If you’re 30 minutes into a poker game and you don’t know who the patsy is, you are the patsy. That was the Warren Buffett-inspired message delivered to technology startups and their investors at a closed-door event late Tuesday to promote alternatives to initial public offerings.
Wall Street banks, argued Bill Gurley of venture capital firm Benchmark, are the ones dealing the cards and making suckers out of everyone else, according to people who attended the event. The poker metaphor came up repeatedly over the course of the afternoon, which concluded with a dinner conversation between Gurley and Michael Lewis, author of “Liar’s Poker” and “The Big Short.”
Silicon Valley investors and entrepreneurs met in the hundreds on Tuesday for the event at the Palace Hotel in San Francisco, described in a handout to attendees as an “industry-led symposium on the benefits of the direct listing approach.” Direct listings are a rarely used alternative to an IPO, in which a company makes its shares available for trading on a stock exchange without the formalities of a traditional public offering. That means a scaled-down roadshow, no fundraising and fewer fees for banks.
“We’re not out to start a fistfight, we’re not out to vilify a particular bank,” Gurley said in an interview after the summit. He conceded that banks have to satisfy both their corporate clients in an IPO, as well as buy-side investors. “There’s that old saying, ‘Don’t hate the player, hate the game.’ It may be that the game has changed in a way that all of these players are self-optimizing.”
The main target of ire was the first-day stock surge that often accompanies IPOs underwritten by banks. A video aired by Henry Blodget compared that to selling your house for $1 million and then seeing it resold soon after for double the price.
Gurley posted a picture of a grand wedding, explaining that bankers and other advisers frame an IPO as a once-in-a-lifetime event. “It’s an important business transaction. If you get into a dreamy mode of thinking of it like a wedding, you lose the fiscal discipline you should be applying because it’s one of the most expensive transactions you’ll ever do,” he said.
The venture capitalist estimated that more than $6 billion in wealth has been transferred from companies to IPO investors from recent stock-market debuts that jumped soon after the offering. “The buy side has been trained for free giveaways. They’re more entitled than a millennial,” he said. “It’s a very long-term issue that has negatively impacted our industry.”
Gurley, who helped organize Tuesday’s convention, has spent much of the last year promoting direct listings. He was first to plant the idea with Stewart Butterfield, chief executive officer of Slack Technologies Inc., according to a person with knowledge of the interaction. In June, the corporate software company became the second major business to go that route in recent years, after Spotify Technology SA. Slack’s general counsel, David Schellhase, spoke at the summit, advising companies to hire an investor relations expert early and spend ample time with public investors, said a person who listened to the presentation.
Some attendees were convinced and plan to consider alternatives. “I expect this to be a regular agenda item for board discussion for companies looking to go public,” said Sarah Cannon of Index Ventures, which backed Slack.
Airbnb Inc. is on track to be the largest tech company to embrace this new path. The home-rental company, valued by private investors at $35 billion, has said it intends to go public next year and is leaning toward a direct stock listing.
One downside of direct listings is that they don’t raise new funds for the companies involved. That’s unnecessary for some startups that have already raised hundreds of millions of dollars in private markets. But other companies need the new money to fund growth, pay off debt or cash out early investors.
Two of the highest-profile companies in Benchmark’s portfolio, Uber Technologies Inc. and WeWork, chose traditional IPOs -- with dire results for some investors. Uber shares are down more than 30% from the May offering price, and WeWork pulled its plans recently. Then again, Spotify and Slack are also below their debut listing prices. That raises a question of whether IPOs are a scapegoat for a larger problem: Public equity investors just aren’t buying the rich valuations that several large tech startups got in private financing rounds.
That idea was largely ignored at Tuesday’s confab, in favor of criticizing Wall Street. None of the three largest IPO advisers -- Goldman Sachs Group Inc., Morgan Stanley or JPMorgan Chase & Co. -- was featured in the speaker lineup. Goldman and Morgan Stanley also worked on the Slack and Spotify direct listings.
“The takeaway is not only that a direct listing is something you can do, but something you should do,” said Manny Medina, CEO of software startup Outreach Inc., who attended the event. “You’re getting money that should be yours.”