about the Walmart healthcare supercenter, Amazon announced a new health initiative focused (at least for now) on its employees. I am still eager to see how Amazon’s health JV with Berkshire and JP Morgan will come together – that JV was announced almost two years ago...is it still even happening?

Amazon announced a slew of connected Alexa devices including eye glasses, a ring, and earbuds. As they check off the list of apparel-based communication items that Agent 86 used, they still need a connected shoe, belt, tie, wallet, and handkerchief to complete the ensemble. Amazon also announced an anti-Google/Apple initiative to allow all voice assistants to be available on competing hardware platforms.

Google matched Apple’s gaming bundle with a new $4.99 monthly subscription for 350 games. One notable difference is that the new Play Pass also includes some apps that are not games such as AccuWeather. One thing I don’t quite understand on mobile game bundles: my impression is that most people play one game most of the time, or maybe a few games, not dozens or hundreds. Admittedly, I don’t play mobile games and could be totally wrong here, but I’m leaning on my impressions from console-based games and this recent comment from Take-Two CEO Strauss Zelnick (at a Goldman Sachs conference) who thinks game bundles don’t make sense for more avid gamers:
“So the average American household watches 5 hours of linear programming a day, 150 hours a month, but consumes about 1.5 hours a day of interactive entertainment, about 45 hours a month. If you're watching 150 hours of linear entertainment, unless you're less than 10 years old, you're watching 100 different programs or more. But if you're playing 45 hours of video games, you may be playing 1, 2 or 3 titles in a month. You're not -- it's not 100 titles, it's not even close to 100 titles. So it's not clear to me that a consumer wants to pay for a sort of all-you-can-eat offering in interactive entertainment. At the end of the day, for any new offering to work, you have to start by it appealing to consumers.”

Activision launches a 12-city esports league for Call of Duty in 2020.

The newly re-released World of Warcraft Classic edition is proving to be a censor-free zone for Chinese game players: “China’s Communist Party may still not be savvy enough to recruit night elves and trolls to spread its agenda, allowing WoW Classic to remain -- for now at least -- an island that fosters debate.”

Here’s a long and instructive article on the driving forces behind the rise of open-source processors in the semi world:
“It’s also about the time it takes to do 20 agreements with 20 different IP houses, noted Mendy Furmanek, director of OpenPOWER processor enablement. It’s become so cumbersome to go into building chips because of all these factors. At the same time, we really need the innovation. That’s why this [open ISA] movement is happening rapidly. We’ve got to get all of these barriers out of our way. It’s not just about money. It’s about all those things. But ultimately, it’s about faster innovation.”
“Custom processors represent the next logical step in architectural and power efficiencies. RISC-V’s modular architecture allows for elimination of extraneous logic without breaking software compatibility, and user-defined instructions can also be accommodated. And there is already a wide range of options in the market, from production-ready cores on GitHub, to commercial suppliers of RISC-V IP from companies like Andes and Codasip.”

Miscellaneous Stuff
A quad of cool astronomy stories this week:

• A network of radio telescopes caught a star being ripped apart by a black hole (there is a cool animated representation of the event in the article for astro geeks).

• Gamma Ray bursts from the centers of galaxies (which I studied in college) can go faster than the speed of light (because the superluminal speeds happen in the jet medium itself, it doesn’t violate special relativity).

• NASA has a new animated representation of how a black hole warps its surroundings.

• Planet Nine, the name given to the mysterious object that could be altering orbits of distant objects in our solar system, could be an ancient bowling-ball sized black hole instead of a large, difficult-to-spot planet. (This is more of a thought exercise than a theory, but it’s a fun one!)

Industrial chemistry’s use of fossil fuels accounts for 14% of all greenhouse gas emissions. Now companies ranging from startups to giants like Siemens are working on compound synthesis using alternatives fuel/material sources, such as using electricity (from renewable sources) to split readily-available, non-hydrocarbon starting materials (e.g., water, oxygen, carbon dioxide, nitrogen) instead of relying on fossil-fuel-powered reactors and oil-based ingredients. The increased availability of excess electricity during peak solar generating hours will make these new processes much cheaper as well.

Rising carbon dioxide levels have been shown to cause nutrients in plants to drop by 30% in some cases. As nutrient density drops, we have to eat more calories to make up for it. The same problem causes plants to produce less nectar and pollen to have less protein in it (key source of fuel for bees).

Rather than focus on a certain sensory input like a spotlight, the brain actually filters out other input. In order to overcome the risk of missing that other input, it appears the brain is wired to then periodically distract itself around four times a second in case it’s missing something important.

I watched the new Bill Gates documentary on Netflix and was fairly disappointed. It was about 30-40 minutes of breezy questioning of Gates spliced into three hours of miscellaneous Microsoft history. Basically we learn that Bill is on time, competitive, and thinks all complex analytical problems can be solved with more work. The arrogance of Gates and Microsoft 20 years ago in the antitrust period seems to echo today at the new Internet platforms; it seems as though no lessons have been learned about the role of government regulation.

Stuff about Geopolitics, Economics, and the Finance Industry
A JP Morgan survey of advisers notes that ETFs will double to roughly 40% of recommended funds over the next six years. That seems conservative, but it underscores the business risk of active managers with a “risk adjusted” view of performance, i.e., undifferentiated versus the index over time, who are relying on the advisor channel for assets and growth. Related: the SEC has introduced landmark changes to make it easier to launch new ETFs.

This article has some interesting insight into the compensation plan at Aperture, the new asset manager focused on better aligning client outcome with fund compensation: “Aperture looks at a three-year time period to calculate performance and pays portfolio managers once a year. However, half of their compensation is deferred and they only receive it if in the succeeding two years the cumulative performance over the three-year time period is equal to the performance that was achieved in that time period...He added that many firms use high watermarks, however those are risk-induced as if you outperform by 5% one year and the second year you underperform by 5%, then the next year you need to outperform by 5% just to get even.”

Trump’s negotiating tactics with China continue to be crazy like a fox as he threatened to de-list Chinese companies in the US (which Mark Cuban has smartly been calling for as a tactic for some time now) and curtail US investments in China. As the Chinese government dispatches more representatives to tech companies, be reminded that there is no such thing as a “non-state owned” Chinese company.

China is also extending its big brother oversight to select US companies by subjecting them to scoring and punishments in China. “United, Delta and American received letters last year from Chinese aviation officials saying their social credit score could be hit unless their websites labeled Macau, Hong Kong and Taiwan as part of China. Lower scores would lead to investigations, the possibility of frozen bank accounts, limitations on local employees’ movement and other punishments, according to a letter sent to United and seen by The New York Times.”

The SEC opens up the “testing the waters” meetings to all sizes of IPOs. TTW meetings allow companies to gauge investor interest and hot topics before they publicly release their S1 filing. Having done many TTW meetings in the past, they are almost always valuable for both companies and investors, and can help in some cases with the guessing in setting IPO price ranges.

-Brad

Disclaimers:

The content of this newsletter is my personal opinion as of the date published and are subject to change without notice and may not reflect the opinion of NZS Capital, LLC (“NZS”).  This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I often I try to make jokes, and they aren’t very funny – sorry. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC (“NZS”). If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital has no control. In no event will NZS be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.