Frequency Mismatch
"Massive frequency mismatch"
This is how Bill Gurley started his conversation with Patrick O'Shaugnessy, providing some context why many private companies are still going public using a traditional IPO process, as opposed to a direct listing (DL.)
Bill's point is that most founders who take their company public are doing it once in their lifetime. The other players in the traditional IPO process (notably, investment banks, buy-side investors or mutual funds) are doing several dozen of these deals a year.
"In game theory they have this thing called flow. And they look at what happens if you have a game where certain players have way more experience than the other player and what ends up happening is you have massive anxiety on the under skilled player and so I think if you're going to be anxious your very likely to fall back on tradition, because it's the safest bet."
Bill's use of frequency mismatch in this particular conversation was much more tied to the eventual exploitation of the end-user due to the agency problem. He believes that the traditional IPO process is completely broken; that companies who go public via the traditional IPO route are being taken advantage of in the form of their stock being significantly under priced (which the data seems to confirm.) The outcomes for these companies are seemingly not what they could be.
Frequency mismatch in itself is not a problem - it exists due to the increased specialization of work. Most of us are willing to pay a good plumber because they are likely to fix a problem in a fraction of the time it would take us. The value proposition is attractive - get a better outcome and save time. I'm happy to write that check due because I believe there is value in the transaction.
Frequency mismatch becomes a problem when there's a disconnect of what is being said, and what is actually being done. If my plumber wasn't fixing what they were asked to do, or making a mess of my house, or charging me 4x the market rate, I personally would seek out alternative options. But for the plumber, there is some incentive to continue doing business in that sub par manner. What if they could earn a good living while keeping only 70% of their clientele? The 70% who are either unaware that they're not receiving optimal advice, or that are aware but have inertia and won't do anything about it.
If you're a professional of any type serving clients, don't let frequency mismatch be a crutch to doing better work. The best of the best lead new and existing clients to better experiences, outcomes and solutions. The best of the best relentlessly explore if a direct listing is a better way, versus automatically assuming that the traditional IPO route is the default because it's more self-serving and just the way it's always been done.
Frequency mismatch could be the reason clients seek you out. Don't let that be the reason why they stay.
Thanks to Bill and Patrick for a great conversation.
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Sources:
Bill Gurley, Invest Like the Best
