Going Public (with Bill Gurley)

[0:00:00 Speaker 1] from the Salem Center for Policy at the University of texas at Austin. Welcome to an episode of policy and pieces. I’m your host scott, bogus.

[0:00:12 Speaker 0] I think there’s an overreaching reality that everyone just needs to wake up and admit. Which is, there’s no super high end expensive transaction you will do in your life or any company will do other than the I. P. O. Where there is a single advisor for both sides of of of the transaction.

[0:00:34 Speaker 1] That’s Bill Gurley general partner at benchmark, a VC firm behind well known companies like Ebay Snapchat and Uber. He’s been a vocal critic of the traditional I. P. O. Process and in particular something called First Day Underpricing. That’s the difference between the initial price of bank sets for an I. P. O. And the market price at the end of the first day of trading. According to well known academic research. Banks have underpriced IPO’s by an average of 20% since 1980. That’s over four decades of underpricing last year. That amounted to $30 billion left on the table. Bill thinks that’s a problem and explains why direct listings is the solution. My co host today is McCombs NBA student Cory Haas Bill, welcome,

[0:01:18 Speaker 0] Are you

[0:01:19 Speaker 1] good, Corey Welcome,

[0:01:21 Speaker 0] excited to be here.

[0:01:22 Speaker 1] Right. Bill, you don’t need a lot of introduction. You’re already well known, particularly the VC world and we want to explore a little bit today. Your views on financial regulation, particularly as it pertains to taking these companies public hoping we can start our interview with a little bit of background questions to Corey. You want to lead us off?

[0:01:44 Speaker 0] Absolutely. Just talking about, you know what’s been called the broken IPO process. We’re kind of talking about new ways to go public and that kind of suggests that there’s been something wrong with the old ways and you know, you’ve definitely been outspoken about the traditional I. P. O. Process. So just in a nutshell, could you give us your overarching view on traditional I. P. O. Process and your thoughts on the first day underpricing and the over subscription model. I can maybe talk for about five hours on that topic. So you’ll have to I don’t know about in a nutshell there’s there’s two key problems that the way that the IPO. Process works. But I think there’s an overreaching reality that everyone just needs to wake up and admit. Which is there’s no super high end expensive transaction you will do in your life or any company will do other than the I. P. O. Where there is a single advisor for both sides of of of the transaction. And we know that the investment bank has a separate financial relationship with the buy side customer for for sales and trading commissions. And we know that exists and then we we we want to just sit there and assume that they’re going to be an unbiased party in helping both sides of the transaction on the I. P. O. The buy side and and the company’s side. And you know professor Jay Ritter at Florida has now accumulated all this data over 40 years and there’s just been systematic underpricing that’s getting worse and worse every year. The two things they do that make no sense whatsoever in the modern world Is they don’t match supply and demand, which is a simple construct that I think was developed maybe three or 400 years ago and exist in every other part of the financial ecosystem. Every bond is priced by simply matching supply and demand You let price and time, you know, dictate who gets the shares. That doesn’t happen. Um Instead they hand pick a price and they hand allocate who gets it and the hand allocated to these customers that they’re serving in other ways and other profit centers in another part of business. And emails have come out that say yeah we can you know redirect these hot IPO’s to our best clients. And then you know it literally I’m I’d have a question for scott. Actually I’m more shocked that the sec doesn’t see this for what it is. I really I really am. It’s like it’s shocking to me. And then the second big thing it’s not open it’s not an open process. The only people that get to participate are the ones that are clients of the bank retails predominantly cut out. And it just it’s nonsensical at this point. It’s gotten worse in the past five or 10 years because the banks have gotten lazier. They used to think about an I. P. O. Is a distribution event. You’d hear words like marketing and distribution. And the big banks had these massive salesforce’s. I worked I worked at 1 20 years ago and they were you know geographically bases the sales team in boston, a sales team unit Seattle and all this stuff. And when they were pushing an I. P. O. They pound the phones and work the deal. These are terms that used to happen. Um And even when they had multiple firms on the cover they would have something called jump ball economics. So you had all these commissions they were tied up to see who could sell the deal the most. That’s all gone. When you go to do an I. P. O. Today the banks tell you you have two goals. One is they want you to have a 95% positive hit rate on your one on one meetings. That means they want 95% of people you meet with put in order and they want you to be 30 to 50 X. Over subscribed. And those two concepts are lunacy and and and I really really really wonder how someone could sit there and and by the way they put out after the I. P. O. Oh you know we did this great. It was 30 X. Oversubscribed. That’s like like you’re ignoring 97% of demand and you didn’t even you didn’t even get a chance to bid if you’re not in this close group of customers. So it’s more than 97%. You’ve probably ignored you know, 99% of the man. And then why would anyone be shocked when the price pops when 30 X. Over subscribe was your goal? What’s also shocking to me is that boards and management teams don’t find that remarkably jarring from an intellectual standpoint, that that would be the goal if you took any asset. You know, let’s say, let’s say you’re running a newspaper and you have ad revenue and you said let’s set the price so that we have 30 X more demand than supply. Like who would run a business that way? No one would run a business that way. So it’s gotten extremely perverse. There’s a lot of rationalization about it, but there’s this wonderful super elegant thing called direct listing that makes it all go away. But you know, they’re still fights with the sec to push through adding primary capital to the direct listing, which I think would be the final nail in the coffin anyway, less than five hours. But the dutch, I would frame the whole thing. So if the process is so broken, why aren’t boards and management able to push back more in the IPO process and make it more fair? That’s a general assumption. And for anyone that’s been down in it, you just don’t have as much leverage as you may think. There’s another issue which is for the vast majority of people going through the process. It’s the first time they’ve done it for founders Ceos Cfos, it might be the second, but there’s a drastic experiential differential between the banks and the buy side and these companies that are going through everybody else has done it 100 times and they’re just doing it for the first time. There’s also, I think because it’s the only time you do it, you know, everyone begs you to think about it like a Grand Southern wedding. You know, pull out all the stops, you know, no, no expense too great. Like you only do this once, right? And I think that creates a bit of a conservatism and a bit of tilting to the traditional that said, I think there’s a particularly unique characteristic of the people that are pushing back against it, you know? And so, you know, Larry and Sergey google were very upset about this problem and we’re pushing on it. Pierre Omidyar debate tried to get an auction done, He couldn’t, but he was pushing on it. Daniel Lak at Spotify speaks very, very eloquently about why he wanted to do something that was more fair and the same thing for Stewart slack and just a few days ago, David at roadblocks, you know, he just felt it was the right thing. You know, there’s this great quote that Mike moritz had in the financial Times, he says the only thing that keeps people from doing direct listings is intelligence and courage. I love that quote, but the courage is a part of it. Well, one today you don’t, you can’t raise capital. So that’s probably the bigger limiter. But you know, you’re doing something new and different. And by the way, I’ve gone way too far without mentioning Barry McCarthy’s really the guy that that made the direct listing thing come to life. He was the CFO it Spotify and if you talk to Stacy it, uh, the the N. Y S. E. He spent two years getting that done a

