The Downstream Effect of Reddit's IPO, Implications of the Residential Realtor Settlement, and What Boeing's Struggles Means for American Industry.

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March 28, 2024

DESCRIPTION:

Mike and I sat down this week to chat about current events and their implications for the innovation economy. We begin our conversation by highlighting successful tech IPOs like Reddit and Estera, suggesting a strong demand for tech companies in the public market. We discuss how these IPOs could signal to other entrepreneurs and investors, potentially fueling more listings and investments. Our conversation shifts to a significant settlement in the real estate world, impacting companies like Compass. We analyze how changes in realtor commissions could shift capital to homeowners and potentially disrupt the real estate brokerage industry. Lastly, We touch upon Boeing's recent challenges, reflecting on corporate management issues and the potential for new players to enter the aviation industry. We discuss the lack of innovation in commercial aviation and suggest opportunities for entrepreneurs and government intervention to foster competition and innovation in the sector.

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TRANSCRIPT (this is an automated transcript):

MPD: Welcome everybody. I'm Mark Peter Davis, managing partner of interplay. I'm on a mission to help entrepreneurs advance society, and this podcast is definitively part of that effort. All right. Today we're jumping into some current events. My partner, Mike Rogers and I are going to get into it, but we're going to tie those events back to how they impact the innovation economy.

So hopefully you got some news, but also make sense of it. Enjoy.

All right, man, let's jump in. So we've got we're gonna do a current event session. But little twist today that we're going to pick some topics that can tie back to innovation, startup economy, things that kind of live in our world. Great. Sounds good. So you got a list. You want to pick your first title and hit it?

Mike: Yeah. I think big news this week is we had two really successful IPOs Reddit and Estera, Reddit still trading upstairs, all trading up. They seem to be really successful launches. Demand seems to be quite high for tech companies. I think the AI side of things is unlocking a lot of investor interest and participating in these deals.

And I think there's just a lot of pent up demand for new issue on the sidelines. So net really strong for the innovation economy, really strong for startups, really strong for the IPO market. I think. good for everyone generally, unlock this pent up capital, people looking for new issue and access to these tech companies in the public markets and setting valuations.

And, we had a couple IPOs, Instacart being the big name a few months ago now, I think people thought that was going to unlock things. And then it was a slow start. After that, these two have come in, we have fed saying they're going to cut rates later this year. Unemployment still holding strong, soft landing seems like the best outcome here.

I think this whole picture is really positive for our industry.

MPD: Yeah, this is big. This is we're looking for a bellwether in the venture world, right? Yeah. Everyone's looking for some signal. So now other entrepreneurs and bankers will say, Hey, these IPOs crushed it. So maybe we should go list now and get some liquidity.

It puts some fuel back in the tank at the top of the market and it flows through. 100%.

Mike: I think a lot of people after these IPOs are starting to call their bankers up saying, Hey this looked good. What do you think we could trade for? How much could we raise, et cetera, et cetera. Reddit's closing on a 10 billion valuation right now.

That's awesome. Like that's a bellwether deal. That's no joke.

MPD: And this also opens up the market on the M and a side, although that's not totally intuitive from the outside. But what happens is a lot of the public companies look and they say, okay, we can tap capital now. Totally. We can sell shares, raise cash and go on a buying spree.

And if this pattern holds now, it's just a couple of data points at this point, but if it holds this could be the next phase of like second shift year of

Mike: soft landing. Totally. The other piece too, is it's not just, they can buy companies, but now they know where these things should price.

So before there was a lot of uncertainty around valuations in general pricing in the market. Now it's Hey, we could go buy this company at maybe some sort of private valuation before it goes public because we're scared that once it goes public, it might be out of our reach. Totally.

So that liquidity premium that you're seeing in Reddit right now could transfer over to other businesses that might be in the acquisition strike zone for some larger companies. And I think it should hopefully just grease the wheels on

MPD: this sector going forward. The one catch is Chris, our partner, Chris was talking a couple of weeks back on the pod about how we're doing a soft landing into a minefield and the mines are commercial real estate.

Yeah. Cause we've got a lot going, everything across the economy looks pretty good, but we all know. There's a whole reset around that. Now, at the same time, you've got so many pools of capital that have been waiting for hit on a buying spree once commercial real estate really goes bankrupt. So maybe they, maybe there's a soft landing baked in because it's the buyers are so well capitalized and so prepared for it.

It's not a shock. I don't know. Yeah.

