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. 
[1:27]


The CFO of Spotify started in on this idea that the way we go about pulling off an IPO was designed 4 centuries ago
[1:57]


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. 
[2:13]


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
[4:18]


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. 
[5:09]


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
[10:12] 


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
[11:25] 


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. 
[17:45] 


It goes back to the pageantry of an IPO. The minute you 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.
[22:02] 


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. 
[31:24] 


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. 
[44:16] 


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