Industry Insights

Venture capital direct listing

Derek Watson
Derek Watson

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Venture capital’s call for more direct listings is growing louder with a group of big-name investors and tech company executives expected to attend a private, invite-only “symposium” on the matter next month at a hotel in San Francisco.

Why it matters: There’s a growing investor consensus that the traditional VC-backed IPO process is antiquated and broken — too often benefiting a high-net-worth bank clients and a small pool of mutual and hedge funds, at the expense of issuers.

Details: Among those expected to speak are Benchmark’s Bill Gurley, who’s been banging this drum for a while, Sequoia Capital’s Mike Moritz, who just wrote about direct listings in the FT, and Spotify CFO Barry McCarthy, whose company went public via a direct listing last year.

Jay Ritter, a University of Florida professor who’s also slated to speak at the private event, released data in April showing that the “under-pricing” phenomena is accelerating for VC-backed IPOs.He reported at least $6 billion in net under-priced dollars at the time, versus $16.1 billion for 2017-2018 combined.He’s also found that average first day returns for offerings led by Goldman Sachs and Morgan Stanley are 33.5% and 29.2%, respectively, higher than for other underwriters.

Our thought bubble: We last discussed this situation in June, around the Slack direct listing, and argued that investors should work with the SEC to create a hybrid structure whereby companies could both list directly and raise new capital.

That still hasn’t happened.On the other hand, we’ve heard that law firm Latham & Watkins, which worked on both Slack and Spotify, has drafted a pre-IPO conversion term sheet that could help issuers raise simultaneous capital at a slight discount to the direct listing price.

The bottom line: Venture capitalists regularly congregate at industry conferences in resort towns, but rarely self-organize for the sake of knowledge-sharing and next-step action. Next month’s event will be an exception, suggesting that the startup IPO scene could soon undergo a sea change.