Diary of an IPO
Below the diary of an IPO journey by its CEO and Founder, published in his Linkedin profile. As you will appreciate, it’s a long and winding road. Enjoy!
Glenn Kelman is the CEO of Redfin, a technology-powered real estate brokerage that recently went public. Below is his story...
Boarding Delta 2989 in Chicago on a Friday night, I left Chris Nielsen, our CFO, in 16D and headed to the bathroom. We'd been scrunched together in the back row of a black SUV for the first five days of our roadshow but now, when I latched the bathroom door, I was alone. I called our chairman to tell him not enough people wanted to buy Redfin’s stock and that our IPO was in trouble.
The Sunday before, I’d been happy and heedless. I’d skipped the final rehearsal of our investor pitch to take my kids canoeing. I’d run through the airport without realizing my shirt was inside-out until bumping into a board member’s husband.
I kept a diary of the whole IPO process, which was as weird as an abduction by space aliens. Instead of being bathed in a golden light, I found myself poked and prodded like Kate McKinnon in a Saturday Night Live skit. And what I learned is that seeking approval from one person after another will tear your heart out. I learned to see everything I loved, at least for a moment, from an appraising distance, so I could stop nit-picking it or promoting it or defending the way it is now, and instead reimagine it at its full potential. I learned that sometimes you should just tell people the ugliest things about you because those are the things that people trust the most.
And I learned that very rich people insist on getting the whole truth about a business before buying its stock, which means that civil society is still capable of producing the whole truth about topics that are far more important than Redfin's stock. There should be a roadshow for the healthcare system and education reform, with private jets and black cars for the doctors and teachers involved, but also an army of IPO lawyers and regulators to assure the skeptics that everything in the roadshow is true.
The whole IPO process has historically been a coronation, but several recently had turned into a beheading, and several after ours faltered too. Today, as tech businesses line up to cash in on a roaring stock market, 2018 promises to be the biggest year for public offerings since 1999’s Internet bubble. What’s at stake now are the same challenges Redfin went through a few months before: the world has begun to wonder if any Internet company can compete with Facebook, Google and Amazon, and if this new generation of companies can surpass the billion-dollar price-tags put on them in a private sale.
Day One: A Rolling Panic Room
The roadshows in which companies pitch our prospects to investors are choreographed pandemonium, starting on a Monday in New York, and ending nearly two weeks later back in the same place with an IPO. In between, there are ten meetings a day, in a new city every day, with not a single meeting booked until the roadshow begins with a presentation to the salespeople who schedule the meetings.
The first morning of the roadshow was the presentation to this salesforce, on the top floor of Goldman’s headquarters. You could see the Statue of Liberty, dwarfed by all the commerce. I had wanted to be disaffected by the tableaux of Manhattan’s power, but I’d already asked the bankers, in embarrassing detail, exactly what to wear.
Before running Redfin, I’d co-founded a company that had gone public in 2002. Even on the day we rang the bell, I only had a sip of champagne in a cubicle before trudging back to my own desk. Going into Redfin’s IPO, I realized how foolish I’d been to dismiss anything in our haphazard lives that can act as a rite of passage. Adult life, bereft of proms or podiums or graduation ceremonies, is just so much hard work.
A Pitch to the Last of the Mohicans
No one understands this need for ceremony, the theater of the IPO, better than Goldman Sachs. Goldman’s salespeople are the last of the Mohicans, as sales and trading have largely been automated over the past twenty years. A human being isn’t needed to trade Google or Apple stock unless it’s a very large order. But a new stock like Redfin is still sold by people.
The Goldman bankers who put together deals for the public markets can’t even access the floors housing the Goldman sales and trading folks, who only get to work off the public set of facts assembled by the bankers. Only when the bankers have finally prepared a company for its roadshow can they, on the day of the roadshow’s launch, walk across the lobby to the elevators that take them to the salespeople.
The hedge funds and mutual funds called on by the salespeople are collectively known as the buy-side. The banks selling your stock to these funds are known as the sell-side. The public generally thinks of investment bankers as the peak of wealth and power but it’s the fund managers who make obscene money, at least until a bad trade chases them out of the business.
