Size Matters

Today’s sponsor, The F Suite

This is my all time favorite scene from Succession. Cousin Greg learns that his billionaire grandfather is cutting him out of the will. But, lucky for him, his back channels tell him he’ll still get a small taste - $5 million - when the old man kicks the can.

Tom and Connor proceed to explain why $5 million is actually the worst place to be:

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“You can’t do anything with $5, Greg.

$5’s a nightmare.

You can’t retire… Not worth it to work. $5 will drive you un poco loco, my fine feathered friend.

Poorest rich person in America. The world’s tallest dwarf. The weakest strong man at the circus.”

-Tom and Connor

The same could be said about companies trading at a $5 billion market cap.

$5’s a nightmare.

Companies in this range (some would even argue sub $10 billion) get caught between a rock and a hard place.

Why? Well, it has nothing to do with underlying business fundamentals.

Let’s say you’re a hedge fund manager with a $15 billion dollar fund. You can’t have 100 positions in the fund. So in order to move the needle, you need to have a position that’s at least $500m in each company.

And you also need the ability to get out of a stock relatively quickly (and quietly), if shit hits the fan.

As a litmus test, investors ask how many days of daily volume it would take for them to bounce.

A quick example:

The float on a $2 billion company is 20% to 40%, meaning there’s between $400M and $800M in actual tradeable equity at any given point.
And the daily trading volume on that float is $50M.
Finally, you want to stay under 10% of daily trading volume so you don’t crush the price.
Conclusion: it will take a long time to get out of a $500M position at $5M increments.

Plus, to build a meaningful stake, you’d need to own a significant chunk of ownership, triggering a threshold that requires reporting whenever you move in or out. That’s a pain and comes with a whole set of competitive considerations.

And from a coverage standpoint, researching and keeping up with these stocks will take about the same amount of time, effort, and resources as covering a stock with a $40 billion market cap. So the juice isn’t worth the squeeze.

Aside from the trading mechanics, from the perspective of the company, it’s really hard to get research coverage below a certain threshold. The Goldmans and Morgan Stanleys of the world won’t cover you at $4 billion, which makes it hard to generate awareness and visibility.

So you float in this zone that’s neither interest nor disinterest - but, rather, irrelevance…which is actually the worst place to be.

All these considerations, which are squarely outside the task of “building a great business”, are reasons why it doesn’t make sense for most companies to go public unless they’re going to trade in the mid to high teens of billions.

I used to think you could just build a good company that grows nicely, with solid unit economics, and you can go public at $100M or $200M in revenue. You can. But you’re fighting an up hill battle to thrive in the public markets, which partially trades on attention.

Yes the public markets bring liquidity, access to capital, and enterprise sales credibility. But if you aren’t pushing double digit billions in market cap, you’d hate to fall out of a favor in a way that’s hard to come back from (see: Jfrog, Pager Duty).

As my good friend, a crossover investor in the technology space told me:

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“Sure - you are technically allowed to take a 125cc motorbike on a German Autobahn that has no speed limits. It’s just not going to be all that fun or safe with all the fast cars and big trucks around you.

One hiccup, somebody overlooks you, and you get severely injured, if not end up dead.

You can make it, but you better drive real careful and stay in your lane (and hope you don’t get side swiped at some point). Or you go as fast as you can and pray to God you reach the exit before shit goes sideways.”

Couldn’t have said it better myself.

So yea, size still matters.