Nasdaq VP on why companies are electing to stay private longer

Nasdaq Private Market Vice President Jack Cassel joins The Final Round panel to share findings from the Nasdaq 2020 Mid-Year Private Company Report.

Video Transcript

MYLES UDLAND: Well as the market has recovered here since the pandemic-- since the lows back in March-- we've seen a very hot market for IPOs, SPACs have been a big trend, direct listings. Joining us now to discuss everything going on in capital markets is Jack Cassel. He's vice president for new listings and capital markets at the NASDAQ. Jack, thanks for joining the program. So let's start with the idea I tossed out in the tease, which is-- I think Matt Levine coined it, right-- private markets are the new public markets. Thinking about how you guys have-- the demand and how the private side-- the secondary private side has gone for you guys, what's that been like in the last few months? And do you think there is a renaissance in companies wanting to go public again? Or is there still a preference for remaining private if the capital is there?

JACK CASSEL: Yeah. So the trend started a few years ago with companies staying private longer. We saw a lot of venture capital as well as institutional capital coming into the private companies so that they could capture this value creation as the companies continued to mature. And so at NASDAQ, we built out the NASDAQ private market platform to work with companies to structure and execute these secondary liquidities-- from tender offers to buybacks to auctions and block transactions.

And so it's been pretty directly correlated to the public markets. And a lot of that, again, is driven by buyer demand. But as we think of the companies, not only are they staying private longer, but there is demand from their employees to have liquidity in their private stock.

So on the private market side for NASDAQ, we actually are coming off the best first half we've ever had, with total transaction volume totaling $1.7 billion, and a record number of actual programs that we had run for 29. So that was on the heels of a lot of momentum coming out of Q4 last year. We saw, obviously, the world slowed down in April-- May-- or excuse me, March and April.

But through May, we saw an uptick in the volume of deals, the conversations picking back up as the market started to stabilize. And we're very optimistic about the rest of the year for it.

MYLES UDLAND: And I just wanted to follow up quickly on that point about employee liquidity, because we talk about this a lot on the program when it comes to, say, a big private company x wants to go public, and I always make the point that a lot of this is going to be hankering from employees saying, I'm sitting on all this illiquid stock. I need a liquidity event. Are companies being more proactive now and coming to you guys to say, hey, we'd love to get x number of employees, x amount of cash, so that we can sort of, I don't know, keep our executive path-- the strategy we want to go, but also make sure that these engineers we've incentivized heavily with the liquid stock can have an event and sort of stay happy and contented here at our business?

JACK CASSEL: Yeah, look, you're well versed in this. I mean, you nailed it. What we're seeing more and more in about half of those 29 programs were Series A and Series B companies. And a lot of it is, again, that fight for talent-- especially here in the Valley and in the Bay Area. When you think of the comp packages that your Googles, Facebooks, SalesForce, even Uber are able to put out for this engineering talent for liquidity and an immediate vesting schedules, et cetera, the private companies have to compete with that.

And so they're, in turn, going not only to the employees, but they're looking at this as a benefit with their HR department. Hey, we're going to pick up and schedule a regular cadence of running these programs on an annual or even twice a year basis so that we can provide this for our employees.

DAN ROBERTS: Jack, Dan Roberts here. Let's talk specifically about Airbnb. And I know that due to your position, maybe you have to talk in more broad terms. But we see the reports of the company wanting to go public now. What's interesting is, you know, demand was 67% down reportedly in the last quarter. I mean, this company, obviously, due to the nature of its business, has just been brutalized by the pandemic. And yet here we are-- they're about to go public anyway.

And first of all, we had previously thought Airbnb would definitely be a candidate for a direct listing due to sort of the way that avoids the hype, avoids the roadshow. Now, it doesn't sound like that's the case. I mean, I guess it remains to be seen. But some people see a kind of disconnect in the fact that companies like this are, you know, expecting the public markets to greet them warmly when, you know, especially for Airbnb, its business is not looking very healthy right now.

JACK CASSEL: Yeah, it's a good question. So I cannot comment on any particular private companies, especially. But what we've seen through this transition with an incredible market in June and July is the market bounced back. I think it was 36 IPOs in June, 49 total in July. That was the most since 2014. Actually, I think we eclipsed the 2014.

So there's still a lot of investor demand for these stories. And when you think of some of the unicorns that have remained private for so long, they're very smart about telling the story early in their lifecycle. They're meeting with analysts, they're meeting with buy side investors, large institutional firms, starting to test their narrative, starting to test their KPIs to see what's resonating well with the story.

So as we look at the second half of this year, we see a lot of these companies that might have gotten hit with kind of the coded downturn, or that might have, again, put a strain on the business. But if they have that narrative around how they're going to come out of this, how they have fixed the problems with the business and what that looks like going forward because they have those relationships going into this, I think the public markets, or at least those initial investors, are being more forgiving around what they've just gone through, because they're buying into the story. They're buying into the management team and really the vision of the company for the long term.

MELODY HAHM: I mean, Jack, to kind of push back on that a little bit, I think early on during March and April, as you mentioned, when we were speaking to venture capitalists, they said that there was a paradigm shift-- that they insisted it would not be a growth at all costs sort of mentality anymore. But from what I'm hearing from you, it sounds like, nope, back to business as usual. We'll continue to incentivize and congratulate companies that are saying and promising large, ridiculous amounts of TAM versus just steadily growing a business. How do you sort of reconcile how startups will grow during this period? Do you really think it's back to business as normal? Or do you anticipate there will be sort of a shift in the way people scrutinize financials.

JACK CASSEL: Yeah, it's a great counter-point and thought. I think, again, it's case by case. It's going to be company by company. It's going to be, who's the end user? It's software versus internet versus health care. We've seen incredible politicization in health care, let alone the SPACs you mentioned at the top.

So it's going to be case by case. It's going to be based on TAM, of course. That's always one of the key metrics. I think now we're seeing more of a shift towards profitability. You don't necessarily need to be profitable at time of IPO, but you need to have a story there. You need to look people in the eye, you need to look at the investors through the roadshow and say, here's how we get here. Here's how we'll continue to grow. No, it's not going to be at the 80% clip, but if it's at 45% year over year growth and now we're able to move this down to the bottom line and get to a profitable position faster, than that will be rewarded, certainly.

MYLES UDLAND: All right, Jack Cassel, vice president, new listings capital markets at the NASDAQ-- Jack, thanks so much for joining the program today.

JACK CASSEL: Thanks for having me.