Bill Gurley - Direct Listing vs IPO
Inspired by Bill Gurley on Invest Like The Best
Worth Stealing
The IPO process is regulatory capture in plain sight
The process hasn't been updated in 40 years not because it works, but because the parties who benefit most from it are the ones running it. Spotify's Barry McCarthy saw it. Almost no one else pushed back.
The frequency mismatch explains the whole dynamic
Founders do this once if they're lucky, so defer to the people who've done it a hundred times. That deference is not a bug in the system, it is what the system runs on.
"10 to 20 times oversubscribed" means you were deliberately underpriced
Banks celebrate oversubscription as demand management skill. It is a euphemism for ignoring 90% of real demand to keep the price artificially low and guarantee a day one pop.
The pop is a transfer, not a celebration
When your house sells and your estate agent resells it the next morning for 80% more, you don't call that a good result. The press calls it one every time.
The banker's real customer is the buy side
The bank has two clients: the company going public, and the funds buying the shares. One of them calls back 40 times a year. The other never calls again. The data on who gets served is not ambiguous.
The best banks produce the worst execution
Jay Ritter's University of Florida analysis shows Goldman underprices IPOs more than Credit Suisse. Founders hire Goldman for comfort. It works exactly as designed.
Employees pay for it too
In Elastic, the $338m left on the table was not just investors' and founders' money. Employees missed out on $106m. The pop is not shared upside.
The 180-day lockup is a fee factory
Banks push hard for lockups. Then, a week after the IPO, they circle back to warn you about the cliff edge in six months. The problem they are warning about is the one they built, because they want to run the secondary.
First principles exposes the absurdity
If you were designing the IPO process from scratch today, you wouldn't design it this way. It is a set of historical accidents reinforced by the people who profit from them. The direct listing fixes most of this. Price and time. Anonymous orders. No preferred allocations.
Direct listings democratise access
In a traditional IPO, retail investors are cut out. In a direct listing, anyone willing to pay above the clearing price gets filled. The name on the order does not matter.
My Thoughts
The IPO pop is not good news. It is a transfer.
When Elastic priced at $28 and opened at $70, the sellers at $28 left $338 million on the table. That money went to the funds the bank had pre-allocated shares to. The $28 price was not discovered. It was chosen.
Bill Gurley has been making this argument for years. The traditional IPO process was designed four decades ago and has not changed. It survives because the parties running it benefit from it, not the company going public.
The reason founders accept this is simple. They have never done it before. The banker has done it dozens of times, and they arrive with answers to every question and a name for every step. Anxiety does the rest. You trust the people who seem to know what they are doing.
Being 10 to 20 times oversubscribed sounds like a triumph. It means the bank set the price low enough to manufacture a queue, then handed shares to the funds they wanted to reward. Employees with options found out afterwards. In Elastic, they were short by $106 million.
The direct listing removes most of the machinery. Orders clear on price and time. No names, no preferred allocations, no handpicked accounts threatening to walk. For a long time, the standard objection was that a direct listing did not allow you to raise fresh capital alongside the listing. NYSE and Nasdaq have since changed their rules to permit it. The structural case for the traditional IPO gets thinner. If you were starting the process from scratch today, you wouldn't design it this way. The traditional process is not a solution. It is a set of historical accidents reinforced by the people who profit from them.
Mike Moritz said what separates companies willing to do a direct listing is intelligence and courage. In that order.