VC Bill Gurley Explains Why Direct Listings Are Better Than IPOs

While people like free stuff, what they like better is easy money, and the traditional IPO process is essentially that for a privileged few, venture capitalist Bill Gurley said in a recent blog post.

Gurley makes a compelling argument for direct listings over IPOs in a lengthy post which can be read here. It boils down to two key advantages, beginning with the use of order matching systems to determine price and allocation to produce a true market price. No matter where you hold your account or what your level of influence is, if you bid even a penny above the closing price, your order is filled, Gurley said. All you need is a brokerage account connected to an exchange.

Silence the pro-IPO folks with two statements, Gurley suggested.

Why aren’t they using supply and demand to determine the true market price and why shouldn’t public offerings be open to all interested parties instead of the elite?

He tells the story of Bill Hambrecht, who was a co-founder of investment bank Hambrecht and Quist, which catered to entrepreneurs and VC-backed companies for three decades. Because IPOs were handled by traditional investment banks, they have become an insider’s game where the connected get access to the best deals. Hambrecht utilized the Dutch auction method which was open to everyone.

To understand why the IPO process is the way it is, begin with looking at the players, Gurley said. It begins with the company founders and personnel on the cap table before the listing. Then come the investment banks and finally the buy-side investors.

Most executives listing a company via an IPO will maybe be a part of two such transactions in their lives, as opposed to investment banks who participate in as many as 40 per year.

“If they have worked in business for 20 years, you have a 700-1 experience differential right out of the gate,” Gurley said.

Investment banks and buy-side investors work with each other frequently, and are naturally more likely to take care of each other before they consider the listing company. That leads them to produce a lower initial price and then benefit from the post-IPO “pop”.

Even more incredibly, listing companies will often ask buy-side investors for advice, even though the latter party has a vested interest in keeping the share price as low as possible.

“Why would you ask for advice from the exact party receiving the incredibly large one-day, no-cost windfall?” Gurley asked. “Interestingly, as more and more members of Party C move to compete in the late stage private market, they often pitch as ‘value-add’ that they will help you navigate the public offering process because they have so much ‘experience’. But this ‘experience’ is in collecting free single-day windfalls at the direct expense of the company. Why would you want advice from them? 

“We should not be so easily manipulated.”

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