The following is the unofficial transcript of excerpts from a CNBC EXCLUSIVE interview with Tech Investor Bill Gurley and CNBC's Scott Wapner on CNBC's "Fast Money Halftime Report" (M-F 12PM – 1PM) on Tuesday, September 10th.
All references must be sourced to CNBC.
Bill Gurley (in Response to Frmr Twitter CEO Dick Costolo)
I have been outspoken about the oversupply of capital for half a decade. So, I may have been early to Dick's prognosis. But, look, there is a lot of money in late-stage private. And in certain cases, that leads to using capital as a weapon. And when that happens, and it's not in every market, it's not true in NextDoor's case, and in other markets where markets where capital becomes a weapon, the losses get really big and that word 'frothy' is going to come out and you're going to start hearing a lot of questions about unit economics, which is starting to happen.
Bill Gurley (on Going Public)
Look, I have been – I have always been a big believer that it is always a good time to take a company into public markets. I think there are people like Rich Barton and Marc Benioff who share my -- and Mark Cuban who share my beliefs that it really is just about playing at the next level. And you get out there amongst some of the smartest investors in the world and they hold you to a high standard, but that makes you execute better. So, I view it as the right step for anybody who is ready to take the next step. And I also think that Silicon Valley has become so competitive in the venture capital market that the level of discipline invoked from the board is just not there. And I think too many people have to worry about where their next deal is coming from, whether they have a buddy-buddy relationship with the founder. And the buyside can be a lot tougher. But I think in a lot of ways that makes the companies execute a lot better. Mark Zuckerburg said that he made a mistake, he went public two years too late and that the bi-sect really pushed him on mobile in a way that was helpful.
Bill Gurley (on Softbank):
Scott Wapner: Bill, has SoftBank had a good impact?
Bill Gurley: It's had an impact. I'd say massive impact.
Scott Wapner: I know massive, but has it been a good one?
Bill Gurley: Well, look, I think that one of the things that is frequently part of their arsenal is using capital as a weapon. Right. And so, you get into these discussions about profitability or not profitability. If they enter your market, I don't care what industry you're in and I don't care if they invest in you, if they invest in your competitor, you're engaged in a game. Now, certain, you know, one reason we love things like social networks are they are not exposed to price competition in that way. But ride sharing is, food delivery is, banking is which I think is the next industry that will be exposed to this kind of capital as a weapon thing. And it's real. And one of the challenges is, if you are on the boards of these companies, is choosing not to engage is seeding the field. So, I think it's one of the toughest things a board has ever had to analyze. Like, any board in the history of business. Like, no one has faced this. We even saw it in enterprise in the Cloudera case where two enterprise companies raise a billion dollars each and they just put it into sales. It's a hard challenge. Like, if you don't engage, you lose.
Bill Gurley (on Founder CEOs):
Scott Wapner: But, let me ask you this sort of related to WeWork but not really. Do you still support founder CEOs? should founders continue to run the companies as they go into the public market?
Bill Gurley: Look, I think the best outcome as can be seen by the likes of everything from Microsoft to Google to Facebook – Amazon, right, is when a founder takes it all away. it is by far the best outcome. it is best outcome for venture investors. Most CEO searches are a 50/50 gamble. and it is very rare to land someone like a Sarah Friar, who is just incredible. No one wants to make that transition unless they have to. Whether or not you have the wherewithal to scale as a CEO, which includes things like leadership and being able to manage 10,000 employees and all these things, that's a -- we have to live through that every single time.
Scott Wapner: I mean, those are the questions that exist around Adam Neumann with WeWork. But you went through this issue with Travis at Uber. that didn't sort of color or paint your view on whether these folks may be great innovators and great creators, but not such great stewards?
Bill Gurley: Look, I think -- I think like, as Brad highlighted, we're talking about the like super upper echelon of these private companies that make it to this level. And so out of the, you know, ten that made it to this level, five have had the type of founder that can go all the way. And that's what you're looking for, that's what you are hoping for, that's what you're, as a board member, trying to make happen. and so I almost consider it unfortunate that we weren't able to make that happen in the Uber case. I'm thrilled that Dara's come in and everything he's done. But that wasn't the optimal path.
