This episode explains why traditional IPOs are unfair to regular investors and how direct listings are better. Bill Gurley argues that the first-day price jump in an IPO isn't a success—it's a $171 billion wealth transfer from the company to big bank clients. He calls out Goldman Sachs and Morgan Stanley as the worst banks, with average first-day underpricing of 33.5% and 29%. Key examples: Elastic (IPO at $28, first trade at $70, lost $338 million), Zoom (IPO at $36, first trade at $62, lost $623 million), and Uber (banks made over $100 million from the Green Shoe option, which lets them sell extra shares).
This report compares traditional IPOs with direct listings, with the core argument strongly favoring direct listings. Bill Gurley argues that during a traditional IPO, investment banks systematically underprice the offering, leading to a significant "pop" on the first day of trading. This effectivel
Here is the translated investment research report in English.
The guest is Bill Gurley, a partner at Benchmark Capital. The main theme of this episode is to dissect the systemic flaws of the traditional IPO process and argue why a Direct Listing is a superior alternative. The most impactful judgment of the entire episode: Gurley argues that the first-day "pop" in a traditional IPO is not a sign of success, but a systemic wealth transfer mechanism worth $171 billion, where underwriters (especially Goldman Sachs and Morgan Stanley) serve their buy-side clients rather than the issuing company.
Bill Gurley argues that the core problem with the traditional IPO process is that it is designed as a system to transfer company value to specific buy-side institutions, rather than to achieve optimal pricing for the company.
Gurley uses the concept of "frequency mismatch" to explain the root of this phenomenon: a company's founder/CEO may only experience an IPO once in their lifetime, while investment banks and buy-side institutions handle 20-40 deals per year. This asymmetry of information and experience causes the company to anxiously adhere to tradition, while the more experienced counterparty can profit from the process.
He breaks down the key steps in the process in detail:
1. Artificially Created Scarcity: The investment bank's goal is to get the IPO 10 to 20 times oversubscribed. Gurley points out that this is a euphemism for "about to ignore 95% of demand," which is the direct cause of the first-day pop.
2. Manual Allocation and "Anchor Accounts": During the pricing and allocation phase, the bank manually selects "important accounts" (usually only 5-10), whose bids are often lower than the market price. The bank may even threaten the company by saying, "We can't proceed unless a certain account participates," which is essentially securing a low price for specific clients.
3. Empirical Data: Data from Professor Jay Ritter of the University of Florida shows that over the past 40 years, the total wealth transfer from first-day pops of all venture-backed IPOs amounts to $171 billion. In just the last 18 months, this figure was $12 billion.
4. Underwriter Disparity: Gurley shares another striking piece of data from Professor Ritter: Over a 10-year period for venture-backed IPOs, the average first-day underpricing was 18%. However, performance varied dramatically among banks: Goldman Sachs topped the list with an underpricing rate of 33.5% (111 cases), followed by Morgan Stanley at 29%, while Credit Suisse was only 3.3% (35 cases). This means companies chose the most reputable banks but got the worst execution price.
> “If GM were out buying steel, you'd expect them to get the best price. If Amazon were out buying cardboard, you'd expect them to get the best price. So why is it that when the best companies in Silicon Valley, the very best, pick the very best banks, they get the worst execution.”
Gurley describes a Direct Listing as a more intuitive and fairer process that leverages existing technology to achieve true price discovery and equitable access.
The core of a Direct Listing relies on the existing "Designated Market Maker" (DMM) at exchanges like the NYSE and its "price-time priority" algorithm. This algorithm is identical to the one used to match all stock buy and sell orders at the opening of every trading day.
1. Algorithmic Matching, Not Manual Allocation: The system sorts all buy and sell orders by price and time, automatically finding the equilibrium point between supply and demand. This means any order bidding above the opening price (including retail investors) will be filled, unlike in a traditional IPO where they are deliberately ignored.
2. Anonymity and Fairness: The name on the order is irrelevant. The DMM doesn't look at names, only price and time. This completely eliminates the relationship-based privileged access in traditional IPOs.
3. Elimination of Lock-up: Direct Listings have no lock-up period. All shareholders (including employees and early investors) can trade freely from day one. This avoids the risk of a stock price crash caused by lock-up expirations in traditional IPOs and increases market liquidity, reducing volatility.
4. Supporting Data: Using Elastic and Zoom as examples, if they had used a Direct Listing, the first-day "pop" would have belonged to the company and its shareholders. In Elastic's case, the total first-day wealth transfer was $338 million (founder lost $106 million, employees lost $106 million, investors lost $126 million). In Zoom's case, the total was $623 million (founder lost $100 million, employees lost $175 million, investors lost $342 million).