[0:09:48 Speaker 1] couple, a couple of questions and you’ve, you’ve touched on a lot of things going to pack a lot of it. And first you mentioned, jay Ritter is an academic and for many, many years decades academics have this hypothesis where the empirical evidence seems to suggest that there’s an information communicated from the from those that are purchasing the IPO and they’re communicating their demand schedule and because of that, you need to compensate them for giving that truthful information. And absent that truthful information, investment banker wouldn’t know how to price the deal and because they look in a discount, they tend to put in for more shares than otherwise would want to buy. And I just is that just a forest? Is that not a reasonable interpretation?

[0:10:29 Speaker 0] Well, I do think it’s a farce just because we’ve done five highly successful direct listings, like it’s not a necessary component, neither is the green shoe and a bunch of other crazy stuff that it’s been built into this process, but it also requires scott. I think it requires you to ignore the fact that there is a conflict of interest and the conflict is so apparent. You know, the last year alone, I think under pricings were $35 billion. I mean that’s we’re talking about a ton of money and to think that people wouldn’t you know, do everything they can to try and keep that that gravy train going is it literally requires you to project this kind of moral fairness on the investment banks that there’s no history that would suggest that they would ignore their own economic motive to do the right thing. And like I said, emails have been discovered, you know that they use this to give curry favor. I mean it’s like I said, I mean I could get emotional about it because I just I’m shocked that people have trouble seeing it. You know,

[0:11:45 Speaker 1] when when google went public, it was the biggest IPO ever, presumably they had a lot of market power. They pushed through reverse price auction with their lead underwriter. But at the end of the day, it was still underpriced by 15%. Was that process just undermined by in the writing process or why did the reverse price auction work for?

[0:12:05 Speaker 0] So, so so they didn’t want, they didn’t they actually tried to do it that way and then they used some human judgment to which I think it was a mistake. But two or three other things about that particular event, once, you know, we’ve had once again, six direct listings since then, that have all been way smoother than that one was. There’s some fundamental differences about the way the direct listing works versus what they did. So the direct listing just leverages the exact same people and technology that opens stocks every day. And, and in perhaps the most massive piece of irony altogether. A direct listing is exactly how stock opens the day after their hand allocated idea. I mean, it’s the same systems, the same people, the same matching process except the only people that can sell are the ones you gave the stock to the night before, which is also kind of a weird idiocy from my point of view. But a direct listening just has less steps than an I. P. O. Because they skipped the one where they give their best customers a discount of break. The other issue back then, because that infrastructure wasn’t integrated in the system. The way direct listing is, if you wanted to be a retail, if a retail investor wanted to get on that google thing, they had to open an account at Hamburg and quist. Like nowadays with direct listings, you can go on Robin Hood and say I want shares and if you’re a penny above you get filled so it’s more integrated into the system. And then there was some interesting work done by Legg mason’s Bill miller on the google I. P. O. Where he hired all these auction theorist, you appreciate this, got to try and give him a advantage and they met for like a day or two and Bill noticed that every one of them started their talk by saying, assuming an experienced, you know, set of participants and he realized that in that case because it was the first time that there was an experience and so he put in a huge order um, and got filled purely on the theory that that you didn’t have enough, you know, mileage under your belt on interacting with it.

