Mark Fasken: This is Winning IR, a podcast exploring the diverse insights within the IR community. Join me, Mark Fasken, as I sit down with IROs and other IR stakeholders to discuss the winning strategies, tactics, and shifts in thinking that are redefining the profession.
Our guest today is a senior finance leader in the technology sector with experience spanning enterprise software and internet businesses. Rodney Nelson is the VP of Investor Relations at Twilio and his expertise lies in corporate strategy, equity and debt fundraising, public offerings, investor relations, financial and strategic planning, financial accounting and SEC reporting. Prior to Twilio and at the time of recording this episode, Rodney was the Director and Head of Investor Relations at Qualtrics.
Rodney is also a Board Member and Sponsorship Committee Chair of the Boston Chapter of the National Investor Relations Institute (NIRI Boston).
I’m very excited to be able to bring his insights to you today on how a shareholder base evolves over time for a public company, and what exactly that means for IROs.
What are some changes IROs may see in their investor base as they make the transition to a public company and as they mature over time?
Mark Fasken: Hey, so Rodney, your past three companies that you've been at have either been public or soon to go public. Can you elaborate on some of the changes that you saw in the investor base of the various companies you've been at as they've made that transition to a public company and as they've matured over time?
Rodney Nelson: Yeah, it's actually really interesting. Each company I've done IR for has had very different paths to the public markets. So at CarGurus, it was essentially a bootstrap business. I think Lainley only took a couple million in outside capital before CarGurus ultimately went public. Palantir was very heavily invested in the venture markets, raised quite a bit of outside capital before ever going public. Qualtrics, we were a spin, from a very large parent company at SAP.
So at each step along the way, you have kind of different paths to the public markets and therefore a different evolution taking place in the investor base. With CarGurus, because we had so little outside capital in the business and a lot of it was friends and family, you know, our cap table really had its first-ever evolution when we came public and we were growing north of 40% when we came public. So naturally we had a lot of growth investors. We were innovative in our space, you know, we took a very broken model in terms of how you shop for a used car and identify what's a good deal for you and what's not, and flip the economics of that model on its head to make it a more consumer-friendly approach.
And so we attracted a lot of growth investors that saw us as an inevitable and eventual category winner in a market that had been historically a duopoly or an oligopoly. Palantir was a similar story. The business was growing very quickly when we came public, but we knew there would be a bigger transition. We had so much venture in the business when we were private. And this was really the first time we were showcasing the business at scale in any meaningful way. Palantir is historically a very secretive organization and there just wasn't a lot of reporting on it.
Then at Qualtrics, we almost went public in 2018. We were sort of famously bought by SAP on the doorstep of going public. You know, we were all set to price, you know, within days of the SAP announcement.
Coming back out of SAP, you have one large majority shareholder, but again, you're establishing that cap table for the first time when you're going public. In each step along the way, the first cohort that came into the stock were growth investors, but from there, each business took some very different paths from there.
As a result, you had very different evolutions in the cap table over time as we got further and further away from that IPO. The business began to transform from an operational and from a results perspective slow margins became more focused. And so the desires and the demands of the investors in our businesses began to change materially.
What are the biggest changes or adjustments in terms of engaging with new types of investors?
Mark Fasken: So at these three companies you've worked at, what would you say was one of the biggest changes or adjustments in terms of engaging with these new types of investors? I mean, you're probably largely going from your point like friends and family and venture to these institutional investors. What was the biggest adjustment for you and for the rest of the IR team?
Rodney Nelson: I think in each case, it was a little bit different. At CarGurus, there was a real lack of public company experience at the top of the organization. And I think there was something of an expectation that would be not an under followed story per se. We came public with quite a bit of attention. But I don't think there was this expectation that investors would glom onto the story in the way that we did. And we got a lot of attention coming out of the gate fast as we were growing, but B, we were profitable not just on a non-gap basis, but on a gap basis, which is something of a novelty in technology these days. We attracted not just growth investors, but a wide range of investors who wanted to understand the story, but also understand where this business could really go.
