The process that I have been championing is the one Slack and Spotify used. It is called a direct listing.
If you understood how a traditional IPO is allocated — it is completely tautological that they would end up underpriced. It is as unscientific a process as you could possibly have.
There are numerous players in the traditional system that have access to —and are beneficiaries of —these large slugs of underpricing.
A professor at University of Florida calculated the amount of money given away by underpricing: Since 1980 it has been $896 billion. That is more than the market cap of Google.
All the people that are beneficiaries of that don’t want this to end: They come up with a long list of arguments. One of their arguments is this may work for Slack or Spotify but won’t work for anyone else.
In a traditional IPO, they handpick who they are going to give the stock to. They intentionally ignore people who want to pay more. They cut them out of the process.
Don’t investment bankers do that so they can prioritize long-term investors? That is the rhetoric. That is what they say. But if you talk to CEOs who have gone through this process they look at the cap chart six months in and it’s not the same people [investors]
If that agreement [to invest long term] was true perhaps they could enter into some type of lock-up or some contractual guarantee. But there is none. If that is the trade you are making shouldn’t there be something to hold them accountable to that?
Traditional IPOs have been underpriced for so long that venture capitalists and founders don’t want to sell into the IPO because they know it is a rigged price.
Bill is trying to change this by making more people aware of the problem: I have been talking to as many finance professors, lawyers, former SEC people as I can. I’m building a huge network of people who have thought about this [problem].
Why is this happening? There is a remarkable asymmetric experience. The bankers on the buy-side are doing 50-100 IPOs a year. The founder will do one in their lifetime. Two tops. The result is a remarkable amount of disinformation.
Traditional IPOs are like a big southern wedding: It is this thing that is only going to happen once in your life. You get all these handlers. You do it the way they tell you to do it.