[0:14:15 Speaker 1] Can we go back to Spotify and direct listings and how that came about? And do you think like how much of this is due to the ceo of Spotify, pushing it through? You kind of alluded to that? And I’m just wondering if you know any of the backstory and

[0:14:28 Speaker 0] yeah I mean just from talking to these people, I think 100% of the credit goes to Barry McCarthy who was the CFO, he was the CFO at netflix before he became the CFO at Spotify, he’s famously said you can do a google search that nutritional I. P. O. Process is moronic, which I agree with and he just had had enough and and he had been around long enough to see the process, you know from the company side over over and over and over again. Which is you know going back to when I was answering course question like there’s there’s just not that many people that get multiple shots on goal and then he just pushed and pushed and pushed basically. He uncovered this direct listing thing which had been kind of sitting off on the side unused and was able to move it enough to the center to where it would accomplish what he wanted to do. There were other people that like there were lawyers that worked hard on it. I think Stacey Cunningham at the NyC really, really worked hard at it and Daniel believed in it, you know. But you know, I spoke to dan is just the other day and I was giving him credit. He always pushes the credit to bury. But Daniel, Daniel felt the fairness thing was a really big deal to him. The access, the open access, why he wanted, you know, everyone should be able to bid and be on the same playing field.

[0:15:55 Speaker 1] Do you think that chairman Clayton during his tenure at the sec, the fact that he hired a longtime Silicon Valley lawyer, Bill Henman, to lead the division of Corporation Finance. Do you think that had any influence on the ability of firms to go public through a direct listing?

[0:16:12 Speaker 0] I don’t know. I mean, I would turn that question around on you since you were inside. There’s a lot. I don’t know about that. I I was thrilled that he, you know, pushed through the direct listing with a capital raise. You know, two days before he left office. I’m not 100 convinced that the people that are left behind have the same motivations that he did. But I have a hard time. I really have a hard time seeing how anyone would suggest that matching supply and demand and opening the process to all bidders is wrong. I just, I really have a hard time seeing that. And if people are against that, you know, it just for me it just smells of regulatory capture and you know, the the whatever commission of institutional investors were this, this this large lobbying group that was fighting this tooth and nail. So palantir recently did a direct listing for their shares and you know, since then their shares have about tripled in value. So they’re they’re CFO recently, you know, indicated that they had underestimated the value going public. So do you think that a minority view or a common refrain about direct listing? We’ll call you might be asking one or two different questions like, like are you talking about just being public in general as a concept for a founder or the way you go public? I think we can do that in general being public as a founder. Okay. Yeah. There’s a there’s a really interesting interview that was done with Mark Zuckerberg, where about two years after he went public, he said, he said, you know, I waited way too long to go public and he regretted it. And there had been a movement, I don’t even remember who started it, but there was this phrase stay private longer. I think it was probably engineered by the late stage investors who we’re obviously getting access to these high growth companies and then, you know, kind of cutting the line ahead of the buy side. But what I have found, and there are other people that echo this. So Marc Benioff is a big believer in this Rich Barton at Zillow is a big believer. I have found two things. One the buy side is way smarter than people give them credit for. In fact, I think a lot of Silicon Valley founders erroneously think that that Wall Street investors aren’t very bright and they’re just wrong. They’re just wrong, they’re dead wrong about it. And so what happens when a management team, our founder starts interacting with the street? Um, they get challenged more, they get asked really hard questions, they get asked to frame things in a way maybe they didn’t before. And all that stuff is provocative and, you know, I think it’s probably better to hear from someone like Benny offer Barton who are on the ground. You know, another thing I like to highlight, you know, I’ve never seen Benioff for Hastings or Bezoza complained about being public, you know, and I’d often thought of this, this idea, which is if you imagine a senior quarterback at a top university that’s done well and it’s expected to go high in the draft and they’re interviewing him like a week before and he says, you know, I’ve thought about it. I just don’t think I want to play on Sundays. I mean, they record every minute, they watch every statistic. It’s, uh, there’s no way I can work on my long term performance with that amount of short term scrutiny. And if he did that, he would drop in the draft, you know, very, very quickly. And yet there are private ceos who will say things like that. And I think the by sides listening, you know, and the problem is the minute you give shares or options to your employees, you’re in the game and it’s an upper out game, you know, and if you, if you never want to be public, why did you give the employees options? You know, because they have an expectation of liquidity and if you’re afraid to be public, are you afraid to execute at that next level, then you’re probably not the right person to be running the organization? You know, as harsh as that may sound. And so anyway, I’ve, I’ve often felt that, you know, the process of being public, process of getting ready to be public does nothing, but but helps the company get further along. And there’s another element which I’ve, I’ve said before, so I’ll mention it briefly, the hyper competitive nature of venture capital over the past 20 years, which has only gotten systematically more competitive has led to was the best phrase I could use kind of a white glove approach to how much oversight they provide at a board level. Everybody’s so afraid of their reputation and winning the next deal that no one is willing to push back and, you know, that gets into issues of fiduciary duty and, and the governance and this kind of thing. But the street pushes back, you know, it really does in a way that I don’t think a Silicon Valley board really can.

