'The IPO process has devolved,' tech investor Bill Gurley says as he leads a direct listing movement

Key Points
  • Benchmark Capital General Partner Bill Gurley organized a meeting of private companies Tuesday to advocate the direct listing model over the IPO.
  • In an interview on CNBC Wednesday, Gurley said he believes "the IPO process has devolved" and has "become a game of just hand-allocating shares to the same 10 or 15 firms."
  • Gurley said the approach was influenced by trends over the last few decades, rather than recent events like lackluster IPOs.
Direct listing is a more 'elegant approach': Bill Gurley

The IPO process has "devolved" and it's time for a new approach, venture capitalist Bill Gurley said in an interview on CNBC's "Squawk Alley," Wednesday.

Gurley, a general partner at Benchmark Capital, hosted a meeting with about 100 private companies and VC firms in San Francisco Tuesday to discuss the benefits of direct listing rather than the traditional initial public offering process. Executives from Slack and Spotify, which both completed direct listings, were among the attendees.

Gurley told CNBC that direct listings provide more open and equal access to shares and ensures market-based pricing. While an IPO may be appealing for a company that wants to raise capital, Gurley said the group discussed late stage capital fundraising options at Tuesday's meeting. Airbnb is expected to be one of the next major tech companies to consider a direct listing, according to Bloomberg.

"The data of how Silicon Valley companies have been taken advantage of by this broken process, it goes back ... 30 or 40 years," Gurley said. "In the past three years it's gotten worse and I think that's because the IPO process has devolved ... it used to be that the IPO process was about disseminating and marketing and selling far and wide and it's become a game of just hand-allocating shares to the same 10 or 15 firms."

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Companies that go public through the more traditional IPO process pay hefty fees to underwriters so that new shares can be created and sold to the public, ideally with a first day pop. Gurley said this process has caused new listings to be increasingly underpriced. With a direct listing, firms can bypass underwriting fees, but no new shares are created.

While 2019 has seen a series of IPO flops, including Lyft and Uber, of which Gurley used to be a board member, Gurley said his confidence in this new approach is motivated by trends over the past two decades, rather than more recent events.

"I almost think about this as something that I hope will be part of my legacy, as something I can give back to Silicon Valley by trying to move us away from this thing that's clearly been not in our companies' best interest," Gurley said. "It's about finding a better way."

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WATCH: Here's how a direct listing differs from an IPO

Here's how a direct listing differs from an IPO