Spenser Skates is 33 years old and has had just three jobs since leaving MIT in 2010, two of them in companies he founded. The first of those start-ups, speech recognition texting app Sonalight, failed fast, but led to the creation of the second, San Francsico-based Amplitude, which launched in 2014. Today, the cloud analytics unicorn - currently valued at $4 billion - has direct listed on Nasdaq, making Skates one of the youngest US CEOs to take a company public.
Amplitude has 1,200 enterprise customers (including 26 of the Fortune 100), over 500 employees (with headcount growing at 26%), and has offices in New York, London, Paris, and Amsterdam - a straight line east from the Valley. Not bad for a man who studied bioengineering rather than computing, and whose entire previous job experience had been nine months in financial services.
Amplitude makes the bold claim of being the brains behind other companies' products - 45,000 of them - in that the data the start-up gathers pushes clients towards making or fine-tuning decisions from user behaviour. Or to put it another way, Amplitude's proprietary Behavioral Graph, is a "digital optimization system that enables organizations to see and predict which combination of features and actions translates to business outcomes".
Yet seemingly everyone who isn't in AI is in cloud analytics these days, with more and more companies offering to automate business decisions based on what has made other people successful. What price human intuition in our global echo chamber - something Skates clearly has himself?
The answer is that emulating success can be a good thing. In a cutthroat world in which elevator pitches can make the difference between failure and (in Amplitude's case) clinching a $150 million Sequoia Capital-led funding round in July (which quadrupled the start-up's 2020 valuation), Skates wants his company to be "Salesforce for product designers".
In short, it's about telling a simple, persuasive story. Skates tells me that the concept for Amplitude arose from an in-house analytics system that he and his co-founder built for Sonalight. When companies both large and small began saying they could use a system like that, he realised that a different kind of signal had emerged from the big noise he'd failed to make with his speech-to-text app. He says:
[Sonalight] built our own internal analytics system because we wanted answers to questions around our own product data. What were the important things that would happen on a user journey to keep someone highly engaged, right before the churn?
It was clear that there was a massive opportunity: mobile and Web 2.0 were really taking off and the online world was turning from what I think of as a content-centric internet to an application-centric one, where every website has a login and user profile. The best product teams, like Facebook, Netflix, and others, would use a data-driven approach to building their products. So, we thought, ‘Let's build for the 99% of companies that don't know how to use product data.
Letting the market decide
So why has Skates opted for a direct listing (floating its outstanding shares) rather than a traditional IPO (creating new ones)? Why is this a better route for an ambitious start-up? Skates says:
It became super-clear that a traditional IPO has a number of really big downsides. The biggest being that you don't get market-based pricing for your company; you tend to get pricing set by advice from bankers. Because of that, companies often end up pricing stocks too low. For example, the average under-pricing last year for a traditional IPO was 50%. In some cases, like Airbnb and DoorDash, they under-priced their stock by 100%. This was an inefficient process, which was crazy to me coming from the finance world.
I realized a direct listing was a great option for Amplitude because you get market-based pricing of your stock from day one - it's determined by the free market as opposed to centrally planned, if you like. This was validated when I met the CFO of a large public company, who called IPOs ‘the biggest arbitrage opportunity in finance'. As a CEO, why would I want to be on the other side of that?
This is an unusual perspective at a time when some tech flotations are a triumph of hype and hope over a profitable, viable business, with some stocks (perhaps wrongly) seen as absurdly over-valued. After all, compare the top 20 companies by market cap with the top 20 by revenue and the listing is almost entirely different: in the latter world, companies like Walmart are king of the hill, not Amazon, Apple, or Google.
So why is ‘the big tech IPO' still something that gets Wall Street salivating - other than the chance for bankers to make a killing before a bubble bursts? And what about an IPO's attraction for investors, who would see a 50%-undervalued stock as a good thing? Does a direct listing mean investors are more likely to be in it for the long haul rather than to make a quick, speculative buck? Skates adds:
Yes, you have it exactly right. A direct listing is about whoever has the most long-term belief, not who has the best relationship with a banker. You incentivize long-term shareholders, not the short-term flip. I don't want the people who want free money, I want the people who are buying our stock because they have the most belief in Amplitude long term to be our shareholders.
IPOs are popular just because it's the way things have always been done. But it's a process that's 50 years old. In today's modern finance world, it doesn't make any sense. There's a lot more capital out there, there's a lot more information too, so it's much easier to get in touch with public market investors.
The biggest misconception is that a traditional IPO is good for your brand, because you can get the same or even more by going directly to retail investors.
Other than this, what has Skates' biggest lesson been from growing a unicorn out of a failed start-up?
One of the most important things is how to tell your story in a really simple way. That's incredibly important, even more so when you're going out to public markets. When investors have the pick of so many different companies, you want to break through that noise. You have to be really good at telling your story in a concise way.
The other big one is how to drive your business with predictability, giving forecasts and estimates that are accurate. With public scrutiny, being able to forecast where your business is going is incredibly important. And if you've missed that, that's a huge red flag.
Being in the predictability business is good for business, it seems, especially if you can back a hunch with real-world data. This is a lesson we could all learn in a world that often seems driven by empty promises. Amplitude may not have pumped up the volume of its shares, but it's succeeding by focusing on amplifying signal, not noise. A good thing in 2021.