Whereas at Palantir, everybody was getting a look at the business for the first time ever. There was no real understanding of what Palantir did, what they were in markets for. The first six to 12 months was surely educating the market on what our opportunity was.
Whereas you got CarGurus and Qualtrics, a bit more defined, businesses operating at scale, showcasing some level of profitability with kind of a clear category that they were operating in. And so you take on sort of different responsibilities in those first sets of conversations.
When it's earlier in the growth story, the business is growing 40, 45, 50%. You're having a lot of conversations about the market here. How scalable is this business really? You're a $500 million business today. Can this become a billion, $2 billion, $5 billion in revenue? What needs to happen for you to get there? Whereas as growth starts to slow, naturally, as you might expect, some of your investors will begin to ask why. They might have believed that the TAM was far larger and that therefore growth should be much more durable for 3, 5, 7, 10 years.
Then you'll get attracted to this growth rate. It's not hyper growth, but we should start to expect some leverage in this business. Where is the margin expansion going to come from and where can margins ultimately get so that I can underwrite this business not just on an EV to sales basis, but on an EV to profitability or an EV to free cash flow basis and begin to make my case. That's why coming back to the topic of this conversation, that's why it's so important because a growth investor, they're really only going to care about growth. Once growth stops or begins to slow, they're going to become just naturally less interested in the business.
And so they're going to have a different mandate, and they may have a different time horizon relative to what a garp or a value investor is going to have, because they're going to invest more in the long lines of a business that's cheap on fundamentals or undervalued on an against your TAM, understanding that the free cash flow and the profitability will come further down the road and that it's in your best interest to go after that TAM as aggressively as you possibly can. So I've lived through that transition actually at every company I've done IR at.
Cargurus, we decelerated from 40% plus growth into the teens, Palantir has had a similar trajectory in the public markets. Qualtrics, we grew 36% last year. Earlier this year, we guided to mid teens growth on a subscription basis, paired with much more aggressive margin expansion. So we've stepped along the way.
You need to be educating investors about what's happening in the business, what expectations they should have and then as the IRO making sure that the expectations of your investors are aligning and matching up with what you're expecting the business to do over the next 12 24 36 48 months so that there isn’t a misalignment in expectations and execution.
Why should IR teams be so focused on the profile of their investor base?
Mark Fasken: You covered some of the questions that I wanted to hit on, which is we're talking about this idea of better understanding your shareholder base. So one of my questions is as an IRO or CFO or management team, why should I be so focused on the profile of my investor base? And to summarize a few points, and I feel like, and let me know if I missed anything, but it's really about that to use the word alignment, right? It's as you're looking into the future, are you going to continue to be aligned with the shareholders that you currently have? Right? It is kind of looking into the future and thinking, you know, do we need to start building relationships with a different kind of investor as our business may go through changes as well. Is that sort of a good way of thinking about it?
Rodney Nelson: I think so. And I think of it as your business is getting recapitalized in the public markets every day. You have investors buying and selling your stock every day and effectively repricing and revaluing your business every single trading day. And so there's plenty of opportunity in the public markets for your business and its shareholders to transition very quickly if you're not careful. And that transition can be smooth and the stock can continue to appreciate and go up with the natural volatility of the market, of course.
Mismanage it and you can have some really ugly days in the market. And that's usually where you see huge dislocation and price because expectations were here, execution was here, and all the investors that were expecting this now think, do I really want to be in this stock? Because I was underwriting 25, 30, 35% growth compounding over the next two years. Now I'm being told it's 20%. I'm not sure what I'm invested in now.
