Bill Gurley – Direct Listing vs. IPO

**Patrick O'Shaughnessy** (0:04)
Hello, and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_3** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:49)
My guest this week is Bill Gurley, General Partner at Benchmark Capital. Our conversation is about one specific issue that has popped up as a topic of interest in the investment community in recent months, the comparison between bringing a company public through a traditional IPO and what's known as a direct listing. To be clear, this episode is very much in favor of direct listings instead of traditional IPOs. For those that want a good discussion of the IPO process and its upsides, check out episode 173 of the Exponent podcast with Ben Thompson, which I'll link in the show notes. Now, please enjoy my very interesting conversation with Bill Gurley.
So, Bill, we're going to tackle a single issue on the podcast, which I think the first time that we've done that and a fun framing for introducing what this issue is, is the Warren Buffett idea that if you're at a poker table and you don't know who the Patsy is, you're probably the Patsy. So maybe you could begin to describing what the table is, what game is being played and who is the Patsy.

**Bill Gurley** (1:42)
So I've been spent a lot of time diving deep into how the IPO process works. And I have to give a huge nod to Barry McCarthy, the CFO of Spotify, who years ago started banging on this drum and highlighting the fact that the kind of core process and the core way we go about pulling off an IPO does design four decades ago and it hasn't been changed and it hasn't been updated for modern tools, modern algorithms, modern technologies.
And as a result of that, it has resulted in what Jay Ritter at the University of Florida calculates is 171 billion of underpricing. And it's my view as someone who's spent the past two decades as a part of Silicon Valley that Silicon Valley has been this patsy, that the Silicon Valley companies that are getting the short end of the stick on this IPO process and they're the ones who are basically funding this massive value transfer that happens on the first day of an IPO.

**Patrick O'Shaughnessy** (2:46)
Just to put some more context around it, I always think analogies are helpful. Daryl Morey, of all people, had a really interesting analogy for this. You mind sharing that?

**Bill Gurley** (2:53)
Yeah. So Daryl had, cause he saw me talking about this and he said, you know, I always thought this was strange. He said it'd be like when people celebrate a pop on an IPO, it'd be like a sports team owner or someone that owned a arena selling their tickets and then seeing them pop in the aftermarket and being excited going, yay, that worked out great for us. Henry Blige has another analogy that relates to this kind of pop thing. He said it'd be like selling your house and then waking up the next day and finding out that the broker that sold your house sold it to someone else for 80% higher than you sold it to before.
How would you feel about that?

**Patrick O'Shaughnessy** (3:31)
Erotic.

**Bill Gurley** (3:33)
Yeah, that's correct.

**Patrick O'Shaughnessy** (3:34)
So what we're going to do is go through what the process is today, what the alternative is, what we call direct listing or direct public offering and why that might be more attractive to founders, employees of early stage companies, kind of Silicon Valley writ large. To do that, we have to first unpack what actually happens in an IPO. Embarrassingly, even I, you and I have been going back and forth about this, even I didn't fully understand all the details behind this. It's one of these like arcane processes that you just sort of take for granted and nobody has really challenged. So I think to lay the groundwork would be to describe what is actually literally happening when a company engages a famous Wall Street firm to help them underwrite the IPO and then brings it public.