Scott Wapner: It's interesting, we have this debate sort of what kind of company you are. Right. You just said WeWork to you is a real estate company and not a tech company. There is another company that is going have its road show as early as tomorrow, and that's Peloton, which tells the world it's an everything company. I mean, I can go down the list and read exactly what they say they are, a tech company, a media company, interactive software, product design, social connection, DTC retail, apparel, logistics.
Bill Gurley: No machine learning?
Scott Wapner: No, not yet. No, maybe that will be in the updated prospectus. What does that say, though, bill, about these companies having to sell their story as best they can to the market place?
Bill Gurley: Oh, look, I think being good at narrative in the public markets is extremely powerful. Like, it's, you know, the best are always great at being able to tell their story.
Scott Wapner: There has to be substance behind it though, right?
Bill Gurley: Absolutely. But there's not an either/or question. Like, the best is to have a ton of substance and to be a great story teller.
Bill Gurley (on Uber):
Scott Wapner: Brings me to Uber. Notable obviously investor is benchmark. what do you make of what's happened since the IPO?
Bill Gurley: Well, it's interesting. You guys had someone on in the past week or two who said two things. They said, you know, the markets that they are in are highly competitive and that there are really low barriers to entry. And I agree with the first one. I think the markets continue to be competitive for all the reasons we had talked about in the capital. I think the barrier to entry question is exactly the opposite of that. There is no one competing in ride sharing that hasn't been willing to lose a billion dollars a year. And that makes it a sport of kings. There were three or four other players in the U.S. market. I don't even remember their names. They're gone. The auto makers and google all threatened to enter the business. That didn't happen. Right? So I actually think there are high barriers to entry. They are highly competitive. You look at, especially food delivery you have players being funded by this capital as a weapon concept that we talked about. You know, Uber is in it for the long-haul. They've got 13 billion dollars on the balance sheet and aim to be a player in the market.
Scott Wapner: We talked about the narrative. Has Dara not expressed the narrative in a good enough way?
Bill Gurley: Well, I think Dara has done an amazing job, first of all.. I mean, if you think about where we were when we took over, we had fires burning in several places in the U.S. -- I mean that as a figuratively and all over the world from a regulatory standpoint. All those were put away. He took us to the public markets, he's changed the brand and he's culture inside the company. I'm thrilled with what he has done.
Scott Wapner: Is there a real -- can you see a path to profitability? The investors seem to be questioning whether there is one.
Bill Gurley: Absolutely. And a number of companies have gone through that transition, Amazon, Twitter, Snap. They've all -- this is part of what you talk about you come to the public market and the public market is going to push you harder. And so the public markets are saying we want to know there is a path to profitability. They started talking about the contribution from the ride sharing business and started disclosing more details around that. Like I said, I think food is more competitive so that may take a little bit longer. They are extremely well capitalized and they are aware that the street cares about this. And I think they're marching towards that.
Scott Wapner: Look, Bill, you mentioned Mark Cuban earlier, and his view on IPOs and taking companies public. he came on my show and said that Uber waited too long and that it's a mature company. There's not much growth left for investors to see.
Bill Gurley: Well, so I agree with him that they waited too long. As I've said, I am a big fan of companies going public sooner rather than later for all the reasons I've mentioned. I think the company has incredible growth. Let's look at the fact that I think most analysts for 2020 have 85 billion in gross GMV. That is a massive business. This company is less than ten years old. Like, to have 20% or 30% growth on that top line is phenomenal. And one of the things brad talked about like long-term trends, you know, Kara talks about why I don't know why anyone would own a car anymore. She is one of the first movers in that mindset. But we've spent 100 years building a car-centric society in the U.S. We go through peak car and that starts going the other way, you can have a four-decade growth driver for ride sharing as more and more people move away from car ownership. And I think that's going to happen.
Bill Gurley: Although, I will tell you. I get more calls today about people inquiring on going long than being dismissive. So now that the stock is pulled back this much, you have a $55 billion market cap, you have 13 billion in cash, you have 13 billion conservatively in Didi, Korean, the Russian asset Grab. There is like 25 billion against a company that will do 85 billion gross next year. And even in the darkest days in '01 when amazon was being held to the same kind of test and question, it traded about 0.5 against those GMV. And then it eventually went up to 1.3 and then to 1.8.