Once I realized how much money was being made on the buy-side, I almost started to feel bad for the bankers on the sell-side. The bankers worked around the clock for months; the junior analysts and mid-level associates on the team all talked about how happy they were to have a humane lead banker who insisted they take one day off every seven. For all this, they earned the bank a few million dollars, a princely sum but not compared to the amount a single fund got flipping our stock within 30 minutes of our IPO.
The banks used to get a plate at their own buffet, using their own money to buy and sell the stocks they sold to others, but after the financial crisis of 2008, Dodd-Frank legislation made this illegal, eliminating one of the bank’s most lucrative businesses, along with many of its risks. Now that a bank can’t bet its own capital, it’s more like an accounting firm or ad agency, selling its people’s time and services for money.
A Ballet Choreographed on the Fly
And while it’s popular to grouse about the banks and their fees, their service was a thing of beauty. After our pitch to the sales force, Chris and I ate sandwiches in a Goldman conference room to give the sales people time to book the day. Forty-five minutes later, we were in a car headed uptown for the first of 56 meetings, which continued, without a single gap except for travel and sleep, for the next nine days.
We had two SUVs, one carrying two bankers and three or four Redfin folks, one driving behind us empty. I asked our bankers if the empty SUV was carrying spare human organs in case of a medical emergency; they laughed. Maybe it was available as a rolling panic room in case any of us ever needed personal space or private reassurance? We asked many times to have it sent home but its purpose was unfathomable and implacable.
The First Goldman IPO on Commercial Flights
By three that first day, we knew we were headed to Boston that night on a commercial flight. Since one of Redfin’s mottos is that we’re all paid by the sweat of an agent’s brow, we’d said we couldn’t pay for the private jet until the roadshow’s final crazy sprint, when we were going from Kansas City to Milwaukee to Baltimore in one day.
Our would-be investors loved this thrift, and our bankers, despite noting that they had never run a roadshow on commercial flights, gamely celebrated it. But then we found ourselves, each and every night on the roadshow’s first week, flights delayed for hours, eating Sbarro, lugging a box of prospectuses through La Guardia, Logan or O’Hare, unable to reach the hotel until 1 a.m.
Goldman never complained.
I went from banker to banker at the airport, apologizing for the decision not to use a private jet. Later that week, I heard from a board member about a recent IPO in which the company going public paid for two private planes, one for the CEO alone, and the other for everyone else.
Like A Dated Disney Ride
And when we finally got to the private jet at the end of the roadshow, what was that like? It was extremely convenient. There was no metal detector. The plane took off when you got on and often the SUVs drove straight onto the tarmac. I’d never even noticed that these tiny airports existed before, hidden in plain sight in the suburbs of every major city.
The planes themselves, with phones built into the armrest from the days before in-flight wifi, reminded me of those Disney rides that are supposed to be futuristic but actually feel dated. The pilots were freakishly, almost suspiciously handsome. You could sit between them while they landed. Everyone took pictures but no one posted them to Instagram. And you got whatever food you wanted. We sampled the local fare like a visiting king: BBQ from Kansas City, fried cheese curds from Wisconsin. The bank had made sure the plane stocked my favorite beer.
Masters of the Universe
In other ways too, the roadshow had the feel of a bygone era. For example, almost everyone on the buy-side we met that week was a man: in one group lunch, all 24 of the portfolio managers in attendance were male. We may have met more portfolio managers who were Israeli special forces veterans than women. I asked our bankers how long it would take the first one to kill me with his bare hands.
Almost all of them took notes on tablets. Some of them tried to look up as you spoke, but with their eyes focused on nothing except the numbers in their head. They weren’t just capturing the highlights of a meeting; it was a nearly verbatim transcription of what we’d said, so we could be held accountable for it later. Information in every form is the currency of Wall Street, and drops of it never seem to fall on the floor.
Chess with Bobby Fischer
Most of the fund managers were exotically, obviously smart. Except for one person who fell asleep in a meeting, none of the fund managers we met was anyone I’d want to be on the other side of a trade with, buying what he sold, or selling what he bought. This is what I realized I had been doing my whole life as an E-Trade stock-picker; it had been like challenging Bobby Fischer to a game of chess. I spent a long time that first week trying to judge whether it made sense to have so many brilliant people decide where our society allocates capital, as opposed to making cars or software or hospitals.