Mike: It's an interesting concept and we haven't talked too much about it, but I, I wonder if they're segmented markets. I think I listen, I'm not an expert in the commercial real estate side. I know enough to be dangerous, but not enough to be an expert.

I think my gut is that would stay fairly trapped in the commercial real estate and banking world. We're that most of that exposure lies now, of course, pension funds own commercial real estate assets. Everyone owns this down and down the line, but our bubble is still relatively small compared to the broader CRE commercial estate market.

And my gut is that for the existing cohorts of companies that are looking to go public and raise venture kind of dollars. I don't think that will impact it too much is my guess, but, I might eat those words.

Yeah.

MPD: A contrarian's view here is in an election year. If there's a cataclysmic economic, bailouts, interest rate moves, who knows?

There's a lot of levers that get pulled that can have other impacts. Yeah. Rates are

Mike: coming down. Banks are extending and pretending on this debt. I think that'll continue to happen. I think too, like the precedent is very clear now for the U. S. Government that anything that is systematic, they will step in on.

They've done this now three or four times in the last 10 years. And while I won't apply it, if I think it's a good precedent or a bad precedent, it is the precedent. And I would be shocked if this commercial real estate issue did get to a tipping point where Kenley, our major financial institutions were impaired, that the government didn't step in.

Election year, no election year. It's just, it's too systematic and they've set the president there. All right. Part

MPD: two. What's our next topic? I don't know.

Mike: What do you want to talk about?

MPD: I can't remember. We like planned ahead of

Mike: time. I can't remember what it was. Yeah. The next one that's worth talking about is this big settlement in the real estate world, in the residential real estate world.

Which just happened this week impacting stocks like compass, which to be full disclosure, we are shareholders of in our fund. But generally speaking, the realtor commissions are going to change anyone who's bought or sold a house has dealt with this pain point before paying five, 6 percent in a lot of cases to transact on a home is really good for the giant real estate brokerage industry, but really terrible for consumers.

It's my view that this shift will move capital from the pockets of big real estate brokerage firms and realtors to homeowners who, candidly, I think deserve it a little bit more than they do. Feelings aside, I think the real estate market's been a bit locked up right now. for a bunch of reasons, interest rates being one of them.

But also this transaction cost makes it hard to buy and sell, right? If you've only gained three or four or 5 percent on your property in the last few years, and you might want to move, you're like, yeah, but I got to pay 6 percent to move plus legal fees, plus transaction, whatever. Plus fees on the new mortgage.

Plus fees.

MPD: Yeah. It's crazy.

Mike: Layers and layers of fees. It stacks so high that trading and moving becomes not worth it economically anymore. And when you create that environment, it becomes really hard to do it. Although most people

MPD: don't understand that. I think they don't see the full stack of fees they get hit with.

Mike: No one goes into it with the fee expectation that ends up. They don't do the

MPD: math. And so they're like, Oh, I made money. I'm up, but they might not be up.

Mike: When a realtor gets 6%. on the value of the home, which is crazy. If you ask me, then you have to have the whole value of the home go up by more than 6 percent in your time living there just to break even on their commission, not including the lawyer fees, not including search, not including renovations, not including taxes.

It just to me seems like it's always been an inequitable portion of the pie and has Impaired our real estate market. This is a

MPD: really interesting moment in my mind. Since I've been in this venture business going on 20 years now the, this has been the one broker arena where tech has not been able to break through, penetrate and disrupt totally.

And this may be the gloves off moment. I actually built a hypothesis around why this one wouldn't break, why we couldn't beat it. And the theory was that I came up with was like a two by two matrix where you had the risk or the value of the S you're buying and the level of opacity of information. When you're buying a home for a lot of people, it's the vast majority of their net worth.

So risk is high. You got to get it right. And you're going into a situation where you have a huge information asymmetry. Knowing how to deal with plumbing and chimneys. There's so many different areas of expertise that someone who doesn't work in real estate at all has no shot of ramping up on during a transaction.

So I had decided, okay, that must be the reason why this is the one category that we can't break into. There's been countless venture backed companies cause every VC is looking at this and saying, Hey, It has all the parameters of something that should be disrupted, but it's never worked.

Hundreds of millions of dollars have gone in. It's never, ever

Mike: worked. And the biggest one is Compass, right? They Oh, there was Redfin before that.

MPD: There's Every five or ten years, it's been a repeat cycle of tech company comes out with a huge amount of funding and just runs into this market and hits a

Mike: wall.

