Silicon Valley Is Simply as Responsible for IPO Dysfunction as Wall Street
My main gripe with the TechCrunch Disrupt event I went to in San Francisco last week?
You ‘d believe that with Uber trading 30% listed below its IPO rate, Lyft trading 40% listed below and Slack trading 8% listed below, there ‘d be simply a little stress and anxiety. However I didn’t hear a single word spoken in defense (or criticism) of everybody’s favorite whipping kid, Alfred E. Neuman.
Oh, wait a minute, I meant the other happy-go-lucky man, WeWork’s ex-CEO Adam Neumann.
I believe you understand WeWork’s story by now. WeWork was initially expected to IPO near (a minimum of) the $47 billion appraisal it had throughout its last raise in January. However that figure was cut in half, then cut almost in half again. The IPO was delayed. And poor Neumann was ousted. (Let’s not feel too sorry for him, though. Forbes approximates his existing worth at around $2.2 billion.)
So when David Krane, the CEO of GV (Alphabet’s venture arm), was asked if start-ups were waiting too long to IPO, I believed, “Here it comes: the been worthy of diatribe against start-ups collecting so much cash at higher and higher assessments during their years or two stay (that’s the average these days!) in the pre-IPO private markets.”
But instead I heard, “Not an issue. There’s no pressure to look for capital in the general public markets and that’s an advantage for these business“
This is from a person whose pre-IPO fund had actually consisted of Slack and Uber. Both now scuffling in the public markets.
It’s Silicon Valley nonchalance at its finest: The longer these start-ups invest with us, rather than going through the impulses of Wall Street buy-side brokers and public belief, the much better.
In other words, do not look at us. It’s Wall Street’s fault the IPO system is broken.
It’s self-serving and clueless. And it’s, naturally, getting steam in different Silicon Valley circles. The very day I showed up in San Francisco last week, Standard Capital General Partner Bill Gurley organized a meeting of 100 private business and equity capital (VC) firms to motivate start-ups to utilize direct listings instead of IPOs.
Direct listings allow companies to sign up with the public markets without raising money from selling more shares and without producing brand-new shares. They likewise allow start-ups to bypass underwriting costs.
Gurley made a pretty convincing case. He argued that IPOs used to be about offering shares everywhere but have devolved into “a game of simply hand-allocating shares to the same 10 or 15 firms.” Direct listings, he argues, would supply more open and equivalent access to shares.
Gurley’s right that the IPO process is deeply flawed. By setting the IPO rate, buying shares in advance and selling them to the very same handful of preselected institutional investors, banks do their best to prop up prices. It hasn’t been working recently. Costs fall either after IPO day or, in the case of WeWork, in the weeks leading up to IPO day.
But here’s what Gurley didn’t say. The pre-IPO video game follows the same quasi-incestuous practices as the post-IPO video game: walling off the sale of shares from retail investors and granting access to the exact same couple of dozen effective Silicon Valley VC firms. These VC companies press hypergrowth, often at the cost of making an earnings. They’re complicit in setting inflated evaluations (making their internal rates of return look much better than they in fact are). And VC companies use their cash to keep the fastest-growing startups to themselves and make it possible for those start-ups to delay going public.
Gurley does everybody an injustice by blaming Wall Street for the damaged IPO process while disregarding the trespasses of his own VC associates. More direct listings are a step in the right direction, but they are not a cure-all. If Gurley is severe about promoting for “more open and equivalent access to shares,” he ought to extend that aim to pre-IPO investing, not simply post-IPO investing.
Everybody would benefit, including retail financiers (who might access a lot more high-quality startup investments) and the startups themselves (that would have access to billions of dollars from those retail investors). The venture capitalists would also benefit. They might utilize an extra set of eyes (more like a couple of thousand more!) to suss out the losers they miss out on.
But for this to happen, Silicon Valley needs to take a more honest look at itself.
More angst, anybody?