VCs Can't Get Enough Of Direct Listings

Venture capitalists are trying to push the IPO alternative as a better way for startups to go public.

- Michal Lev-Ram

TECH -VENTURE CAPITALIST BILL GURLEY uses a fat black pen to circle the word “moronic” in a news story he has pointed out. The recent article is a critique of the traditional process that startups use to go public: an initial public offering. It argues that IPOs—the path to Wall Street riches for nearly all big tech companies, including Amazon, Facebook, and Microsoft—are outdated and inefficient and that the investment banking industry’s inability to evolve is, yes, moronic.

In this particular case, Gurley wasn’t the one who used that strong adjective. The article attributes the word “moronic” to Barry McCarthy, chief financial officer of music-streaming service Spotify.

But Gurley, a well-known tech investor at Benchmark, might as well have uttered it—and written the whole manifesto himself. He’s one of the loudest proponents of so-called direct listings, an alternative to the IPO that’s gaining momentum in Silicon Valley.

In traditional IPOs, bankers spend weeks (and earn hefty fees) lining up big institutional investors to buy shares. The newly public company gets the publicity of a splashy launch, and a large infusion of cash to boost growth.

But many of today’s startups, rich already with private capital, don’t need cash—they’re primarily looking for an efficient way for early investors to sell some of their stakes.

In a direct listing, a company doesn’t issue any new stock and therefore doesn’t raise additional money. Instead, shareholders sell existing stock directly to the public, leaving investment banks to serve merely as advisers in the process and not underwriters.