Bill Gurley (on Direct Listings):
Scott Wapner: So, we hit whether a company should go public. and there is the obvious question as well now to consider of how to go public, whether a traditional IPO is the right answer or direct listings, with Spotify and Slack and who knows who is going to be the next. your view on that? is that now going to be more of the norm than the exception? Or --
Bill Gurley: I think – well, I have actually been digging into this quite deeply ever since Barry McCarthy led the way with the Spotify direct listing. And I apologize to the Silicon Valley community that it took me two decades to figure this out. But I think Silicon Valley's been on the bad end of a bad joke for about four decades now, in terms of the traditional IPO process works. Barry McCarthy has called it moronic. And the more I have studied and contrasted with direct listings, the more I realize that. I brought along some data, I don't know if you can show it. This data is compiled by Jay Ritter. You guys have had him on. He is a professor at the University of Florida, known as Mr. IPO. He has tons of IPO data. So, the first slide is about underpricing. And this is solely looking at the difference between the price that the stocks handed out to the night before and to close the next day. So, over 39 years that's been 171 billion for silicon valley companies. and it's been increasing lately, just year to date we are at 6 billion in underpricing. and if you study the way it works, it's kind of counter-logical that it happens. The next slide is even more surprising. so the next slide, I asked Jay if he had ever run analysis of looking at underpricing by lead underwriter. And he said, sure. That is easy to do. So, he ran some numbers. So, this is ten years of data, a decade of date, over 100 IPOs per underwriter. And what you see is astonishing. What you see is that no one questions who the two best investment banks are. So, it turns out that if you go with the best investment bank, you get the worst execution. And that is – that's remarkably odd. If you're Amazon buying cardboard or GM buying steel, do you get the best execution or the worst execution? Right? That's pretty understandable, right? You get the best. Here if you choose to work with the top under writer, you get the worst execution. So, something's not right. There's a market inefficiency under foot.
Scott Wapner: Wouldn't it be nice though for a company like Slack to have that support and some of these companies to have that support at the time of going public?
Bill Gurley: What do you mean by support?
Scott Wapner: You know what I mean. From the underwriters.
Bill Gurley: I don't – what support do they provide? The word underwriter is a myth, anyway. They don't put capital up. The only capital that is available for stabilization is the green shoots, which is the company's own capital. And once it breaks, they make a profit on that. So they're more worried about profit maximization than actually stock stabilization.
Scott Wapner: I didn't realize you were that much of an evangelist for direct listings now. I mean, that's –
Bill Gurley: Absolutely. Listen, when they were on a traditional IPO process, you have to understand what happens. They go meet with wonderful people like brad and many others, so they have about two to three weeks on the road. And they ask them to give them their demand. And they tabulate it and they put it all in a file which would make you think that somehow there is some type of process here. But then, guess what? And if you have any of them on, ask them what the target over allocation is for standard IPO. Because they will tell you 20x. So, 20x over supply is a euphemism for we are about to ignore 95% of the demand for your stock. Intentionally ignore 95% of the demand for your stock. Now, in a direct listing process, they match supply and demand. Most people don't know this. They use the standard opening process and technology that's used to open every stock every single day. And one of the ultimate ironies is if you do a traditional IPO, you do a direct listing the next morning. It's just the only people allowed to sell are the ones we handed the stock to the night before. And that's why this is set up to fail. Now, I kept studying that list of the lead underwriters and wondering how could that possibly be true that the best players give you the worst execution? And it dawned on me. There is an area of study in economics called The Agency Problem. And there is a variant of it called The Multiple Agency Problem. So, you have an agent looking after multiple parties: the company, but guess what, also the buy-side. Now, if you look back at the chart and you say what if their job is to pass along the most profits they possibly can to the buy side, then the chart makes sense. So, you just have to realize, the customer is not the start up. The customer is the buy side.
