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Venture capitalists to warn startups of the downside of IPOs in San Francisco meeting

Tue 1st October, 2019 11:00am
By Jane Lanhee Lee
    SAN FRANCISCO, Oct 1 (Reuters) - 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 SA  SPOT.N   and Slack Technologies Inc  WORK.N , 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 Inc 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.

 (Reporting by Jane Lanhee Lee in San Francisco; additional
reporting by Greg Roumeliotis; editing by Greg Mitchell and
Cynthia Osterman)
 ((G.Mitchell@thomsonreuters.com;))
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