Legendary tech VC Bill Gurley explains why the IPO 'game is rigged' and why Slack and Spotify's disappointing listings haven't shaken his faith that direct listings will become the norm

• Venture capitalist Bill Gurley thinks direct listings - a newer, more streamlined way for companies to go public - will eventually replace the traditional initial public offering.
• Direct listings are better for the companies going public and for everyday investors than standard IPOs because they are by their nature more efficient and more democratic, he told Business Insider in a recent interview.
• Gurley has become one of the leading advocates for direct listings, posting about them repeatedly on Twitter and even hosting a special event last fall to promote them.
• He argues that traditional IPOs are "rigged" against regular investors and the companies that use the process.
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When Spotify and then Slack used an alternative method of going public, there was a lot of buzz in Silicon Valley that the traditional initial public offering process might soon go by the wayside.

That hasn't happened. But famed venture capitalist Bill Gurley thinks the method those companies used - a direct listing - will eventually become the standard way firms of all sizes and types go public.

"There's no argument ... on any dimension that the IPO's better" than a direct listing, Gurley, a general partner with Benchmark, told Business Insider in an interview earlier this month. He continued: "I think [a direct listing] is better for everyone."

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In a traditional IPO, companies hire investment banks to underwrite their offering and help them prepare for it - paying them hefty fees for the service. The investment banks take the companies on a so-called roadshow, meeting with prospective investors. The banks then set a price for the companies' shares that's based on their sense of the demand for them. But they typically underprice the shares a bit so that they'll rise in trading on their first day. That serves as a kind of boon to the banks' institutional investor clients that generally purchase the shares in the initial offering and then turn around a sell a portion of them on the open market on their first day of trading.

The direct listing process is generally much simpler. Companies going public through such a process don't typically go on a roadshow and they don't sell shares to select, favored investors. Instead, the companies sell their shares directly on the open market to any investor who bids high enough to buy them. Thus, the public market determines their price, not an investment bank, and so the company's selling shareholders aren't leaving any money on the table. What's more, while companies still hire investment banks to help with direct listings, the fees they pay are typically much lower. Gurley is a leading advocate for direct listings.

Gurley has become something of an evangelist for direct listings. He's touted their benefits on Twitter to his hundreds of thousands of followers. He's repeatedly highlighted the money that companies including Zoom and Datadog have left on the table when their stocks popped after their IPOs. He's also made the rounds on the business shows talking up direct listings and even hosted an invitation-only meeting last fall to drum up support.

To him, the debate over IPOs and direct listings has almost a moral dimension. Direct listings are democratic, allowing any investor to take part. They're fair and efficient, relying on market mechanisms used for pricing practically every other financial product. By contrast, the traditional IPO process is not just inefficient, it's skewed in favor of the banks and their favored clients.

"I've been in the business forever," Gurley said. With IPOs, "the game's rigged."

Although he's now leading the effort to replace the IPO process, Gurley notes that he didn't begin it. During the dot-com era 20 years ago, investment banker Bill Hambrecht tried to do the same thing with a Dutch auction process that similarly was designed to dispense with first-day pops and to democratize IPOs. Google and a handful of smaller companies used Hambrecht's process when they went public, but it was never adopted widely.

But Gurley thinks the direct listing process will fare better. Companies are increasingly aware of the shortcomings of the traditional IPO route - and how much they stand to lose from it.

"There's all these people who kind of know that the game's rigged," he said.

Direct listings aren't a panacea

To be sure, not every IPO pops. Uber - which had one of the biggest tech offerings ever last year - infamously saw its stock fall on its first day of trading.

Meanwhile, both of the companies that direct listed their shares have been poor stock market performers since their offerings - hardly a ringing endorsement for the process. Slack's stock is down 44% from its initial price on its first day of trading last June. Spotify's stock, meanwhile, is off 10% from its initial price on its first day of trading.

And the WeWork debacle showed how the traditional IPO process can protect everyday investors. WeWork was forced to pull its offering after the institutional investors who would have purchased its shares in an IPO balked at its massive losses and controversial transactions involving its CEO. The decline in the company value from $47 billion to less than $8 billion was borne by private investors. In a direct listing, the company could have sold its shares directly to the general public without any such vetting process.

Still, Gurley thinks direct listings are gaining momentum. Some four to seven such deals are in the works, right now, according to what he's been told by those in the know.

Some investment banks have fought to maintain the status quo and likely will continue to do so, Gurley said. But some bankers are starting to get on board. Last fall, for example, Bank of America held a conference in Silicon Valley in which its bankers discussed and even advocated direct listings.

All eyes on the New York Stock Exchange

Defenders of the IPO say that it still has some notable advantages over direct listings. One big one is that many companies rely on a public offering to raise funds. But the rules around direct listings forbid companies from doing just that. Instead, when a direct listing happens, only companies' shareholders can sell shares, and they do so for their own benefit.

But there's a move afoot to change that. The New York Stock Exchange has formally asked the Securities and Exchange Commission to allow companies themselves to raise money in direct listings. Although the SEC rejected the initial application, the NYSE has resubmitted it. Gurley, who has spoken with NYSE officials, said both he and the exchange are optimistic the rules will be changed.

Regardless, direct-listing advocates, such as Bank of America's Neil Kell, have noted that companies who go public via that process can still raise money in other ways. They can sell shares to particular investors in so-called private placement offerings that occur at basically the same time as the listing. They can also sell stock to the public soon after their listings.

Other skeptics of direct listings have argued that they aren't a good fit for smaller companies or those that are less well known. Such companies have traditionally relied on the banker-led roadshow to introduce them to prospective investors and to spur interest in their offerings. Without such a chance to tell their story to investors, they may not be able to inspire sufficient demand for their shares, skeptics have said.

But Gurley thinks that's nonsense. Before its direct listing last year, Slack put together an hours-long presentation for potential investors in which its executive team outlined the business. The company streamed that presentation live and on-demand over the web to anyone who was interested in tuning in and learning about it. Potential investors likely got much more out of that presentation than they would in a typically much-shorter roadshow meeting, Gurley said.

"This is 2020," he said. "You don't have to go visit these little accounts. You can learn way more through a video presentation."

• Read more about direct listings and public offerings:
• Silicon Valley is increasingly convinced that the traditional IPO process leaves too much money on the table. Here's why Bank of America is advocating the increasingly-popular alternative.
• Slack's unusual offering isn't designed to have a first-day pop. Here's why most IPOs still factor in a pop, even though they can cost startups billions.
• Slack's $17 billion direct listing could be the IPO game-changer Silicon Valley has been waiting for. But others say it's a techie delusion.
• $445 billion flowed into startups in the last five years. Now it's threatening to upend one of Silicon Valley's most celebrated customs