The Last Ideology-Free Realm
What impressed me most about these people was their willingness to change their minds. No one in our society seems to change her mind about Donald Trump or Hillary Clinton based on a new fact, but a fund manager on the wrong side of a bad trade has to change her mind in a moment or lose her job. This is why investing is the world’s last ideology-free realm. It would be easier to accept the premise that our society can’t agree on one version of the truth anymore, about whether temperatures are rising or the economy is growing, except that’s exactly what happens when every public company reports its earnings every quarter. You can believe what you want to believe, but not with a million dollars on the line.
“Come On Guys, It’s Only 28 Million Bucks”
We visited the top floors of the tallest skyscrapers, posing for goofy selfies in art installations and beside sprawling views of Central Park. A portfolio manager claimed that the firm’s two full-time art curators had to approve the posters he put up in his own office. We went into a building surrounded by planter boxes with retractable steel gates that could be closed in case of an anarchist riot. From a video conference in a Mexican cabana, a hedge-fund king chafed at how careful his team was being about a Redfin investment, saying “Come on guys, it’s only 28 million bucks.”
For the most part, we answered questions rather than delivering a pitch: about a Redfin agent arrested in our early days for pot farming, about a Redfin sign bludgeoned down and left in my yard. We rotated in members of the executive team, one every two days, but what worked even better was having our local real estate agents show up to speak for themselves, about how we recruited employees or served customers.
Through all 56 meetings, in New York, Boston, Chicago, San Francisco, Kansas City, Milwaukee and Baltimore, the overwhelming experience was of repetition: over and over we answered the same questions. When I got a sore throat, the youngest member of the banking team stopped off at a pharmacy to get me some lozenges and a card with a kitten on it, which I still have.
The Last, Best Order
One of my favorite meetings was with a Scottish fund manager in San Francisco. His firm was known for buying only a few stocks, and holding each for as long as a decade. In a hotel meeting room with enough prospectuses, pitchbooks, cookies, fruit, cheeses, crackers and popcorn for 30 people, he came in alone. And rather than rattling through twenty or thirty questions about our metrics, he just asked me why I ran the company.
I found myself talking about my older brother, who had died just before I became Redfin’s CEO, and the feeling I had then that my life so far hadn’t made the world a much better place. He asked me about whether Redfin’s sense of mission would survive our public offering. He didn’t write much down. His order was one of the last, and the best, to come in.
An Invitation to a Beheading
Hours after each meeting, a salesperson would call the account. The bankers tracked the orders on their phones. There was a line chart showing how many orders each recent IPO had had at the end of each day on the road; a dozen lines sloped steeply upwards except ours, which looked like a dying slug. When Chris and I got on the plane home that first Friday, we were at a third of where our bankers said a strong IPO should be at that point.
Goldman never wavered in its confidence that demand would be sufficient to sell all the stock we had to sell, but what I was too embarrassed to say was that I wanted the IPO to be more than sufficient. I wanted it to be a triumph for everyone I worked with, all the people who could have made more money over the past decade at Amazon or Google, Sotheby’s or Corcoran.
I spent that weekend at home despondent, shaking my head grimly when my six-year-old tried to get me into the bouncy house at a birthday party, brooding over a competitor’s claim that it would be able to dissuade investors from buying our stock. I expected our first day of trading the following Friday to be a fiasco.
The Sound of Hooves Moving Across the Plain
What had been at stake in Redfin’s roadshow was whether we could make money in a world of Internet giants, but also whether we could sell our stock without selling out. We’d known some investors would get hung up on the cost of our real estate agents’ salaries and health insurance, or the amount we saved homebuyers without any data that it drove sales. We never tried to talk them out of those concerns.
To portfolio managers who wanted to see the company as nothing more than a real estate website without the costs of customer service, we had said we were as proud of cleaning out a listing customer’s closets as we were about inventing map-based search. To emphasize the frugality we learned in the 2008 housing crisis, we included in our investor video a cameo of the Batman villain Bane, who talked about being born in the dark. We described ourselves in the prospectus as “rabid squirrels.” We had wanted to go public our way, and now we had 48 hours to wonder whether that had been a mistake.
