Geoff Donaker: Going on the Roadshow

The roadshow. Anybody familiar with the roadshow already? Yeah. Heard of the roadshow? The roadshow is a two or three week marketing period. This is the time where you as a management team get the honor of going and flying around the country to meet groups of investors, sometimes in large settings of groups this size or larger, and sometimes individually with two, three or four investors who tend to be large pension funds and control a lot of money. And so you basically have this two or three week period where you're going around meeting with investors. And the really funny thing about this that's not so fun in the moment, but funny to talk about is you have to say exactly the same thing in every one of those meetings. So you might ask yourself in the day of video, why is it a good idea to travel all around the company meeting with people individually saying exactly the same thing? I don't have any answer to that question, but it's just how the process works. And so we did it and we played along. And there were certainly some entertaining parts of that, such as flying around on a private jet for the first time in my life. That was kind of cool for at least the first day. And then that got old quickly, just like everything else. And there was a couple memorable moments where the CNBC crew was camped out trying to take footage of us outside of a hotel in New York. So we got to go in a secret elevator through like a department store and there was a secret elevator. We went through a kitchen in order to appear on stage at this event. So that was kind of memorable. Mostly, I would tell you it's all a blur because I was in a bunch of different cities giving exactly the same answers to exactly the same questions over and over. And then what's happening all during this process? And. Okay, so maybe we should take a step back. Anybody have an idea why are we doing all these investor meetings? No. Anyone? Go. Sorry. To sell the shares. To sell the shares. Right. Because basically we want. The whole idea with this process is we're creating these shares. In our case, I think it was 7 million shares we were creating. And we're trying to sell them to these large investors who then give us money. And that's the price that then gets set on your shares so that anybody else who holds your shares, your investors and whatnot, can buy and sell those freely in the public markets. So the reason that you're traveling the country is to get these big investors interested in buying your shares and effectively setting a good price for your deal. Okay, so as this is going on the banks, who also control large sales forces, are calling into their clients right after you've met them and saying, hey, what'd you think about those Yelp guys? You just talk to those Yelp guys. Obviously you control, in many cases billions of dollars. Are you interested in getting in on this deal? And if so, at what price would you want to buy and how many shares would you like to buy? This is a really important thing. It's all rather manual, kind of shockingly manual, but that's actually all. What's going on behind the scenes is hundreds of investors or individually talking to their salesperson at each one of the banks, telling them how much Yelp shares do they want to buy and at what price would they do the deal. So then the day before we're scheduled to go public, so we're scheduled to go public on a Friday, we all meet up in Goldman's offices on a Thursday night. We're done talking to investors. And now the key question is, do we have enough demand? Again, we were trying to sell some number of shares. I probably got that number wrong. Now we were trying to sell some number of shares and the question is, do we have the demand to actually sell that number of shares at the price we wanted to sell it at? I think we had gone out saying we're seeking to sell shares at about $13 a share. That was kind of a made up number, but we put it out there. And so then the question is, what does the market want to buy? So what the market told our sales forces was they wanted to buy something like 150 million shares compared to the 7 million we wanted to offer at prices ranging from the 13 we said all the way up to 18, 19, $20. So now you have a really funny exercise which again is basically a bunch of people sitting around a conference table and some people participating on a phone, mostly bankers, but also our board members and us on the management team. And the question goes, okay, it seems like we have enough demand to go forward tomorrow, right? Because 180 is more than 7. But what price should we actually sell those shares at now? Common supply and demand logic would suggest you should sell them at as high a price as you can get, right? Not necessarily. Anybody on why not necessarily. Prices can go up later on. The prices can go up later on. Yes. You also give away a lot of your company. Yeah, that's true. If we sold more shares, we would give away more of the company. That is true, yes. Quality of the investor who's going to hold longer? Yes, Quality of The investor who's going to hold longer. These are all true. And one last one. Yes. If your price is too high, the market could collapse, which happened to many tech companies, and that would be a horrible press. This is the real issue. Yes, he totally nailed it. Yes. If you pick a price that's too high, what could happen the next day is that the price could collapse. And so if, for instance, we had picked a price that we knew, for instance, remember, we have theoretically 180 million shares that people want to buy, and we only have 7 million to sell. What if we pick 25 or 30 and people tell us they're going to do that deal? If the next day the price collapses, we could have effectively a broken deal. So we have a bunch of investors now who, in that theory would have bought all these shares at a really high price, and they sell them immediately in the marketplace, which then could tank the price of the stock on its opening day. And we'd have a bunch of investors who got burned because they lost a bunch of money their first day in. That would be bad. You don't want to do that. So what you're trying to do is you're trying to find kind of the sweet spot. And again, it's all very manual, so it's kind of funny in this day and age. But you're basically trying to choose a sweet spot where your investors have a chance to make money and feel good about some gain, but where you raise as much money for your company as you can as well. Right, because you don't want to just give away money. In our case, we basically at the advice of our bankers and kind of going back and forth and trying to think that through. And also watching some of the other tech deals that hadn't worked shortly before our time, we ended up picking the price of 15, a little bit of this, but you're doing your best to be scientific about it as well. And then the next fun part of the equation becomes who gets them. So remember, investors told us they wanted to buy 180 million shares. As it turns out, when we kind of ask the question like, does this always work that way? It kind of always works this way. And the reason it kind of always works this way is the investors have figured this game out too. Right. Hot deals are always going to be oversubscribed. Means that even if they really only want to buy 100,000 shares, they're going to tell you they want to buy a million shares because they know the way to get 100,000 is to ask for way more. And then it's a little bit of a game for who's going to get what.