Even the Zillows of the world, right? When they first came out, I think the, I wasn't there, but I believe the premise was we're going to take buying offline or online, it was like offline buying online and help you transact without paying a giant broker fee. My assumption is that they ran into this wall that everyone else has run into where the brokers control the transaction and the rate and have caved to becoming a listing service instead.

Now though, if you're like, Hey, I don't, I'm going to go, I don't need a buyer agent anymore. And I can negotiate the seller agent down to 2 percent or something like that. You'll rely on these platforms more and more for finding your property. Maybe they can take a piece of the transaction or they can charge you a service fee, right?

Maybe Zillow goes and says, Hey, for five grand, We'll put a trusted person on the phone who can give you all the market information, break down exactly what the valuations are, price per square foot based upon different conditions, give you everything that this human person was giving you for 3 percent of the value of your home for 25 bips.

And to me, that's what's really interesting here. And to your point where I think now you'll see entrepreneurs be able to build companies in the space

MPD: with success. So the question now is, can the homeowner get enough trust? In a tech platform. Historically, the answer has been tech has been able to earn that trust by breaking through.

I think the best data point is what you were looking up earlier. The percentages of. Seller reps. Yeah, getting paid in other countries where it's not essential collusion structure, which is what we've had until this

Mike: lawsuit. Totally. Yeah, I think again buyer agents in the U. S. Are about 87 percent of transactions.

The reason why that's been historically is because if you don't, the seller has paid the buyers agents. So by the way, great tactic on their side, the person who's about to pocket hundreds of thousands or millions of dollars. Yeah. Okay. An extra couple of extra thousands of dollars, whatever, we'll write it off as a wealth effect for sure.

And the buyer says, great, I'll hire someone because we don't pay them. And in the U S even if you didn't have a buyer's agent, you still ended up with a five or 6 percent transaction fee. So you might as well hire one in other countries. Australia less than 5%, United Kingdom less than 5%, Netherlands 20%.

Average across the globe of transactions in real estate where there's a buyer agent present is sub 33%. In the U. S. it's 88.

MPD: So now when you have to decide, am I going to pay someone to rep me or not everyone's going to opt in to do it. Whereas right now, It didn't matter because the person selling it covered the ticket.

Mike: Exactly. The cost. If we go to even the global average, we'll go down from 88 to 33%.

MPD: Right there. It's a two thirds slash in the market. More or less right

Mike: in the buyer side of the market, for sure. Wow. So that might, so a hundred billion of real estate commissions, say agency year. So if you take off 60 percent of a third of it, you could swipe off like 30 percent or so of that.

So maybe 30 billion of commissions go

MPD: away. If tech breaks into this market, it's going to shrink the hell

Mike: out of it. Oh, it's already there. And I think that's, what's really interesting, right? It's what happens with all these existing point solutions now in this market, because You don't have to pay this person 3 percent anymore, right?

There's 30 billion of spend that just appeared for people to go and try to grab a portion of it.

MPD: Wild. Wild. Wild. That's a

Mike: big market. All right. What's number three? Number three on our list today is, I don't remember. Oh, Boeing. Yeah. Yeah. This one is probably the least relevant to like our portfolio or tech specifically, but I think a relevant conversation to talk about just because of, where they are in the market and how the lessons we can learn in our own portfolio companies, et cetera.

Anyone who's been alive has been following the news at Boeing lately. This once great American company has fallen by the wayside in terms of quality, and they're not building like washing machines, guys are building airplanes, something that really should be high quality. And they over optimized for quality.

Really, I just call it corporate greed, right? Stock buybacks CEO bonuses, operating margins, increasing at the stake of quality and it's coming to a head, right? Interesting story in like poor longterm, longterm corporate management, in my opinion. But what do you think? Yeah, there's a,

MPD: Agency issue with a lot of public company management teams, right?

They just are incentivized to manage for the quarter early earnings per share. Yeah. They might be incentivized to work towards a couple of annual bonuses before they turn out of their job. But some of these decisions and huge companies, they have longterm effects. And it just doesn't square up. But this is a particularly painful one for me.

I'm a little bit of a history nerd, right? Boeing was one of the giants of the twenties and thirties, like when they came out. And a fun trivia fact for folks listen to this. The founder of another great American company is also Boeing. Do you know which one it is? So it's actually United, which was the first commercial airline.

They were both under Boeing and then in the antitrust period, which is anti monopoly put in common parlance, today's language. The government forced Boeing to spin out United. So they used to make the planes and then do the, they invented commercial aviation. So William Boeing is the man right at the time.