[0:21:45 Speaker 1] So a couple of couple of follow up questions. One is a clarification you said by side is smarter than people give them credit for when you say by side, who are you referring to? These are black rocks of the world, Are they smaller funds or who is by side?

[0:21:57 Speaker 0] Yeah. Any and all, you know, it’s the Fidelity’s and Tea Rose of the world and capital groups, but there are smaller firms, I mean some of the smaller firms will take longer, you know, if you’re running a billion dollar fund, you know, and you want to really move the needle, you need to focus on like 10 names, you know, and and those mean a lot to you. And so I’ve seen funds like that where there will be this kind of symbiotic relationship between the company and the fund and they’re looking out for you, you know, and they’re out there talking to your competitors and they’re out there, you know, studying your model in another country maybe. And those things can be additive to the whole thing.

[0:22:39 Speaker 1] Well, that’s that’s interesting. I think it’s also interesting that you made the comment that Mark Zuckerberg thought he waited too long to go public and I hadn’t heard that before and there’s potentially some governance benefits. It seems monitoring having uh by side block holders or shareholders that are part of your ownership structure. If you were to look back, do you think a company like Uber would have benefited from going public sooner?

[0:23:02 Speaker 0] I think it’s possible for sure. Just because the So so the reason Zuckerberg was saying that was they were behind on mobile and I don’t know if you remember, but you know, they came out at 40 and the stock went down into the teens and that signal is a big wake up call, hey, you got a problem, you got to take care of this thing. And I think private companies live in this illusion that their stock is fixed at the price of the last round and that it doesn’t go down, but, but you’re, it’s just not trading, you know, and when, when the, you know, you come out and your price goes way down, it gets everyone more focused against the board, more focused against the management team, more focused. So I do, I do think some of the issues might have been, might have been taken care of clark quicker. There could be, I mean, there there there could also be scenarios where that’s not right and that if we didn’t have all of our if we didn’t have all of our financial systems and accounting and all that in the right place, then getting out early could could have could have actually, you know, had other issues. So it’s not it’s not black or white of the big direct listing so far, all of them have been done by major investment banks and kind of the same ones who traditionally underwrite I. P. O. S. Do you find that ironic or concerning? Well I’d once again want to ascot that question because the sec required that you have a hand holder as you go through it.

[0:24:42 Speaker 1] Yeah. You’re trying really hard to make me the guest of this

[0:24:45 Speaker 0] show. You’re doing a good job not question. I think it is a good question

[0:24:54 Speaker 1] and I don’t actually know the answer to that. I was an economist at the sec not a lawyer. But I do find it interesting that and to go back to your earlier questions about Bill Henman and I know from early on and when I was still there and talking to him, he was very much of a small ball kind of guy. And he just wanted to remove the frictions to make things happen. Very uncharacteristic of uh director of the National Corporation Finance, who usually wants to have big grandiose plans and change the world and write new rules and regulations. So it wouldn’t surprise me if if that were influential, but at the same time I do think that there if it weren’t for a Spotify or a company like that, it probably would never happen.

[0:25:35 Speaker 0] One thing I would say cory is that you know, the real issue from a dollar standpoint is the underpricing way more than the fees. So a lot of people when they think about, oh why did you do a direct listening seven I. P. O. They go, oh it must be cheaper fees. It’s the fees are are small compared. I mean last year the average I. P. O. Was underpriced by like 42% for the whole year. So you know, if your fees are seven or 3 or whatever, it’s nothing, it’s my, you know, it’s tiny compared to that. So anyway, they required I think if we if direct listings became more systematic, especially if we had primary capital to it, I wouldn’t be surprised to see smaller boutique firms, you know, like Evercore something jump in and grab a lot of those just because you don’t need as much handhold. But we’ll see, we’ll see.

[0:26:35 Speaker 1] So let’s look back to a comment you alluded to or made earlier about the council of institutional investors and also the fact that the NYC wanna rule approval that would allow issuers to do a direct listen and issue primary shares. And so the council institutional investors push back pretty strongly and they said that that would undermine the traditional underwriting route and investor protection that traditional underwriter would provide as part of the issuance process. Is there any merit to that argument? Do you agree with and disagree with it? Or what would be your push back there?

