Amplitude Direct Listing: IPO Pops & Startup Strategies

A Shift in Focus: Valuing Private Companies

Generally, concern regarding the compensation of banking professionals is unnecessary. Historically, their financial performance has been consistently strong, and this trend is expected to persist.

Similarly, the earnings of venture capitalists typically do not warrant attention. While analyzing returns on individual deals can be insightful, a general disinterest in any specific VC’s profits is perfectly reasonable.

The Importance of Current Market Dynamics

However, a degree of attention to both banking and venture capital is now required. This is because we must address the complexities of pricing private companies, particularly in the context of direct listings and initial public offerings (IPOs).

The recent public market entry of Amplitude serves as a key example, prompting a deeper examination of these issues.

Understanding IPO Pricing and Alternative Mechanisms

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Delving into the IPO Pricing Challenge

The following discussion will explore the challenges associated with IPO pricing and the innovative approaches startups are employing to circumvent these difficulties through alternative listing methods.

Insights from an interview with Amplitude CEO Spenser Skates regarding this very topic will also be presented.

Who Should Read This?

If you are interested in the valuation of private companies and the methodologies used to determine their price, this analysis is intended for you.

Conversely, if this subject matter does not hold your interest, it is recommended that you explore alternative reading materials, as this content may prove unengaging.

The core issue revolves around establishing a fair market value for companies before they become publicly traded.

Understanding Kubernetes Networking: A Deep Dive

Kubernetes networking is a complex subject, but fundamentally it’s about enabling communication between pods, services, and the outside world. Effective networking is crucial for deploying and managing distributed applications within a Kubernetes cluster.

Core Concepts in Kubernetes Networking

Several key concepts underpin Kubernetes networking. These include Pods, Services, and Network Policies, each playing a distinct role in how traffic flows.

Pods are the smallest deployable units in Kubernetes, representing a single instance of an application. Each pod is assigned a unique IP address within the cluster.

Services provide a stable network endpoint for accessing pods. They abstract away the underlying pod IPs, which can change dynamically. This ensures consistent access even as pods are scaled or replaced.

Network Policies define rules governing communication between pods. They allow you to control which pods can talk to each other, enhancing security and isolation.

Kubernetes Networking Models

Kubernetes doesn't enforce a specific networking implementation. Instead, it provides an API for networking, allowing various Container Network Interface (CNI) plugins to be used.

CNI plugins are responsible for setting up the network for pods and assigning IP addresses. Popular options include Calico, Flannel, and Weave Net, each with its own strengths and weaknesses.

The choice of CNI plugin impacts network performance, scalability, and features like network policy enforcement. Consider your application's requirements when selecting a plugin.

Service Discovery in Kubernetes

Service discovery is a critical aspect of Kubernetes networking. It allows applications to locate and connect to other services without needing to know their specific IP addresses.

Kubernetes provides built-in DNS-based service discovery. Each service is assigned a DNS name, which can be used by other pods to resolve its IP address. This simplifies application configuration and improves resilience.

Furthermore, Kubernetes supports external DNS, enabling access to services from outside the cluster using custom domain names.

Ingress and External Access

To expose applications running within Kubernetes to the external world, you typically use an Ingress controller.

An Ingress controller acts as a reverse proxy, routing external traffic to the appropriate services within the cluster. It can handle tasks like SSL termination, load balancing, and virtual hosting.

Several Ingress controllers are available, including Nginx Ingress Controller and Traefik. The selection depends on your specific needs and infrastructure.

Network Policies for Enhanced Security

Network Policies are a powerful tool for securing your Kubernetes cluster. They allow you to define granular rules controlling network traffic between pods.

You can use network policies to isolate sensitive applications, restrict access to databases, and prevent unauthorized communication. This significantly reduces the attack surface of your cluster.

Network policies are implemented by CNI plugins that support the Kubernetes NetworkPolicy API. Ensure your chosen CNI plugin provides this functionality.

Troubleshooting Kubernetes Networking

Networking issues can be challenging to diagnose in Kubernetes. Several tools and techniques can help pinpoint the root cause.

• kubectl exec: Allows you to execute commands inside a pod to test network connectivity.
• ping/traceroute: Standard network utilities for verifying reachability.
• tcpdump: Captures network traffic for detailed analysis.
• CNI plugin logs: Provide insights into network configuration and events.

Carefully examining logs and using network diagnostic tools are essential for resolving Kubernetes networking problems.

Understanding the fundamentals of Kubernetes networking is vital for successfully deploying and managing applications in a containerized environment. By leveraging the built-in features and available tools, you can create a secure, scalable, and resilient network infrastructure.

Understanding the Challenges of Initial Public Offerings (IPOs)

Recently, we explored whether direct listings could offer a solution to the common issue of IPO pricing. Specifically, could combining direct listings with late-stage private fundraising assist startups in avoiding substantial first-day IPO price increases?