As those conversations with growth investors and say, in public settings like earnings calls and conferences, look, we are seeing some signs of growth, acceleration, or business. We're being more mindful about resources and expense management to make sure that we're not just investing good capital after bad, we're being mindful of the relationship between growth and profitability. And if you're doing that, you can begin to go out into the market and talk to, whether it's garb investors or value investors, to make sure that as your business begins to make that transition from hyper growth to growth, growth to some balance of growth and profitability to, call it, I don't wanna call it value extraction, but a business that's more likely to be valued on a PE basis than a price to sales basis, you're managing that transition smoothly along the way. Now, the best management teams, the best businesses, figure out ways to stay in those individual stages for as long as possible so that those transitions are smooth.
But if you do have a business where you're looking around the corner and seeing growth decelerating, it's your responsibility as the IRO to do a couple of things. Number one, do what we just talked about, which is go find those investors who are going to appreciate the story as it becomes a mid teens grower with operating margins that are scaling into the teens or into the 20s as you mature the business and also inform your management team that, hey, this story we've been telling about hyper growth, about a huge TAM, it's going to begin to fall on deaf ears if the performance of the business isn't matching it.
Of course, you have to be mindful of what's happening in the macro and the cyclicality of the industry that you're in. But it's about making sure that that two-way line of communication from us to the street and from the street to us is well understood by all parties involved so that you don't have these massive dislocations in expectations versus performance, which can lead to some very uncomfortable days as you're watching your stock day in, day out, week in, week out, year in, year out.
What process should IR teams implement to evaluate and understand the general makeup of their investors and where there might be risks?
Mark Fasken: When the thing that you do really well, and just listening to you talk it and think it through, is you really seem to do a good job of like putting yourself in the shoes of the investor and understanding, you know, if there are certain style and sort of understanding what is their mandate to understand how are they actually thinking about their investment, right? I feel like that's a really important part of that equation. And so that was part of the question that I had is, maybe I'm new to a business or my business is going through some sort of transition. What is the process that you would recommend to go through to do that evaluation, to understand what is sort of the general makeup of my investors and where there might be risks?
Rodney Nelson: So this is where you have to have a, number one, good relationship with your investors. You have to know what their mandates are. If you're a relatively newly public company and you got a bunch of late stage capital from some crossover funds, those funds are most likely in your stock because they believe you are going to be a growth story for an extended period of time in the public markets. And that the harvest years are way down the road and that it's all about growing the flexibility to pull levers in your business to crank up margins at some point down the line. But as the IRO and as a finance leader and in working with your counterparts in FP&A and accounting and with your CFO, you're always going to be operating with more data than the public market has. And if you're seeing underlying trends in your business begin to erode, you know that that crossover investor probably isn't going to ride that transition out with you.
And that's when you need to start to identify, all right, which relationships do I know are at risk and we're transitioning into more of a balanced operating mode. And which investors who aren't currently in our stock that will appreciate that kind of story might be interested in buying stock, maybe not the current valuation, but at some future date when valuation, expectations, and execution begin to align. Now that might be six months out, that might be a year out, that might be two years out. You might be having conversations with a PM for 18 months before they even start a tracker position in your stock. That’s just the way of the world.
You're trying to keep those folks informed so that when those opportunities do align, they're ready to pull the trigger. If the first time you're having a conversation with a GARP investor is when growth has already decelerated massively and you're pivoting the story to growth plus profitability, it's too late, you've forgotten an opportunity to win capital in the capital markets. And so you've got to be constantly mindful of where do I have risk in my cap table today? How do I maintain and sustain those relationships for as long as possible?
Huge downdrafts in the stock and get huge supply in the open market and foster relationships with the next tier of investors who are going to come in and capitalize this business over the next three, five, seven, 10 years ideally and have better alignment in terms of expectations versus what we can deliver as a business. When you get huge dislocation between expectations and operation, that's usually when you get either a big downdraft in the stock or you get boards saying, hey, we need to explore
That's usually where you get some more aggressive actions on the part of the company. Just given the market environment that we're in, we've seen a lot of that over the last six to nine months in technology specifically. Now with some other dislocations happening elsewhere in the market, you might begin to see it in other sectors as well.
How do IROs make time for investors given that they're not a fit at the time?