[0:27:08 Speaker 0] Can you send me a list of all the wonderful investors that have been protected by suing the underwriter? I didn’t realize that that that was a, a common practice.

[0:27:20 Speaker 1] So you don’t think that the argument that having an underwriter do the due diligence will make the issuance,

[0:27:27 Speaker 0] what does that have to do with how it’s priced? Like you could do both. Like why why why is due diligence restricted to how it’s priced? And by the way that term underwriter is complete and utter bullshit right? They don’t put up any capital whatsoever. The deal is not underwritten at all, hasn’t been in years. Uh

[0:27:47 Speaker 1] So is it the best efforts offering?

[0:27:49 Speaker 0] They don’t put their capital. The deal is not guaranteed to the company that never happens. Like the word underwriter came from a place where you would buy the deal and then resell it. That doesn’t happen anymore. Um But but I go back, I push back on this scott like why why is that the push back against how you price? Like why would why? That makes no sense? Like you could have due diligence and still price it this way.

[0:28:15 Speaker 1] Yeah it seems that there are two issues. One is the direct listing of pricing, the other is issuing primary shares, new diligence and issuing new shares. That may be

[0:28:23 Speaker 0] accepted by the way. Here’s another great one for every bond is priced. This way is the council for institutional investors upset about how bonds are priced.

[0:28:34 Speaker 1] Well then what? Okay, so one of the arguments they bring up is that many companies when they go public will curtail the use or minimize the use of dual class share structures or required to be sunset or something of that nature. And so I guess it’s generally speaking, do you have views on dual class share structures? Is that something that is important for the founders to have? And

[0:28:58 Speaker 0] I don’t, for the life of me, I don’t see how that’s related to why you should use supply and demand to set price like it’s completely disconnected from that. And there’s there’s a whole boatload of I PS. With dual class structures or worse, so to me it’s I’m glad to talk about dual class structures but I don’t see how that applies to an I. P. O. Verse direct listing

[0:29:23 Speaker 1] you’re trying to explain is that the pricing of it should be independent of all these other factors. Or people that are pushing back on the direct listing or at least the capital raising part of it are joining two things that are otherwise separate

[0:29:35 Speaker 0] and they’re just looking for hooks. They’re looking for footholds that they can bring an argument and a lot of it’s tied into esoteric. There’s a whole debate right now on adding the primary about how wide the ranges which I mean a traditional I. P. O. S. Are being underpriced and popping 100%. What’s the point of the range? The retail buyer doesn’t get in until that first trade and their way out of bounds on the range. And so it’s just it’s like Weird weird. It’s not weird. It’s just you know, look the bottom line is $35 billion dollars went into their hands of their constituents in one year just for showing up and putting in an order and of course they want to protect that. That’s that’s all this is like. It’s not that hard. So then if direct listings really are the way the future as you see it and I believe we have a pretty sizable direct listing coming up around the corner with coin base. I’m not mistaken. How you know how popular do you see dr listens becoming, do you see it as accounting for 50 of the market share? You’re right about coin based work noting that this will be a big one for NASDAQ because this one is going to be done on NASDAQ and not the N. Y. C. I don’t think that will will matter that much. But it’s good to see both exchanges participating. If we can get to the point where this primary capital and direct listing I think it will become 100%. There’s no one, there’s no one doing bond offerings. The way I. P. O. S are done like they’ve all gone to just use, it’s called a price time algorithm. It’s not that hard. Like here’s here’s the point I would make. You could at University of texas you could grab someone at the end of the freshman year of cops I and the end of their freshman year of finance. That’s it. That’s all that’s all you need. And you say we want you to come up with a way to allocate shares in an initial public offering. What would you do? And they’re going to come up with a direct listing like that’s all the education you need because you’re just going to match supply and demand and algorithms aren’t tricky. Like it’s super simple. And so as a result yeah there’s no one doing bond offerings where someone gets because of their name because they’re going to be a long term holder gets a better price. That doesn’t happen and so it won’t happen here as long as the mechanisms. The thing that will prevent it is if regulatory capture prevents the advancement of innovation because that’s what’s kept it to this place today. Do you not think then that there’s going to be some types of companies that still prefer the I. P. O. Process? Can you imagine any type of company like a pre revenue company or a very small company? Do you think there’s any exceptions to that? You know there might be some some ceos and cfos that like getting invited to special weekends you know at these conferences. You know those are pretty pretty nice affairs and so yeah they might keep doing it. It’s it’s you know it’s not a very nice thing to do for your shareholders if you’re doing that. And and I do really wonder if boards that are you know agreeing to selling you know this very expensive asset which is your stock of your company Knowingly into this 30x. oversubscribed thing knowing it’s being sold at a discount might one day be held accountable for producing very duty violation. You know, I’ve seen derivative lawsuits for for something that’s much less severe. And so I I I wouldn’t be shocked to see them start start showing up here. By the way, I realized something else too. There’s a whole bunch of stuff that happens in the traditional I. P. O. Process That’s not mentioned in the risk factors of an S1, like the fact that the shares their hand allocated to these customers who have a conflict of interest because there are profit center on sales and trading. Why isn’t that a risk factor that should be disclosed in an S. Form? Most people don’t know that if the green shoes executed the bank keeps the profit, it’s called a stabilization tool in this one, but no one ever mentions in there, the bank keeps the profit. That’s a conflict of interest that would make the stabilization effort probably compromised. So I think there’s a whole bunch of stuff that maybe should be in the risk factors of a traditional I. P. O. That’s not.

