Venture capitalists have invited more than 100 start-ups to a meeting on Tuesday where they hope to convince them to go public through direct stock exchange listings rather than IPOs, which often lower returns for early investors.
Two dozen venture capital firms are sponsoring the meeting in San Francisco, and the invited companies are likely to go public in the next year, said Benchmark Capital partner Bill Gurley, one of the organizers. He did not identify the companies.
Advocates of direct listings, the route taken by Spotify Technology and Slack Technologies, say they offer companies a better alternative to the traditional initial public offerings underwritten by investment banks.
In a direct listing, companies list existing shares on the stock exchange without issuing new shares or raising new funds.
Gurley said investment banks have long been "fleecing" companies by pricing shares low so that they pop on their first trading day. That pop benefits institutional clients who buy at the offer price and can flip their shares when they soar.
But underpriced IPOs provide the company less capital and diminish valuations for early investors such as venture capital backers, and any investors or employee stockholders who sell in the offering do not realize full value for their stakes.
Gurley and others pointed to research by Jay Ritter, professor at the University of Florida, which shows the average first-day gain for 88 IPOs priced at $5 or higher so far this year is 24%, the highest since 2000.
Ritter's research shows that over the last 10 years, Goldman Sachs led in underpricing venture-capital-backed IPOs, with its issues on average notching a first-day gain of 33.8% followed by Morgan Stanley at 29.1%.
Goldman Sachs declined to comment and Morgan Stanley did not respond to a request for comment.
David Golden, a former investment banker at JP Morgan who is now managing partner at Revolution Ventures and not involved with the conference, said first-day price moves do not tell the whole story.
"If in the first few days of trading it doubles because there's all this retail sentiment ... and then it trickles down over the next two, three months, maybe even four months, then they probably priced the deal right," said Golden.
Golden said direct listings might work best for buzzy companies that do not need to raise money.
Airbnb stirred speculation that it would opt for a direct listing when it said in September it intended to go public in 2020. Venture capitalists say the company, which is already profitable and well known, is a good candidate for a direct listing, and a source familiar with the company said it had studied them. Airbnb did not elaborate in response to questions.
Several venture capitalists cited conference video company Zoom as an example of under-pricing. Its stock jumped 70% on the first day of trading in April and is still trading at double its IPO price.
CEO Eric Yuan said he had no regrets. "Our selling shareholders got a good return and our new shareholders could enjoy some upside," he said.
But for Gurley and others, the first-day pop is a market failure. "Giving away five hundred million dollars in one day — it's really hard to justify," said Gurley.