How a Silicon Valley VC Took on Goldman Sachs, Wall Street and Revolutionized IPOs

By June 2019, Bill Gurley had lost his faith in the traditional IPO process. The venture capitalist had worked in Silicon Valley for more than 20 years, making his name as an investor in such well-known consumer-facing companies as OpenTable, Zillow, and Uber. 

He had seen or participated in dozens of companies going public and was getting prepared to step back from his day-to-day role as a partner at the venture-capital firm Benchmark, giving him more freedom to speak his mind about IPOs’ inherent conflicts of interest.

His frustration over IPOs has been heading towards its boiling point for the last 18 months. In November 2017, he was on the board of Stitch Fix, the personalized-fashion app, when Goldman Sachs and JPMorgan underwrote the company’s IPO. Taking a company public is a huge event in the life cycle of a company. In a traditional IPO, the company raises money by selling shares — pieces of their company — to investors and then listing them on a public stock exchange. The infusion of cash helps the company supercharge and grow its business while providing a wider range of investors a chance to own a piece of an exciting business. Banks called underwriters help advise the company along the way: marketing their story to potential investors, pricing the shares, and deciding how many each investor should receive.

During the run-up to the Stitch Fix deal, Gurley had a conversation with one of the company’s lead bankers that dramatically changed his perception of the traditional IPO process. The banker had called Gurley on the phone. “Bill, this deal is only three times oversubscribed,” the banker had said.

Gurley thought that sounded just fine. Any number over one meant there would be a buyer for every share the company was putting out onto the public markets. “No,” the banker said. “That’s the problem. We usually have 10 times more supply and demand. We want to get to 30 times.”

Gurley suggested a way to drive up demand. Stitch Fix had a lot of retail customers who might want to buy the stock, so Gurley asked the banker how much of the deal they planned to allocate to those retail investors.

“Five percent,” the banker said.

“How about 20%,” Gurley suggested.

The banker declined.

The answer suggested to Gurley that the banker had no interest in considering other ways to stimulate demand for an IPO. “Telling us we have a supply-demand problem,” Gurley said, “but being unwilling to consider alternate solutions that would improve that, versus just simply dropping the price.”

Stitch Fix ultimately priced its shares at $15, below its initial estimated range of $18 to $20. The company raised $120 million after deciding to sell fewer shares at the lower price. The shares, which started trading on the Nasdaq stock exchange, opened at $16.90 before closing the day at $15.15. The disappointing performance was captured by The Wall Street Journal, which cited the decision to price at $15 as “another setback for a hot startup looking to cash in on its private-market success.”

To Gurley, the Stitch Fix stumble was a call to action. “I was rooting for the process,” Gurley said later. “The thing that caused me to pick up the baton was this IPO.”

That disappointment would help fuel the legendary investor’s crusade to reshape the IPO industry and put him at odds with some of Wall Street’s most powerful players. Gurley latched onto an idea pioneered by the streaming-music service Spotify to cut out many of the IPO middlemen and used his bully pulpit to frequently remind people about the drawbacks of the traditional way of doing things. 

A new way

In October 2018, Gurley had another run-in with Wall Street investment bankers over their handling of an IPO. Elastic, another Benchmark investment in the enterprise-software industry, was preparing for an IPO led by Goldman Sachs. Benchmark believed the company had a bright future and could price the shares at around $80 apiece.

When it came time to price the deal, Elastic sold shares at less than half that amount, or $36. Gurley laid the blame at the feet of Goldman Sachs. Benchmark thought the price was too low and told the bank that if it was going to sell Elastic’s shares for that amount, Benchmark wanted to buy between $10 million and $20 million shares in the IPO. The request was unusual: Private investors like Benchmark typically reduce their stake when companies sell shares publicly or soon after. 

Nonetheless, Goldman wouldn’t give it to Benchmark. By the time the markets closed on Elastic’s first day of trading, the stock had risen 94%, to $70, proving that there was more demand for the company’s stock than Goldman had anticipated. But Elastic couldn’t get in on that frenzy, since it only made money off the initial sale. The underpricing also cost Benchmark $60 million, the venture firm reckoned.

The Elastic experience left Gurley sour, even though it may not have been as clear-cut as he thought. CEO Shay Banon spoke to Business Insider the day after the IPO and took responsibility: “As for the pricing, I decided that $36 per share was a fair price for our company.”

Gurley said Banon’s quote didn’t surprise him. “I will tell you that every single time this kind of discounting situation takes place and the press asks the CEO in the heat of the moment, ‘Did you just fuck up?’ they always say no, and I don’t know of a world where that wouldn’t happen,” he said. “You’re sitting there on the biggest day of this company’s life, everyone else is throwing confetti around.”

But other companies were proving there was a different and potentially better way to go public. Several months earlier, Spotify successfully listed its shares on the New York Stock Exchange without undergoing an IPO. The company didn’t use investment banks to handpick investors or choose a price that satisfied their demands. And it didn’t sell shares of its own. Instead it matched existing shareholders who wanted to sell — venture funds, employees, and anyone else who held a stake in the company — with anyone who wanted to buy. 

That process meant the price was set in an open market, based solely on the forces of supply and demand. And it allowed insiders to sell their shares quickly rather than having to wait a customary 180 days in a traditional IPO. 

Spotify’s shares opened at $165.90, well above where it had recently traded in the private markets. More than 30 million shares changed hands during the first day, and though the price closed at $149.01, a decline of 10%, the shares experienced less volatility than many other tech IPOs. 

While some thought Spotify’s direct listing might be a one-time event, talk soon coalesced around a second company that was considering the option. As 2018 came to a close, Slack, the workplace-messaging app, began to prepare for a direct listing of its own. 

