Sep 19, 2019

VCs plan invite-only meeting to promote direct listings

Benchmark's Bill Gurley. Photo: Michael Kovac/Getty Images

Venture capital's call for more direct listings is growing louder with a group of big-name investors and tech company executives expected to attend a private, invite-only "symposium" on the matter next month at a hotel in San Francisco.

Why it matters: There's a growing investor consensus that the traditional VC-backed IPO process is antiquated and broken — too often benefiting a high-net-worth bank clients and a small pool of mutual and hedge funds, at the expense of issuers.

Details: Among those expected to speak are Benchmark's Bill Gurley, who's been banging this drum for a while, Sequoia Capital's Mike Moritz, who just wrote about direct listings in the FT, and Spotify CFO Barry McCarthy, whose company went public via a direct listing last year.

  • Jay Ritter, a University of Florida professor who's also slated to speak at the private event, released data in April showing that the "under-pricing" phenomena is accelerating for VC-backed IPOs.
  • He reported at least $6 billion in net under-priced dollars at the time, versus $16.1 billion for 2017-2018 combined.
  • He's also found that average first day returns for offerings led by Goldman Sachs and Morgan Stanley are 33.5% and 29.2%, respectively, higher than for other underwriters.

Our thought bubble: We last discussed this situation in June, around the Slack direct listing, and argued that investors should work with the SEC to create a hybrid structure whereby companies could both list directly and raise new capital.

  • That still hasn't happened.
  • On the other hand, we've heard that law firm Latham & Watkins, which worked on both Slack and Spotify, has drafted a pre-IPO conversion term sheet that could help issuers raise simultaneous capital at a slight discount to the direct listing price.

The bottom line: Venture capitalists regularly congregate at industry conferences in resort towns, but rarely self-organize for the sake of knowledge-sharing and next-step action. Next month's event will be an exception, suggesting that the startup IPO scene could soon undergo a sea change.

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Flash forward: Today, it's hard to find anybody who's happy with way that companies transition from being private to being public. Even the institutional clients of the large investment banks, who can get significant allocations of coveted IPOs, are feeling the pain. Companies like Uber and Peloton have never traded above their IPO price.

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