> “...if you are a compsci student or a finance student, isn't that how you would design it? Why would someone get an unfair advantage at the table when you're talking about an offering?”
Gurley believes the main resistance to change comes from vested interests, and driving change requires a combination of "wisdom and courage."
1. Source of Resistance: The biggest resistance comes from the 10 or so top-tier buy-side institutions that enjoy privileged access in traditional IPOs. They are the primary beneficiaries of the past $171 billion wealth transfer. For the other 9,000+ mutual funds, a Direct Listing is a better option as they get fairer access and larger positions.
2. The Irony of the "Green Shoe": Gurley points out that banks claim the "Green Shoe" (over-allotment option) is for price stabilization, but in practice, when the stock price falls, the bank uses this mechanism to buy shares at a low price and keep the spread as profit. For example, in the Uber case, banks made over $100 million in profit just from the Green Shoe, doubling their total fees.
3. Path to Change: Gurley argues that change doesn't require regulatory push, but more pioneering companies like Spotify and Slack to adopt Direct Listings. He quotes Mike Moritz of Sequoia Capital, saying it requires "wisdom and courage." He reveals that some very well-known, smart founders are already excited about this.
| Ticker | Guest Sentiment | Key Data |
|---|---|---|
| Elastic | Used as a case study for traditional IPO wealth transfer | Total first-day wealth transfer: $338M; IPO price: $28, first trade: $70, current: $93 |
| Zoom | Used as a case study for traditional IPO wealth transfer | Total first-day wealth transfer: $623M; IPO price: $36, first trade: $62, current: $85 |
| Uber | Used as a case study for Green Shoe profits | Banks made over $100M profit from the Green Shoe, doubling total fees |
| Spotify | Highly praised as a Direct Listing pioneer | CEO Daniel Ek chose Direct Listing for "fairness"; provided 16 hours of video materials |
| Slack | Highly praised as a Direct Listing pioneer | Data shows buy-side institutions can build meaningful positions faster with lower volatility after a Direct Listing |
| Beyond Meat | Used as a case study for the pitfalls of lock-ups and secondary offerings | Announced a secondary offering at a 25% discount, stock price crashed |
1. The traditional IPO "pop" is a systemic wealth transfer, not a sign of success. (Bill Gurley) — Over the past 40 years, first-day pops of venture-backed IPOs have caused a $171 billion wealth transfer, with $12 billion in the last 18 months alone. This is an inevitable result of artificially creating oversubscription and manual allocation.
2. Goldman Sachs and Morgan Stanley are the worst banks for IPO execution. (Bill Gurley) — Based on 10 years of data, Goldman Sachs has an average first-day underpricing of 33.5% (111 cases), Morgan Stanley 29%, while Credit Suisse is only 3.3% (35 cases). Companies choose the best brand but get the worst price.
3. A Direct Listing is an algorithmic match; a traditional IPO is a manual allocation. The former is vastly superior in fairness and efficiency. (Bill Gurley) — Direct Listings use a "price-time priority" algorithm to anonymously match all orders; any retail investor bidding above the opening price gets filled. Traditional IPOs deliberately ignore 95% of demand to serve only 10 privileged accounts.
4. The lock-up is a "problem" created by investment banks so they can sell their services again. (Bill Gurley) — Banks mandate a 180-day lock-up, then tell the company "you have a big problem" right before it expires and pitch a secondary offering service. These secondary offerings are often priced at a 25% discount to the market, allowing the company to be "fleeced" again.
5. The "Green Shoe" is not a stabilization tool, but a profit center for investment banks. (Bill Gurley) — In the Uber case, banks made over $100 million in profit by buying shares low via the Green Shoe and keeping the spread, doubling total fees. Its trading volume was only 3% of the 30-day average volume, making it incapable of stabilization.
6. Direct Listings eliminate the information asymmetry caused by "frequency mismatch." (Bill Gurley) — A founder faces a once-in-a-lifetime IPO against banks and buy-side firms that do 20-40 deals a year. Direct Listings, through a public, transparent algorithm, take pricing power back from the experienced counterparty and give it to the market.
7. Driving change requires "wisdom and courage," not regulation. (Bill Gurley, quoting Mike Moritz) — Wisdom is understanding the superiority of Direct Listings; courage is being the first to try it. As more success stories like Spotify and Slack emerge, change will happen naturally.
8. Direct Listings are more beneficial for long-term buy-side institutions. (Bill Gurley) — A long-term fund managing $2 billion with 10-12 positions would only get a $1.5-2 million allocation in a traditional IPO, just 1% of its target position. In a Direct Listing, they can build their full position at once.