Alan Patricof Interview – An Irrational Exuberance in Terms of the New IPO Market

Alan Patricof, a legendary value capital investor, shared his thoughts on various trending market issues in a CNBC interview released at the end of March. Before we get into details of the interview, let’s briefly remind ourselves of the investor’s impressive background.

Back in the early days of his career, more precisely in 1969, Mr. Patricof founded his own company called Patricof and Co. Ventures. He managed to raise $2.5 million of initial capital, mainly through his previous success as an investor – he bet on a new publication at the time, New York magazine, which happened to be a good pick. Eight years after launching one of the first venture capital firms,  Patricof and Co.Ventures, he formed the private equity firm Apax Partners, now one of the largest private equity firms globally with $41 billion under management. The company has its headquarters in London, England, while providing additional offices in New York, Munich, Tel Aviv, Shanghai, Hong Kong, and Mumbai.

Mr. Patricof is often considered as a “Founding Father of the venture capital industry”, and during his 40 and more years long career he played an important part in the growth of several leading companies. Among those dominant names are Office Depot, Apple Computer, Audible, Inc., America Online, and Cadence Systems, to name a few. In 2001, Mr. Patricof decided it was time to shift his focus back on venture capital investments in smaller companies, so he stepped from a chairman position at the company. In 2006 he founded another venture capital firm, Greycroft Partners, which mainly focuses on early stage digital media companies. Greycroft Partners has more than $1 billion under management and provides its professional services in New York and Los Angeles. Mr. Patricof graduated with a BS in Finance from Ohio State University, with an MBA from Columbia University Graduate School of Business and with an MS from Columbia Business School.

In the interview, he discussed private and public markets explaining that in the last decade, we haven’t had a perfect market, and that many companies stayed private because there was more money there. According to Mr. Patricof’s opinion, the things are now changing, and more and more companies are going public, as the private market can no longer fund the losses. The public markets now represent the logical option. He further said that he thinks “there is somewhat of irrational exuberance here in terms of the new IPO market” because more and more companies that are going public are actually already very popular companies, with which are consumers familiar, referring to Lyft, Inc. (NASDAQ:LYFT), Uber Technologies, Inc. (NYSE:UBER), and Pinterest, Inc. (NYSE:PINS), to name a few. This familiarity will raise enthusiasm and it will create “a consumer IPO market”.

When asked on what metrics should investors pay attention to in order to avoid making mistakes carried away by the excitement, Mr. Patricof replied that instead of focusing on growth rates, which many companies can’t sustain further, they should focus on profits. He emphasized that when companies are valued at $20, 30$ or $120 billion they require careful approach as there’s a lot less room for mistakes.

Mr. Patricof believes that the private market is also prosperous with so many new companies being launched, hence he has no fear of it lacking the businesses. He further pointed out one precious thing he learned very early in his career: “I learned that ultimately everything has to be funded by free cash flow. You can’t have shareholders forever subsidizing the growth of the companies.”

On Apple News app created by Apple Inc. (NASDAQ:AAPL) and its idea to profit from a subscription payment model, Mr. Patricof said that with the company being a popular consumer brand it is, they may find a way for this concept to work. He is of the opinion that this can be a good model for publishers, as it can generate more traffic enabling them to profit from more advertising. Further noting that he is hoping for AXIOS, in which his firm is investing, to also start utilizing the subscription payment model.

For more details from the interview watch the video below:

Watch CNBC’s interview with legendary tech investor Alan Patricof from CNBC.

Disclosure: None.

This article is originally published at Insider Monkey.