Our roadshow video included a cameo of the Batman villain Bane, to emphasize that, having survived the great real estate recession of 2008, we "were born in the dark. Our head of design, Chris Fryer, wore the mask.
I don’t know what changed that weekend. Goldman went into overdrive with every open account; no one, I would guess, got her day off. A call with a titan of finance was arranged to give me an inspiring speech that everything would work out, then he forgot to mute his phone while he flushed the toilet.
Maybe, since our roadshow was in the middle of earnings season, the fund managers just needed a Saturday to make up their minds. Maybe they started to hear the sound that they are in the end most exquisitely attuned to, of other hooves beginning to move across the plain. We wanted to believe that everything strange about our half-website, half-broker business was why investors didn’t decide right away, but also why so many came our way in the end. We’ll never know.
All we know is that between Friday night and Monday morning in San Francisco, the number of orders for our stock had tripled. And after every meeting, more orders came pouring in. When we left California for the Midwest, the roadshow had gone from a death-march to a celebration. On the last day, when we had orders for twenty-three times times the actual number of shares we had to sell, folks from our Baltimore office crowded onto the private plane, filling every seat for the trip back to New York. The 40 longest-tenured employees would be there, to celebrate a harrowing, happy decade together. Someone opened a bottle of champagne.
The Yo-Yo Ma of Trading Stocks
Back in New York, we sat down with the Goldman trader who would open our stock, Benny Adler. He walked into the room talking about the rumors surrounding the fabled Aramco IPO, which some time in 2018 is supposed to turn Saudi Arabia’s billion years of buried dinosaur bones and carboniferous forests into a trillion-dollar public company, and how it was every trader’s dream to open that stock. He had opened Alibaba and Twitter, with the bank’s legendary CEO, Lloyd Blankfein, standing, arms folded, just a few inches behind him on Goldman’s trading floor. Someone told me he was brought into deals that Goldman didn’t even underwrite.
Later that night, Redfin would sell our stock to the investors we met on the road show, for $15 per share. The next day would be the first day of trading, when, about an hour after the market had opened, some of those investors would sell to the public the shares they had just bought. It was Benny’s job to pick the price of that first trade, based on the pre-orders from buyers and sellers lining up on either side of his screen.
The enemy, for us, was volatility: we didn’t want the stock to go down, but we didn’t want it to go up too much either. When the stock price doubles on the first day of trading, it makes for a nice headline, but leaves you with shareholders set up for disappointment. And it’s not like anyone at Redfin would benefit from that first-day pop: the new shares issued to the investors we just met on the roadshow could trade, but the company and its employees had agreed not to sell any stock for months, a standard practice for virtually every IPO.
In the meantime, the stock would jolt up and down on what Wall Street describes as “technicals,” not “fundamentals.” The company’s revenues, products and customers become almost irrelevant to the stock price when the overwhelming issue is that there are so few shares to buy. Hedge funds will bet against the stock, and others will bid it up just to squeeze those funds out of that bet. It’s like a new type of card game in a Las Vegas casino, with lots of gamblers lined up to play, and only a few investors holding the cards.
Benny talked to us about what he’d do if the stock started falling the next day, warning any would-be buyers to hold off, then organizing a rally backed by Goldman’s own trading at $13. This element of the deal, known as a green shoe, let Goldman sell extra shares on the assumption that demand would be high, but obligated Goldman to buy those shares back if demand was low.
Benny had also identified investors from the roadshow who had called to tell Goldman they would sell their Redfin stock at $21. He said that others would be sneakier: promising to hold our stock for years in order to get a large initial allocation of shares, then, within minutes of the first trade, smuggling quick sales through smaller brokerages. All of this would limit how much the stock could go up. I felt relieved.
We were already worried about setting expectations on our first day that we’d spend all of 2018 struggling to meet. This is why we sold some of our stock to investors from the roadshow who wanted to flip it rather than own it, just to put enough shares in play the next day. It’s why Benny kiboshed a Redfin appearance scheduled on CNBC before the opening bell. When we worried it might be hard for the CNBC producers to re-schedule on such short notice, Benny just laughed.
Then it was time to go. I asked him if I could take his photo. “Not here,” he said. Then he walked out to the trading floor, picked up a phone and pretended to yell into it. I snapped the picture.