[0:34:22 Speaker 1] So let me ask the question little bit differently. Do you think that the market would be, would embrace through direct listing any I. P. O. S? In other words, there isn’t an I. P. O. Type or characteristic that wouldn’t be suitable for direct listing.

[0:34:35 Speaker 0] I think that the buy side would, would love for a 40 more years of one day giveaways. And so they would be thrilled to have as many companies come through that pipeline as possible. But I think if we add capital raises to a direct listing, it’s just so much smarter. There’d be no reason for a management team to choose the other route. And Corey, you were mentioning things like small or not known. These were all blockers that were put up that are just their, their arguments that don’t hold water, you know, at that point, you know, go back a year ago, pre covid they said, oh if your deal is not known, if you’re not a household name, you know, you’re going to have to visit the accounts well fast forward today and every I. P. O in 2020 was done over zoom and so well maybe that in person meeting wasn’t that big a deal. And then someone realized that a direct listing has actually more information dissemination in a traditional I. P. O. Because you get to do this Ambassador day where you could have like eight hours of content and then if you want to, you can still go do the roadshow. So slack did both slack did the investor day in the roadshow, which is a super set of the information you would get in a traditional I. P. O. Process. So look, we live in a day and age with with virtual tools like we’re using right here. That would make it super easy for anyone to get information on any company. And the buy side knows the private company universe way more than they did in the past. And you know, one of our company’s Asana did a direct listing which is far from a household name. So it they’re all superfluous arguments like I keep going back to why why can’t you simply match supply and demand? And why wouldn’t you open it up to every investor? Why would why would some people be cut off And and in any direct listening conversation I’ve ever had. Those two arguments are never addressed by the other side. They always move into something else. Well what about suing the underwriter? What about the ranger? What about all this stuff about the lock up? But but they won’t address that. Why are you against using supply and demand to pick pricing? Why why would you want to block out? You know mostly retail investment. You know

[0:36:54 Speaker 1] so let’s switch gears a little bit here because we’re talking about direct listening to the future of direct listings. But right now today we have this huge craze with stacks and lots of them and they’re widely used. I mean but they’ve been around awhile. But why why is somebody doing it now? Why is it why is it exploded?

[0:37:14 Speaker 0] It’s the same discussion scott. It’s exploded because the one day underpricing in the I. P. O. Market has gotten worse and worse and worse. So I think the last three years was for four years was like one point 13,000,000,007 billion. 35 billion. And when you leave, you know when you raise the cost of capital for a traditional I. P. O. Over 50% which is what they’re doing right now. If you include the underpricing and the fees you makes packs look cheap and and prior to this moment everyone would have said Spaccia too expensive because the sponsor shares and all this stuff. And so it doesn’t make sense. But when you create a a a pricing umbrella that high then you makes packs look super cheap. And so now everyone’s running at him and you know, there’s there’s an article in the journal this week, the implies grab which is a very large company in Southeast Asia is gonna forgo an I. P. O. Process and do a do a SPAC with altimeter. And that’s proof of it. And the irony is the banks created this mess by creating such a uh such a massive window from which you know, to operate underneath. And a lot of these SPAC sponsors, if you were to interview him, I don’t know if you guys have talked to any, they know they’re stealing the right to allocate from the investment bank. You know, they’re shopping the pipe the way a bank would run an IPO process.

[0:38:51 Speaker 1] So should we view Spak says like this interstitial place between the traditional I. P. O. And the direct listing and it’s just a stopgap until we get to direct listing for all.