Mark Fasken: The question that I have is, as an IRO, so let's say, let's take an example, right? You're in a business that has a high growth business, maybe it's recently gone public and it's going through a period of explosive growth. How do you have those meetings or make time for some of those maybe garb investors given that they're not really a fit at the time? Like, is that just something as an IRO, would you involve management in those meetings? Because I guess it could be seen as a little bit odd. It's like, why are you meeting GARP investors when you're a growth story?
Rodney Nelson: Mm-hmm. Yeah, so part of this is the focus on you as the IRO. You don't necessarily want to burn valuable management time with somebody who you know may not be in your stock for a year. But if you begin to, I can think of a very large asset manager when I was at Carburews where I began having conversations with them in late 2018. We were still growing at a breakneck pace.
It was to buy companies that were growing quickly, but not growing at all costs, and had a clear path to margin expansion and mature margins that would dictate access returns and invest in capital for a very long period of time. We weren't at that phase yet, but we could see in our business that we probably had at least another year of really high growth, and a year plus out was a bit more of a question mark. And so there was gonna come a time in 12 to 18 months with a much lower growth profile than we have today. And our focus might need to shift more on managing the bottom line and begin to deliver more profitability to our investors. And so I had conversations with this person for more than six months before I ever exposed them to our management team. He began to expand the aperture of the relationship and have this person have conversations with our CFO, brought them around on some road shows where we had our founder and CEO participating.
And then six months after that, took a small position in the business. And it just so happened that shortly thereafter, we did in fact have our moment where growth was clearly decelerating, but we were counterbalancing that with more material and margin expansion. And this person wasn't caught off guard. That was their mandate. They could begin to see it kind of unfolding over the course of the 12 months that they had been engaging with us and following our business. And when that opportunity came where we did have a bit of a dislocation in the share price, they stepped in in a much more material way into the stock and valuation expectations and execution came into full alignment for them.
But if the first time that I had that conversation with them was the 25% down day that we had, it might have taken a full year to get them on board because all they're seeing is dark red on the screen and wondering, hey, is there something fundamentally wrong here with this business? Whereas we had been bringing them along for an extended period of time.
Mark Fasken: I guess the thing is also to keep in mind that even in a situation where you are, say, a growth story and you're speaking to a growth investor, it can still take 12 months. Let alone your growth story and you're speaking to a GARP investor, right? So yeah, you always have to have that lead time regardless, but yeah, it's a great point. And so those are sort of the steps that you go through, right? It's sort of thinking through, okay, what might we look like a year from now or two years from now? How does that future align?
If it doesn't properly align, then being proactive about, okay, well, let's go out and identify investors that would be better aligned. And starting those conversations early, because to your point, they could take 12 plus months to materialize. And you want to make sure that you're not sort of scrambling once the growth rate or whatever the trajectory of the company changes. Good summary.
Rodney Nelson: That's exactly right. It's your job as the IRO to look around those corners. The CFO is trying to look around corners to identify where there's going to be air pockets and growth, where there's misallocation of resources. Your job is to take that and translate that into, okay, how are we positioned in the public markets? How is our cap table positioned? Where do we see risk? And we've gone through the cyclotrics over the last year where we had a lot of growth investors in the business. But we've also been fostering relationships with firms and funds that have mandates that meet what the future of our business is going to look like. And so, you know, over the course of Q3 and Q4, we saw some very high quality, you know, more GARP focused investors come into the stock. And that's because we've been, you know, we've been signaling to the market all along. Look, growth is here, but we also know that there's a lot of pressure in the macro.
We have really amped up the messaging around margins. That was reflected in our guide that we gave in January where last year we did 4% non-gap operating margins. Our guide at the time was for 10% to 11% operating margins for FY23. That's the kind of leap forward good management teams will deliver when they know that growth is maybe going to be below not just street expectations, but your own expectations as well internally. If you're effective at seeing around those corners, it doesn't have to be a terrible day for you. In fact, it can be a good day for you in the market because you've prepared for that moment.