Benny Adler, the Goldman managing director who opened Redfin's stock.
From the same Goldman conference room where we nibbled on sandwiches before the roadshow started, we went over the list of investors who’d given us orders on the roadshow, and decided which to sell our stock to that night. Goldman rolled out a cake for our CTO’s 40th birthday.
At the NASDAQ in Times Square the next day, I told my wife I felt the way I did on the morning of our wedding: that as much as I wanted to marry her, it had made me miserable when everyone told me it would be the happiest day of my life. I can never quite be happy when I’m supposed to be. I was nervous about a speech I’d have to give in front of her at the NASDAQ, as if my parents had come to one of my little-league games.
I mumbled something to our employees about Shakespeare’s tragedies being unbearable because they could have so easily turned out the other way. What I forgot to say was that was what also made Redfin’s triumphs so giddy, because of all the times we almost went bankrupt. I gave a second speech that was broadcast on the financial news shows, more enthusiastic but still meandering. Out of sheer cluelessness, I hadn’t realized anything I said would be broadcast until a few minutes before.
And then I pushed a button on a screen that was supposed to open the market, but in fact wasn’t connected to anything. There were confetti cannons and photographers and videographers and images that took over all the screens on Times Square. An hour later, our stock started trading at $19.56, a $45 million gift to the roadshow investors who got an allocation the night before at $15.
Every Startup Should Have a Day Like That
Then the employees left the NASDAQ studio, which looked like a game-show set, and the interviews began. Everyone was nice to us. I finally figured out that the only time I could ever bear myself on TV was when I didn’t worry at all about what to say, and focused instead on conveying how I felt, which was very, very excited.
My last call with the press was at 5:30 p.m., via a cell phone as I walked through Central Park to a fancy French restaurant. Redfin’s CTO, my wife, another friend and I saw a play. Then we walked into the disorienting brilliance and crowds of Times Square at midnight, forgetting that Redfin would appear on all the screens again. It had in fact turned out like my wedding: it was the best day of my professional life. Every startup, every group of people who works together for a long time, should have a day like that.
Glory, Not Just Gold
Many assumed I was happy because of all the money I’d made. And I’m sure that some part of it was that, but it wasn’t at all how I felt, then or now. Ask anyone how much money you get for winning a Pulitzer Prize and you will learn that most people in the end are hungrier for glory than gold. For twelve years, I’d asked almost everyone I cared about to believe in a company that I had worried would fail, and then it didn’t. There’s probably a long word in German for that feeling, but the closest we have in English is ecstasy.
The Tiny Piece of String at the Finish
The only way I’ve been able to account for that ecstasy is by comparing it to a bicycle race. I was one of the worst bicycle riders who ever pinned a number to his jersey.
Unless you’re one of those rare gods who can pedal into the wind alone, you never break out into the open road until the final two hundred meters of a race. Otherwise, you ride within 24 inches of a competitor’s back-wheel, wondering how to maintain that pace for another 30 seconds, but then doing that for hours. Everyone is jostling you and pinching off the line you want to take around a corner, and trying to ditch you on murderous descents, all because of a tiny piece of string strung across an arbitrary finish line.
If you were riding for yourself and not your teammates, or if there was a way to pull out without having to pedal home alone, you would. After my first race, I realized that it was actually a relief not to have the talent of a Greg LeMond, because I still wouldn’t want to turn myself inside out every day to earn a living. Business has often been that hard for me too. Almost nothing can make you more miserable than when your company is struggling, and only then do you realize that this is exactly when it’s almost impossible for a CEO to quit.
But then within sight of the line, the race opens up, almost like a hallucination, and you can finally see the world in front of you. You forget for just a moment about all the races, wrecks and failures behind you and ahead of you. And then just like that, the race is over, and you’re disoriented and relieved and already nostalgic and completely happy in a way you’ve never been before. This was how I felt when I walked out of the NASDAQ and into our life as a public company. That was four months ago. I haven’t checked the stock price since.
Many thanks to the bankers, lawyers and auditors at Goldman Sachs, Allen & Company, Fenwick & West, Cooley, Deloitte and to all the people of Redfin for supporting our IPO.
Glenn Kelman | CEO of Redfin