Taking it public

Before Slack could complete its transaction, the cybersecurity firm CrowdStrike held a traditional IPO in June 2019. Its shares nearly doubled in a day. The performance — and the money left on the table by CrowdStrike — was enough to unleash a series of tweets from Gurley, who wasn’t shy about sharing his opinions. A frequent guest on financial-news networks including CNBC, Gurley showed a talent for Twitter, too; hundreds of thousands of Twitter followers hung on his every word.

With the CrowdStrike IPO, Gurley now had reason to take his concerns about the state of the IPO market to the public. On June 12, he wrote, “One perspective – CrowdStrike (and other way underpriced deals) are the true definition of a ‘broken’ IPO.” He calculated how much the company left on the table by selling at a lower price in its IPO: $575 million. 

“Imagine if a CFO/CEO gave away a half a billion dollars?” Gurley asked. “Or simply squandered it. How would that be viewed? This is similar, but it’s institutionalized, and therefore everyone is numb to it. And the press views a ‘pop’ as success, which is just poor financial comprehension.”

Twelve Books/Grand Central Publishing

His final tweet of the thread referenced Slack’s upcoming direct listing and the mechanism for setting its price. “There is no reason whatsoever equities cannot be priced in a blind auction. Bonds have been priced/sold this way for decades. This is how 100% of IPOs should be done. And hopefully will one day.”

The following day, two more IPOs — the pet retailer Chewy and the freelancing marketplace Fiverr — surged more than 50% when their shares started trading, further reinforcing Gurley’s point.

Picking fights

By the time Slack priced its direct listing, Gurley had laid the groundwork for his next Twitter thread. Little more than an hour after the close of the trading day, he placed his cursor into a blank space and typed out a message.

In this tweet, Gurley praised the lack of volatility in Slack’s listing, which closed within 1% of its opening price, and name-checked the advisors Morgan Stanley and Citadel Securities, which handled the trading on the NYSE. And he offered a full-throated endorsement.

“If your company is interested in a direct-listing, recommend you call Morgan Stanley,” Gurley wrote. “Other banks want to position direct listings as ‘exceptional’ or ‘rare.’ MS believes they are 1) a better mousetrap, and 2) can be used broadly.”

The message ping-ponged down the corridors of Silicon Valley and Wall Street almost as soon as he sent it. Here was a powerful venture capitalist daring to air his grievances with Wall Street investment banks, who were powerful in their own right and often productive partners with venture investors. Goldman’s head of technology banking, Nick Giovanni, wasn’t happy. Giovanni, known for an intense and direct manner and a tendency to drive his people hard, headed a team that had led the IPO-underwriter rankings for years. He could be difficult, but he was also talented and unavoidable if you wanted Goldman’s expertise.

Giovanni called Gurley. Goldman had been the lead bank on the two direct listings so far — why was Gurley throwing his support behind the competitor? The banker wanted to know.

“Do you know how much business that tweet might cost us?” Giovanni snapped.

Gurley didn’t want to hear it. “Nick, let me show you the Elastic math. You cost us $60 million. How much business do you have to lose before you and I are even?”

The two men spent another few minutes talking past each other until Giovanni suggested that Goldman and Benchmark should spend more time discussing Goldman’s position on direct listings. Giovanni felt that because Goldman’s take was more nuanced — it wanted what was best for the client, not a one-size-fits-all approach — it didn’t fit into a clean narrative. He told Gurley he would get back to him. But while Giovanni followed up with Gurley’s Benchmark colleagues, he didn’t reconnect with Gurley, the venture capitalist said. 

Lighting a fire

Gurley wasn’t alone in his criticism of IPOs. Spotify CFO Barry McCarthy had been public about his concerns, and other venture capitalists were coming around to the direct-listing idea as well. An Andreessen Horowitz partner, Jamie McGurk, penned a direct-listing manifesto weeks after helping his firm prepare for Slack’s direct listing, and Michael Moritz, a partner at the venture firm Sequoia, wrote a scathing op-ed in the Financial Times in August of that year. 

By the time the rest of the VC world had begun to catch on to the direct-listing push, Gurley was already working on a plan for a daylong symposium that would educate startup executives and other venture capitalists about the direct-listing process. Investment bankers weren’t invited.

Now that Spotify and Slack had proved the model, other firms began to seriously consider direct listings.  Three more used it in 2020, and another six used the model the following year. But more than that, the direct listing had given startup founders the permission to think creatively about how to go public. 

Suddenly, the investment bankers who had been gatekeepers of the process for nearly 40 years found themselves fielding questions from clients interested in alternatives. Blank-check companies that had existed in a financial backwater for years took on renewed significance. And even in cases where companies chose an IPO, one did away with an antiquated insurance feature called a greenshoe that often meant investment banks made extra money, and others rewrote the 180-day lockup to favor employees and other insiders, or designed ways to sell more shares to retail investors. 

And in December 2020, the Securities and Exchange Commission opened the door to direct listings in which a company could sell new shares to raise needed money. 

Taken together, Spotify, Gurley, and others uncorked the greatest wave of innovation to strike the IPO market in decades. The tale of how they did it is nothing short of a revolution.

---

Dakin Campbell is the chief finance correspondent at Insider, where he writes and reports features and investigations about Wall Street and the broader finance industry. Excerpted from “Going Public: How Silicon Valley Rebels Loosened Wall Street’s Grip on the IPO and Sparked a Revolution” by Dakin Campbell. Copyright © 2022. Available from Twelve, an imprint of Hachette Book Group, Inc.