[0:39:02 Speaker 0] I think that some management teams are viewing it that way. I think the other part that makes the spat conversation complicated is that we are in a very very highly speculative, low interest rate environment. There’s a lot of money popping and you know, some of the spats that have gone out are quite speculative. Their pre revenue, there’s a lot of pre revenue companies that have stacked and it’s unlikely that they would have done a traditional I. P. O. Now you know when you see this grab thing you’re seeing, you’re seeing something a little bit different. You’re seeing a company chooses back as an IPO alternative so that’s a little bit newer but it is messy out there. So then you know talking about pre revenue companies, do you think that pre revenue companies should go public? You know whether it’s through an I. P. O. Or respect or however probably not. You know you could ask that two different ways like should they or should they be allowed to you know and should it be allowed to I I once again scott might be better than me. I mean you know when Wynn resorts when public as a SPAC before he ever built the hotel dude had a track record. You know and it worked out for shareholders. So it’s, you know, maybe maybe it’s okay. I think for Silicon Valley companies to do it, it’s pretty the one challenge that you’re faced with poor. If you look at a couple of sectors like electric vehicles or this new sector called vitale, which is vertical takeoff and landing, which is basically electric helicopters. Once one player in the industry goes, it kind of forces the hand of the others because they’re able to grab half a billion dollars of capital. And if you just sit there and don’t do it and say, oh, I’m going to be conservative and, and run my tight ship, you might be just be left behind. It

[0:41:06 Speaker 1] isn’t that somewhat ironic because companies been private, staying private for longer and amassing huge war chest before they go public. And now it seems to be just the opposite argument where you need to go public to get that capital.

[0:41:19 Speaker 0] I think that the current state of our markets are allowing More money at a higher price via this back channel than the private markets right now and that wasn’t true three or four years ago. And maybe it is ironic like

[0:41:40 Speaker 1] do you think you think also packs are created equal? Are there some that are better than others

[0:41:46 Speaker 0] from a sponsor perspective scott? How are you asking that question? A sponsor

[0:41:50 Speaker 1] perspective and also from how the deals are structured and fees and so forth.

[0:41:54 Speaker 0] There’s a lot of moving parts on the structure side. You know, I’ve heard of some sponsors that are like saying, you know, they’re going to try and negotiate the 3.5% that goes to the investment bank away on the close there, there have been, you know, Adam bain who worked on the first couple of these is a board member. He likes to say that they’re they’re pick your own adventure is spats, literally every term can be renegotiated along the way. And so the Jobi Aviation one, all of the sponsor shares are tied to stock price hurdles. So if the stock doesn’t go up, the sponsor delusions a lot less. And so there’s just, there’s a lot of moving parts there. There are happening on the SPAC thing right now

[0:42:42 Speaker 1] you think there’ll be standardisation that occurs and if you want to sponsor B a sponsor, you’re going to have to abide by certain terms.

[0:42:48 Speaker 0] Because I don’t know I mean if the terms keep getting whacked, especially if some of the investment bank terms keep getting whacked, they may push back. There was a meeting once again, a direct question scott. There was a meeting at the sec this week, right? And I don’t know what they’re worried about and what they might start poking around and change. You know,

[0:43:12 Speaker 1] are you are you worried about the new administration at the sec? Given that you just brought it up? And in particular, the Democratic Commissioners were not in favor of a direct listing, raising capital and now the leaderships changed. You think that’s going to curtail some of the progress,

[0:43:28 Speaker 0] You know, you’re the second person that used that phrase with me. So I once again, I’m pretty naive about the internal operations of the sec or the individual members, but but I’ve heard, you know, from someone else that the Democratic members were pushing back, and it’s really shocking to me that that’s the case, but mainly because of open access. I can’t imagine how someone that has a platform and and aligns themselves with the Democratic Party would be in favor of a process that basically limits, you know, first day I P O. Pops to a very elite and restricted set of shareholders. I’m stunned by that and that’s why I go back and use the phrase regulatory capture, you know, the only way I could see it from a VC perspective, which, you know, you’re probably a little bit familiar with is the rise in stacks of positive development. You know, it’s certainly another way to for the companies to exit, you know, but now we’ll VCS need to compete with facts. I don’t I mean, it depends on where you are in the in the pecking order. My firm is it does almost entirely early stage, like two people in a power point. So it’s not an alternative for that. I don’t I don’t think of it as good or bad. It’s more speculative as I said before and having lived through 99 2000 things can get super messy when things are speculative. And so there’s always a chance you’ll get liquidity sooner in a company than you might like all of a sudden your shares are sellable in a pre revenue company, that could be a huge benefit. But when the playing field gets sloppy, it also is much harder to give good advice to. You know, if your if your competitors all raise a billion dollars and you do too, the only way to compete and use those assets is to take massive burn rate. And that means, you know, intentionally executing an unprofitable manner. That’s pretty sloppy. And so I I see, I see pros and cons like it’s not it’s not just one thing, it’s complex.

[0:45:49 Speaker 1] So you’ve been with us for a while and you’ve answered a lot of questions, we’re running out of time and maybe a couple last ones to ask. One harkens back to what the sec and regulators have done over the past decade with respect to the global settlement Sarbanes Oxley and I’m just wondering, did any of that help or was that just a sideshow? Was the jobs act helpful? Was emerging growth company status testing the waters confidential filings. Was that all good?