How can IROs present their analysis/risk identification to the board?
Mark Fasken: Actually on your point about the management team and the communication and working with the CFO. To your point as the IRO, it's really incumbent on you to do some of this analysis around those corners, as you say. But once you've done that analysis, you've identified some of those risks. How do you present that to the board? Have you had pushback where maybe people don't agree with what the future looks like?
Rodney Nelson: I think you can take a couple of approaches. I think if you have a good rapport with your board, with your leadership team, hopefully they are taking you at face value that the feedback you're getting from the market is accurate, especially if you can then pair with, hey, people are really concerned about our growth profile here. We know that we have some issues that we're working through from a growth perspective. Like let's have an honest conversation about whether we see a clear path to reacceleration or if we need to start shifting how we're running the business and on top of that, the way that we're talking about the business to be a bit more balanced so that when that day comes where that transition begins in earnest, we're not catching people off guard.
If that's not getting the message across, I think there's a couple of things you can begin to, I mean, number one, make sure that you're letting them here straight from the horse's mouth, have investors come in, meet with your management team, you've got to build that relationship so that they can understand firsthand their investors expect of them. And if management isn't hearing from their top five, their top 10, their top 20 with regularity, I think it's a lot easier to kind of stick your head in the sand and just say, we're gonna do what we've always done, even in the face of some data that may suggest that what we've always done may not be working anymore. So that two way line of communication between the IRO and management, as well as between investors and management, sometimes the IRO has got to get out of the way and just let the investor or let the sell side analyst give their version of the events so that they can hear from a different party.
Now, again, I think a good IRO, it's incumbent upon them to establish those relationships internally so that you're a trusted voice. So you don't need to bring in those third parties. You can also do things like perception studies that can put some real data behind what you're saying. We went out and talked to 70, 80, 90 investors analysts, and these were the findings that can be impactful as well. But if you're consistently bringing data and aligning that or matching that up with what your business is actually doing from a performance perspective, usually your management teams in my experience will take those things at face value and they may not pivot the business on a dime, but they will be far more open to it, a minimum pivoting the messaging so that we're all preparing the market for the next evolution of the business that's to come.
Is being a trusted advisor to the board/executive management something that most IROs are focused on or doing well?
Mark Fasken: This is like something that you're pretty passionate about. And I think it's great because this idea of looking around corners, being that trusted advisor, I mean, I just think that they're also important. But do you think that this is something that most IROs are focused on or doing well?
Rodney Nelson: You know, I think it's a mixed bag. I think there are probably, look, I think at a macro level, IR teams are lean. You know, there's typically not more than one or two people in a given organization whose job title has investor relations in it. So you have a very finite amount of time and a finite number of resources to go out and execute against all of these things. If you're a widely followed stock, you know, maybe you've had a meteoric run, you've hit some volatility, undated by conversations with investors that you have no control over. It might be some combination of your existing investors, some fast money hedge funds who are trading in and out of your stock. You may find yourself short on time to go and do the work to find those investors who are going to ride it out with you for not just the next couple of quarters, but the next several years.
We're also finding time to be proactive in going and finding the PMs, the analysts who will come to appreciate your business because it will come into alignment with their investing mandate. Investors are busy. They've got a lot of companies to follow. They've got not just their portfolio companies, but all the competitors of their portfolio companies. Idea generation isn't something that they spend all of their time doing. You've got, in a lot of cases, forced that issue has the ability to do just because of the finite resources, but it really needs to be a mandate of any good IR team in my opinion. And the more that you can throw data around this to track your progress, to establish targets, and they don't even necessarily need to be conversion targets. They can be, look, we have a dream list of 100 investors. Did we at least get in front of them a couple of times a year to make sure we're keeping them apprised of what's going on in the business? Did we do a good job of maintaining the relationships that we already have?
Seeing our largest investors at a minimum stick with us so that if and when a transition does come, they're not just blowing out their stock and creating unnecessary volatility that might ward off the next tier of investors that are going to come into this thing. I think it's something a lot of IROs know they should do. I think in some cases, there might be very real resource constraints that prevent them from doing it.