An IPO pop occurs when a company’s initial public offering price is set lower than its opening trading price. A modest increase is generally viewed favorably, while a significant jump is often considered a miscalculation.

For example, if a company offers shares at $45 and begins trading at $46, it’s a positive outcome. Even $48 would likely be acceptable. However, a price of $30 opening at $45 represents an error, regardless of any subsequent price adjustments.

Startups and investors are frustrated by IPO pops for two primary reasons:

• Firstly, they suggest the company could have secured more funding, or the same amount with reduced dilution.
• Secondly, private companies and their investors dislike seeing unearned profits go to others, such as when investment bankers undervalue an IPO to allocate shares to favored clients. This practice understandably irritates founders and, to a lesser extent, venture investors.

The problem of IPO pops has become more pronounced in recent years, with several high-profile public offerings experiencing substantial first-day gains, exceeding pre-offering expectations.

One method to circumvent an IPO pop is through a direct listing. In this approach, a company simply commences trading, establishing a reference price that is often disregarded. Because the company doesn’t set a formal price, it avoids the risk of a mispriced IPO.

However, this isn’t a complete solution. IPOs offer the benefit of raising primary capital – meaning the company sells new shares during the offering. This necessitates setting a price for those shares.

A direct listing eliminates the pricing process, which can be problematic if the company requires capital for operations or growth. Consequently, some companies have adopted a hybrid approach: securing a substantial final private funding round and then proceeding with a direct listing. This separates the pricing of the company from the start of trading.

Amplitude recently employed this strategy, completing a Series F funding round at $32.0199 per share before initiating a direct listing.

Despite this approach, challenges remain.

The following details the participants in the Series F funding round (showing shares purchased by Amplitude’s executive officers, directors, and major shareholders):

Amplitude established a direct listing reference price of $35 per share, a modest $3 increase over the final private round price. This resulted in a minimal “pop” of less than 10%.

Initially, it appeared everyone benefited except investment bankers. However, this wasn’t entirely accurate. Consider Amplitude’s first-day trading close:

The outcome suggests Amplitude’s private investors significantly benefited from their final private round, investing $200 million at approximately $32 per share in Q2, while the company’s value reached around $55 per share by late Q3.

It’s arguably less problematic for founders to reward their long-term investors than to enrich investment bankers. While I don’t prioritize the financial success of either group, they certainly do.

Notably, there have been no public complaints from venture capitalists regarding the dilution experienced by Amplitude when its private backers secured equity at a lower price. This is the same criticism venture capitalists often level against bankers during traditional IPOs.

Therefore, the argument about dilution appears disingenuous, and venture capitalists were primarily protecting their own returns. This is a natural aspect of capitalism, but it’s important to avoid hypocrisy.

Amplitude's Public Debut

The Amplitude public relations team might be questioning the purpose of arranging a conversation with their CEO, considering my recent extensive critique of the company's decision to go public. However, my assessment of Amplitude’s direct listing is positive; my primary concern lies with the implications of the listing for the market as a whole, rather than specific financial gains.

To gain a deeper understanding of Amplitude’s chosen path, I recently spoke with the company’s CEO, Spenser Skates. His approachable demeanor, demonstrated by appearing on the call in a T-shirt, immediately made a favorable impression.

During our discussion regarding his company’s liquidity event, Skates expressed sensitivity towards the complexities of IPO pricing. He referenced the Toast IPO as an example where potential value was unrealized, and presented data illustrating the frequent mispricing of IPOs in recent years.

Skates explained that he initiated an auction for the company’s final private funding round. He discovered substantial interest at a valuation of approximately $3 billion, but interest waned significantly at $5 billion, with only one offer at $4 billion. Consequently, he opted for an intermediate valuation.

This approach appears logical. However, the current market valuation of Amplitude, as reported by Yahoo Finance prior to the opening bell, stands at $7.1 billion, exceeding the figures considered during the private auction.

Skates posited that the optimal route to becoming a public company would involve a direct listing coupled with a primary capital raise. This would allow the market to determine the company’s price, after which equity could be sold. As this option isn’t currently available, he chose to raise capital before proceeding with a direct listing.

A valid question arises: why not direct list initially and then raise primary capital later, once a stable market price is established? This strategy could potentially mitigate pricing errors. Skates offered a compelling response, stating that raising capital upfront and then direct listing provided Amplitude with a substantial cash reserve, projecting an image of financial stability.

This is a noteworthy consideration. Furthermore, Amplitude demonstrates strong financial performance and champions a vision for the future of the tech industry – enhanced digital products through data analytics – that aligns with my own perspectives. Therefore, I maintain an objective stance.

The strategy of raising funds from private investors followed by a direct listing doesn’t resolve the IPO pricing problem; it simply transfers potential gains from one group of affluent investors to another. A more effective method for companies to list publicly remains elusive.