Startups hear about drawbacks of IPOs at San Francisco meeting

By Jane Lanhee Lee

SAN FRANCISCO (Reuters) - Venture capitalists and executives from more than 100 startups including Airbnb Inc and Poshmark gathered on Tuesday to bash traditional initial public offerings and promote direct stock exchange listings, according to two people who attended the meeting.

Airbnb, which in September announced plans to go public in 2020, is looking at a direct listing, a venture capitalist who attended the meeting said.

The lodging platform operator is considered a good candidate for a direct listing because it is already profitable and well known. Airbnb did not immediately comment.

Poshmark in September delayed plans for an IPO until next year, according to a report by Bloomberg. Poshmark did not immediately respond to a request for comment.

Other participants included data storage firm Cohesity, which also did not immediately comment, and product analytics platform Amplitude whose CEO Spenser Skates confirmed he was at the event and would strongly prefer direct listing over an IPO.

Advocates of direct listings, the route taken by Spotify Technology SA and Slack Technologies Inc, 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.

Benchmark Capital partner Bill Gurley, one of the organizers of Tuesday's event, 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.

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.

But at the meeting, Gurley argued that times have changed, according to Manny Medina, CEO of sales platform Outreach. His firm, which is valued at $1.1 billion, is considering a direct listing as well.

"I think this is definitely a milestone event. The undertone of today is that you can do this. And you should do this. No matter if you are a consumer-facing company or a B2B SaaS company like we are," said Medina.

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, Cynthia Osterman and Richard Chang)