Should analyzing the shareholder base be a top priority for IROs?
Mark Fasken: Which gets to my next and final question, which is, it seems to me like this should be pretty high on the priority list, right? Like, seems like it should be pretty important. Resources, understand resources are always a challenge in IR, but if you are joining a company as a new IRO or anybody who's listening to this, where do you think this analysis of the shareholder base should rank in terms of priority?
Rodney Nelson: I mean, I think it's got to be one of the first things you do. You've got to understand where there's opportunity and where there's risk in the cap table. Because part of your job should be managing volatility. I mean, we obviously can't control the stock price. Business performance is going to be the overwhelming driver of that. But we can control the narrative. We can do our best to manage expectations in accordance with how the business is going to perform on the stock price.
And I think any IRO that doesn't take at least some ownership of how the equity is performing, I think they're kind of missing the point. I played baseball for a very long time. I view this as my playing field and the scoreboard is the stock price. I know I can't control it every day. I know I can't ultimately control it over long stretches of time. But can I be a difference maker at the margin in helping to keep both our existing informed and operating with an accurate and objective set of facts about our business? Absolutely. To think that that doesn't have an impact on the share price at some juncture, I think is disingenuous. Doing a thorough risk analysis and opportunity analysis of your current cap table and where the future opportunities are going to be, I think it's a new IRO. You owe it to yourself to do that. Then I think you need to back that up with action.
It's great to go to and do a bunch of meetings and get in front of a lot of people in a very finite period of time, get that exposure for your management team. But after one or two in a given quarterly cycle, you're probably going to hit diminishing returns at some point. And you're also going to be seeing a lot of the same class of investor and frankly, just a lot of the same people from conference to conference. That's where you've got to get creative and augment it with in-office visits if you can have much more authority over who you are going to see. You work with your self-side partners ideally and identify those targets that you wanna go see, not just in Boston, New York, LA, San Francisco, but if you're a mid-cap company, you've gotta be spending some time in Chicago, in Milwaukee, in Minneapolis, and what a lot of people would view as secondary markets, but that's where the PMs are that are ultimately going to invest in your company.
Unless you've done that analysis up front to understand, like, hey, these guys were invested in us at the IPO. They participated in a follow-on. They're maxed out. The best I can do with them going forward is just to make sure that they understand the story, have an appropriate level of access to management, and ideally maintain their position over a very long period of time. I've got to worry about where the risks are and where the opportunities are from there. And again, I think that all starts with that initial analysis, if you're a new IRO.
Mark Fasken: Yeah, I totally agree. And that's as you talk about it, like this idea of being the trusted advisor, looking around corners, like you have to understand to your point, where are we going in the future? Because you've got these limited resources, right? You've got limited time, limited number of meetings you can do. And so it seems like the best thing you can do is really understand where are we going and who should we really be talking to? And without doing this analysis, you’re sort of flying blind.
Rodney Nelson: That’s 100% exactly it. You'll find yourself in a, not a negative feedback loop, but you'll find yourself just triaging a lot of the time. And if all you're doing is triaging, you're not doing the critical work, the critical proactive work that you're going to need to do to make sure that you're managing expectations and managing future volatility well if you're just constantly in reactive mode.
There's going to come a period of time where your business is gonna not hit the skids the street's expectations, those are the moments where the IRO can have the biggest impact. Because if you manage that transition or if you manage that period well, there may be some rough days in the stock, but it may go far better than if you spent all of your time just triaging the people who are proactively coming to you instead of spending that proactive time and finding time to identify those investors who are going to start to appreciate the business.
So yeah, I completely agree. I think it's critical.
Mark Fasken: Awesome. This has been great. Rodney, I really appreciate the time. Lots of great insights. Thank you, and hopefully we can do this again sometime soon.
Rodney Nelson: You bet, Mark. Thanks so much for having me.
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