Bill Gurley: By the way, Chairman Clayton in his speech yesterday at lunch, talked about fairness and access. And that's another thing here. If you are in a direct listing, any direct listing, and you are at a Schwab account, or a Robin Hood account, I don't care what and you put in an order that's a penny higher than the closing price, you get filled. That is not true in a traditional IPO. In fact, retail is often held to five percent and you have no guarantee that you can get access. So, the people that are getting that cheap stock, that 171 billion of value transfer, is a handful of the best accounts of the best –
Bill Gurley (on Apple):
Bill Gurley: Yeah, look, I own tons of Apple products. I love every one of them. I'm not considering an alternative to any of them. And when they make an announcement like later today, I will look to see if I want it, and if I want it, I will buy it. If there are a lot of customers like me, and I think they are, it's a stock you want to own.
Bill Gurley: I would say that I think, and biased as a venture capitalist obviously, but I think they could be more aggressive. You know, losing Ways at a billion was a big mistake from my standpoint. And you know, you look at a successful company like Roku, right, which I think trades on a valuation that's based on the premise that someone might want to buy it. But like, those are assets that could have been very strategic to Apple. And I think in a Jobs-sian world, it would make sense to have a no acquisition rule, but in a post-Jobs-sian world, maybe you should be more open minded.
Bill Gurley (on Facebook):
Bill Gurley: A quick comment on Facebook, which is our companies that advertise are finding that Facebook is taking an increasing portion of share relative to Google. So, there really are two digital platforms now for at-scale advertising. And I haven't seen that wane in any way. In fact, Facebook has crossed over into e-commerce which is a hard thing to do. I'm not sure Twitter and Snap, as an example, have made that transition. So, onto big tech.
Bill Gurley (on Trade):
Scott Wapner: I mean, we're -- maybe we talk about so it much for obvious reasons back East, because we're so close to D.C. and the news that filters out of the administration, but how much are people out here, talking about the trade war, impacts from China, directly on technology companies, whether they are the chip names which have gotten hit on any headline that has come across?
Bill Gurley: Yeah, look, some companies are more exposed to it, if are you sourcing products from china, obviously, this is something that's much more in your view than if you are not. Look, I'm a fundamental, but I think last time on the show i said this, but I'm a fundamental believer in free trade and that free trade list bodes for everybody. So I hope, more than anything, that the administration gets this together and we get back on path with China. I think it's critical to the markets.
Bill Gurley (on Microsoft):
Scott Wapner: Microsoft. The story of Microsoft. do you think it's appreciated enough what Satya Nadella has been able to do at Microsoft? the richest company in the world I think now by market cap.
Bill Gurley: The entrepreneurs I talk to are highly aware of what he's done and what he has achieved and the contrast that he's brought to the company and how doubling down on the enterprise has really unlocked so much wealth and value.
Scott Wapner: You own the stock.
Bill Gurley (on Gig Economy):
Scott Wapner: All right. We are back here in San Francisco. Bill Gurley, I have something for. for you. literally a story crossing just as we speak Uber and Lyft poised to lose the fight over the California bill. that reported by the "Wall Street Journal." That bill would require so-called gig workers being classified as employees, not contract workers. That's a big deal for Uber and Lyft.
Bill Gurley: It is, two quick things on this. One, I hope that all regulators will take the time to understand that most of these drivers greatly value the freedom and flexibility to be able to work whenever and wherever they want. There is no job at Starbucks or McDonald's where you can come in Monday and Tuesday and not show you Wednesday and Thursday. And that's a feature of this job. And the second thing is, look, I spoke earlier about there being higher -- I actually have a report in front of me where a guy studied five different episodes of increased regulation and all the stocks went up in every case. And so it takes scale to be able to get involved with government and adhere to regulation. And so, oddly I don't see it as a negative for this stock.
Scott Wapner: I hear your sort of call that regulators heed the advice you gave, but the governor is going to sign that. I mean, it's going to become the rule of law.
Bill Gurley: As I understand it, all they're really doing is reaffirming the decisions that been made by the California Supreme Court.
Bill Gurley (on Dual Class Structure):
Scott Wapner: Let's do some questions from our viewers if we could, first on this, a good one, dual class structure. how is the dual class structure battle in the public markets going to play out?
Bill Gurley: I think if the street is a proponent of the principle that's involved, like taking the Zillow case where I think the street is a big believer in what Rich and Lloyd bring to the table, then I think they are okay with it. to the extent that a stock breaks, you go back to the -- example, it's an anchor on your business, and they ended up changing it over time because the street actually can't invoke change.