Bill Gurley – Direct Listing vs. IPOs | Invest Like The Best #144


Famous Warren Buffett quote: If you’ve been playing poker for a half hour and you still don’t know who the patsy is, you’re the patsy.

The CFO of Spotify started in on this idea that the way we go about pulling off an IPO was designed 4 centuries ago

It hasn’t been updated for modern technologies. As a result there has been $171 billion of underpricing. Silicon Valley has been the patsy. The companies are getting the short end of the stick.

It would be like selling your house and then finding out the next day that the broker resold your house to someone else for 80% more. Why would you celebrate that? [3:08]

The reason that mispricing can happen over and over again is because of a massive frequency mismatch. A founder does one IPO in their lifetime. The investment banks and the buy side are doing 20 to 40 a year.

In game theory they have this thing called flow. In games where one side has way more experience than the other player, the less experienced player has anxiety. . . If you are anxious, you are more likely to fall back on tradition because it is the safest bet.

Another crazy thing that happens is the company is told the ultimate goal is to be 10 to 20 times over subscribed. That is a euphemism for we are about to ignore 95% of demand.

With a traditional IPO the decisions are all made by hand. Some human is going to guess what the share price should be and who should get the shares.

In the last 18 months there has been $12 billion in mispricings. The deficit to the founder’s pockets— in just two companies [Elastic and Zoom]— was $200 million. [14:42]

[Bill favors direct listing instead of a traditional IPO] What should be happening is an algorithmic match. Line up supply, line up demand and then you match the people.

It goes back to the pageantry of an IPO. The minute your are done —and your stock is popping —they put you on a pedestal, ring bells, throw confetti, and tell you what a wonderful job you did. I think it is all to make you feel good about something you shouldn’t feel good about.

One of the great things about a direct listing is it just simplifies so much of this stuff. [28:11]

Direct listings means there is no lockup so you have more liquidity day one.

Sequoia’s Mike Moritz said that the things that separate companies from doing direct listings are intelligence and courage. I think you need both. I don’t dismiss how hard that might be.

Full podcast here: Invest Like the Best, EP.144 Bill Gurley – Direct Listing vs. IPOs

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