Gurley thinks those famous first-day “pops” are a sign that young companies are being taken advantage of.
Bill Gurley is the picture of the folksy, laid-back Silicon Valley vet who’s a natural at mentoring the whiz kids of tech as he lounges in his Bay Area backyard. We’re speaking via Zoom late on a Tuesday afternoon, and Gurley, attired in a maroon Nike T-shirt and baseball cap, is recalling the moment that set him on a mission to fix the broken system for taking young companies public. “It was when we were planning the offering for [software provider] Elastic,” recalls the venture capitalist at Benchmark who backed Uber, Zillow, and Stitch Fix. “We suddenly realized that the investment banks were way underpricing the shares, and that the market cap would jump by $70 [million] to $80 million the first day.”
Gurley was appalled that the banks were going to deliver their prized customers gigantic instant gains at the expense of owners, including Benchmark’s investors. The partners held an emergency meeting and settled on a way to avoid surrendering all that “free money” to Wall Street: They requested that the investment bankers allow Benchmark itself to purchase a chunk of the new shares at the bargain price. That way, if the price bounced as they expected the first day, those original Benchmark investors who’d been funding Elastic for years would pocket the gains.
“That’s how far off the price was,” says Gurley. “But would you believe it, the bankers turned us down. They refused to give us a position so they could reserve more for the mutual and hedge funds that pay them big commissions. It was then that I realized we were the patsies.” As it turned out, the stock rocketed 94% on opening day, so that gains of over $200 million went to the underwriters’ clients, not to original investors like Benchmark, or into the company’s coffers.
It was also the turning point that transformed the lanky legend into the venture capital world’s leading crusader for a new platform for public offerings. “I already knew the system was bad and was a big fan of auctions that prevented investment banks from underpricing shares,” he says. “But the Elastic experience convinced me to fight for change.” Gurley asserts that any fair process for selling shares in IPOs, or all stocks, bonds, or commodities for that matter, most provide two essentials: prices established by the market, and access to all investors seeking to partake in the sale.