From: acquiredfm
The landscape of public markets and initial public offerings (IPOs) has undergone significant changes, particularly influenced by technological advancements and evolving investment strategies. Altimeter Capital, a firm co-founded by Brad Gerstner, has been a pioneer in navigating and shaping these changes through its unique “crossover” investment model, blending hedge fund and venture capital approaches [01:22] [01:27].
Historical Context: Dot-Com Bubble and Market Evolution
Brad Gerstner’s early career provided him with a keen understanding of market dynamics, particularly during the dot-com era. His personal journey into investing began with day trading through law and business school, where he realized there was “no secret” to investing, only diligent work [19:10] [19:30]. The Netscape browser in 1996 signaled a “game change” for the internet, leading him to focus on Silicon Valley and the burgeoning tech scene [19:38] [19:42].
During the peak of the dot-com bubble around 1999, many business school students flocked to startups [21:03] [21:20]. However, the subsequent bust revealed crucial lessons. While consumer behavior indicated a genuine desire to transact online, the bubble burst was due to a “speculative asset bubble” where capital dried up for businesses without viable models [27:20] [27:32]. Companies that were “free cash flow positive” and met existing demand, like those in online travel, continued to thrive [27:35] [27:40].
Post-dot-com bubble, the market was in a state of uncertainty [28:04] [28:07]. The financial crisis of 2008 further intensified this, with widespread fears of collapse [39:50] [40:42]. This period also highlighted a trend where “risk premiums” changed dramatically, causing “high burn businesses with negative unit economics” to fail [28:44] [28:55].
The Rise of Crossover Investing and Altimeter’s Strategy
Historically, legendary investors like Warren Buffett and Paul Tudor Jones invested in both public and private assets without artificial distinctions [32:43] [33:09]. However, this “crossover” approach was not common in tech, especially for early-stage investments [32:29] [32:31]. Brad Gerstner’s experience as an “IPO lawyer” and his insights into market inefficiencies fueled his desire to build a better model [37:00] [37:04].
By 2004-2005, Gerstner observed key market changes:
- Deepening Private Markets: Private markets were becoming “way deeper, way more liquid” [46:17] [46:50].
- Faster Scaling: Companies were scaling faster due to the internet [45:52] [45:56].
- Longer Private Stays: It became harder for companies to go public post-2000, leading them to stay private longer [45:58] [46:04].
These factors led to the “industrialization of venture” [48:30] [48:32], and Altimeter Capital aimed to build the best crossover fund in Silicon Valley, led by a founder (Gerstner himself), to better empathize and align with entrepreneurs [46:25] [46:52].
Altimeter’s strategy involved:
- Dual Capital Pools: Maintaining both a public pool (long/short technology) and a longer-duration venture/growth pool for private investments [47:28] [47:51].
- Concentrated Portfolio: Operating a relatively concentrated portfolio focused on identifying the “best companies in the world” rather than aiming for average returns through over-diversification [01:18:45] [01:19:24].
- Founder-Centric Approach: Providing a “founder’s mentality” with empathy and scalability of capital, offering support in areas like recruiting, board building, and capital raising [01:19:19] [01:19:50].
Public Market Innovations and IPOs
Altimeter’s Capital Markets business is a core part of its offering, leveraging deep expertise in public markets and IPOs [01:21:00] [01:21:04]. Gerstner and his team, with experience in over 100 IPOs, provide “inside scoop” and guidance to founders on the various paths to public markets [01:21:13] [01:21:24].
Key innovations and pathways to public markets include:
- Direct Listings: Altimeter has anchored direct listings for companies like Roblox [01:22:50] [01:22:52]. This alternative offers competition to traditional bank IPOs [01:22:07] [01:22:12].
- SPACs (Special Purpose Acquisition Companies): Gerstner views SPACs as a “third door into the public market,” helping companies build a book, price the security, and sell to public market investors [01:22:18] [01:22:30]. Altimeter notably led the SPAC that took Grab public [02:28] [02:30].
- Traditional IPOs: Altimeter also anchors traditional IPOs, such as for Confluent [01:22:53] [01:22:55].
The goal of these innovations is to:
- Reduce Friction: Make the transition to public markets smoother for CEOs and boards, who often undertake an IPO only once [01:23:07] [01:23:20].
- Increase Choice: Provide founders with various options for going public [01:22:01] [01:22:03].
- Efficient Pricing: Ensure efficient pricing regardless of the chosen path [01:23:34] [01:23:41].
Arguments for Earlier IPOs and Broader Access
Brad Gerstner advocates for a return to earlier IPOs, arguing that it is beneficial for several reasons:
- Discipline: Public markets provide “discipline” for companies, preventing them from operating with “billions of dollars on their balance sheet and…decacorn valuations” without public scrutiny [01:07:01] [01:07:12].
- Innovation: Public companies like Amazon, Facebook, and Salesforce have demonstrated extensive innovation while public [01:07:24] [01:07:33].
- Retail Investor Access: Early IPOs allow retail investors to participate in the “100x investments” that are currently reserved for private market investors [01:08:28] [01:08:56]. This creates a more “level playing field” [01:09:06] [01:09:09].
The Invest America Initiative
Gerstner is a proponent of initiatives like “Invest America,” which aims to democratize access to the stock market [01:35:50] [01:35:57]. He argues that the current system, where “only rich people can invest in the best companies,” is “rigged” [01:38:53] [01:38:59].
The Invest America proposal suggests:
- Giving every child born in the US an “Invest America account” (similar to a Robinhood account for their parents) [01:39:46] [01:40:02].
- Funding these accounts based on means (e.g., 5,000 for lower-income families) [01:40:04] [01:40:17].
- Allowing the money to compound over decades, potentially reaching millions of dollars for retirement [01:40:18] [01:40:27].
- Promoting financial literacy and encouraging saving by giving individuals a “little snowball” and understanding of compounding [01:40:31] [01:40:46].
- Addressing the wealth divide by ensuring “100 percent of the people being owners” rather than just 30% [01:41:20] [01:41:24].
- Creating a standard curriculum for sixth graders to engage with these accounts and learn about investing [01:43:41] [01:44:03].
This initiative seeks to foster a sense of belonging and participation in the economic system, psychologically empowering individuals beyond the monetary value [01:45:30] [01:45:41].
Future Outlook
The venture market is maturing, leading to increased competition and potentially compressed returns for average players, but better access and less dilution for founders [01:13:01] [01:13:27]. Gerstner believes this reflects a broader industrialization seen in other sectors like LBOs, where markets become more efficient and consolidate around major platforms [01:30:52] [01:31:07].
He remains optimistic about the future, stating that the “secular curve around creative destruction and innovation has never been steeper” [01:47:22] [01:47:25]. The system of venture capital, with its ability to allocate capital to business creation and experiments without personal guarantees, is seen as an “incredible thing” and an “engine that moves humanity forward” [01:48:54] [01:49:03]. Altimeter aims to scale its impact and drive the highest net promoter scores (NPS) among both founders and funders, delivering superior returns and fostering innovation [01:50:36] [01:50:47]. The firm envisions a future where an increasing percentage of capital comes from willing retail investors, providing broader exposure to this valuable asset class [01:50:49] [01:51:02].