But yeah, this is tough to watch. This is a great legacy being.

Mike: Destroyed. Yeah. And while usually I'm a pretty government hands off guy, I do think that it's quite a testament to a monopolistic structure that Boeing still employs in the manufacturing of airplanes in this country. There's two airplane manufacturers globally,

MPD: right?

You have, there are some monopolies like there's some industries are just too expensive. Yeah. Semiconductors, airplanes, there's just a few things that you can't have 50 of them.

Mike: No, but you could have three. There's demand now for, there's demand now for three, five, again, I don't think it's going to look like it's going to look like cars, right?

There's going to be six major car companies. And then, there's a long line of private aviation and smaller players in the space, but for the majors, I think it probably should look something like Volkswagen ford, gm and one more that make the majority of the world's cars and or airplanes.

Unfortunately for passenger aircraft, it's Airbus in Europe and Boeing here in the U S and you notice this in Boeing. It was almost shocking over the years. How little they seem to care about these issues coming up. And the short answer was because there was nowhere else to buy planes, right? If you were an airline trying to grow your roots and get new, improved, better aircraft, you had to go to Airbus or you had to go to Boeing.

And if Airbus is line was three years in Boeing line was two years, like you're going to go to Boeing. I

MPD: also think about the innovation, the space, not getting into the technical details. I'm not a aerodynamic engineer or whatever, but like a, I've been in planes for a long time. They haven't changed much.

They got TVs. It's JV innovation. Yeah. And this whole situation top to bottom smells like a wonderful opportunity for entrepreneurs to stand up, raise a huge boatload of capital and start building modernized technology, electrifying planes, maybe removing pilots. There's a lot of frontier opportunity here that it's just not been done.

So I'm hoping this window in time. Inspires some of the folks in maybe the space industry to step, to step to the side and come over and fix aviation, right? Or

Mike: use commercial aviation as a way to grow into, into the

MPD: space world. It's a window. It's a window. And I bet you this will inspire some VCs to write some checks too.

I hope

Mike: Unfortunately it's such a long lead time on these things. Yeah. But yeah, it's worth it. I agree. But you put interesting. You say that actually, because where most of it has gone is into space, right? Blue Origin with Jeff Bezos, obviously SpaceX with Elon Musk. Richard Branson's one two with Virgin Galactic.

So it's like the people who could have been doing this said, eh, I'd rather go to the moon. I just feel like the door

MPD: wasn't open to, it felt like a monopolistic situation, whereas commercial space had the government's blessing. NASA's saying, Hey, we're going to start writing contracts. They've been a good partner.

Yeah. We just had Dylan Taylor from Voyager space on the pod a couple of weeks back. He is, he operates a private company and they're launching the next commercial space station. It's privately owned. I

Mike: actually listened to this one.

MPD: Yeah. Good. Good. You learned something. Yeah. NASA's partnering, making it happen.

That paradigm I don't think has been open from a government standpoint to aviation entrepreneurs, the way I hoping it is right now.

Mike: I like, this is okay. Question for you. Why isn't this the time to your point where the federal government says, you know what? We want another player in aviation.

We're going to write a 20 billion check. The U S government and the people of the U S will own some equity in this thing or whatever it is. And we help spin up the next three next gen aviation companies to compete with it. Boeing and Airbus and launch this the way that it should be

MPD: launched.

The way they do that, since I think they're trying to get out of the business of being equity investors, there's all these conflicts. Yeah, it's fair. There's going to be complaints later by politicians and lawsuits and nonsense is they create RFPs and that's how they fund it. They say, we're willing to fund a 10 year from now purchase from three different companies.

That's how they do it. And they don't take any equity, but they're essentially seeding the market. But this is a great moment. I would hope that there is some political will that comes out of this

Mike: or the big airlines do that or the big air. Cause right. If you're,

MPD: if you're Delta, one of the big, commercial giants right now goes out and buys up Boeing and tries to shake it up.

Like it's not going to happen. I think Elon spread thin enough as it is, but

Mike: I know you want Elon Musk to buy them, but what Boeing as of today is still 115 billion dollar company. So right. But that's tough by it just depends on what you think it could be. Yeah. Even at a year, the stock is still down only 10%.

Which is crazy. Just because the point you still have to buy it. They're falling apart in the sky. Literally could only

MPD: buy planes. Insane. Yeah. Insane. Cool, man.

Mike: Good sesh. Later.

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