[0:46:20 Speaker 0] The last set of things you mentioned Scott was wonderful. So Sarbanes actually had, there was a materiality clause that was adjusted that you’re probably familiar with. That made things 10 times better because you had, you know, you had to hire one audit firm to look after the other audit firm and they were getting caught in the weeds on processes for things that didn’t even matter. And that changed. And then the jobs act all that stuff like getting two shots on goal with the sec out of the eye of the public and shortening the window when you you you know basically can’t you know talking to press and everything that that that was fantastic like and I think really helped a lot and I heard that from everyone you know, that went through the process

[0:47:05 Speaker 1] and when when we had the dot com crash and the global settlement followed and then we had something called regulation FD. And I’m wondering his regulation fair disclosure and the ability for a small company get an analyst to follow them. Is is that a problem today? Is there any needed change regulation there?

[0:47:25 Speaker 0] I don’t really see it as a problem. I was I was sell side analysts when I worked on Wall Street many years ago, you know the spitzer wall really changed things like when I worked back then we talked to the bankers and today I think you have to have a lawyer on the phone for a banker to talk to an analyst and you know getting coverage because the bank took you public when there’s no discourse whatsoever between the the analyst and the banker is kind of like forced marriage. And I found that you’re better off building your arsenal of supporters on the south side as a separate process than who you choose your bank because that spitzer walls so high there’s no relationship there. Does that make sense?

[0:48:17 Speaker 1] What do you think about smaller companies that when they go public can’t get analyst

[0:48:22 Speaker 0] coverage? But once again, we live in 2021 like everyone has information at their fingertips immediately. And so I’ve never had that be a problem. There are smaller boutique banks you can add to the right side of your, of your prospectus that will give you what you’re talking about if you want and they’re not very demanding and it’s easy to do that.

[0:48:48 Speaker 1] Okay, so your, your view is that it’s not an issue today’s age with communications as they are, small companies can get their message out. You don’t need to have analysts filtering or

[0:48:58 Speaker 0] misogyny and

[0:48:59 Speaker 1] information to help investors

[0:49:00 Speaker 0] make their decision. And you’ve got things like seeking Alpha and like there’s, there’s coverage, you know, enormous UGC coverage of anything you do. I don’t, I do not think that that, and by the way, let’s be realistic, the work that’s done by a third tier sell side analyst is not that interesting. Uh, they kind of regurgitate the S one I’ve seen the report.

[0:49:26 Speaker 1] Okay, well, Bill, you’ve been with us for a lot of time and it went very fast and you gave us a lot of information before we sign off. I wanted to turn it over to Korea and see if he has one last question to ask.

[0:49:39 Speaker 0] Absolutely. So Bill, you’ve been a very prolific corporate director and I kind of wanted to know what your thoughts are on how great boards function and then how to be an effective board member as an individual.

[0:49:56 Speaker 1] Yes or no question.

[0:49:57 Speaker 0] Yeah. I mean, it’s a hard question. I think the best boards I’ve been on, there’s a, there’s a recognition from all the members that the primary duty of the board member is to look after, um, the price per share of the corporation. You know, it’s actually a legal requirement, you know, from the Delaware statute, that’s why you’re supposed to be there and when everyone knows that, I think there’s a, there’s a ton of synergy people add value in different ways and you get going in the right direction, when the discussions get away from that, you can end up with a ton of bureaucratic processes and conversations that I think can actually be distracting to the execution of the company. So I’d be my high level thing, you know, being educated, like if you’re going to serve on an audit committee or committee, like you need to do a lot of work to know what best practices on that front and some people are open to that work and some people aren’t. I love it when board members, you know, attend things like directors colleges, I think they get exposed to a lot of things that can be super helpful for a public company board. I’ve noticed it’s really good to have a diversity of, of experiences. So, you know, you might have someone who’s really good and go to market or you might have an auditor that you know has been in that CFO role before. You might have an industry expert. I think making sure that you have complementary skill sets of super valuable.

[0:51:36 Speaker 1] That was great insight. We really appreciate you taking the time to talk to us today. Thanks Bill. We hope you enjoyed today’s episode and if you did please consider telling others about it. Both Corey Haas, my co host and Jack chapman, another mccomb student, help with the background research On a personal note. This episode was particularly enjoyable to produce for more than a decade. While working at the SEc, I had the opportunity to work on a number of offering reforms a supervised many economic analyses that went into policy changes, including the jobs act implementation. I often worked on I PL related issues, including the one that we discussed today. Underpricing, having the opportunity to interview a titan of the VC community without wearing the regulatory handcuffs of being a government official was refreshing and enlightening. At one point I even fell victim to the interviewers send becoming the guests. The statistics I quoted today to open the show come from jay Ritter, a well known well regarded academic who’s been researching I. P. O. S for more than 30 years. He has a wonderful website that publishes statistics including those related to underpricing. This is a production of the Salem Center for Policy Housing McCombs School of Business at the University of texas at Austin. The student executive producers for today’s episode are Zoe Tar and Abby Sawyer, both from the moody School of Communication. Yeah