Why famed VC Bill Gurley thinks IPOs are such a rip-off

Jul 25, 2020

The new investors must capture the upside of the IPO price surge as a payment for the risk of the unknown. This is supposedly a low price to pay for liquidity.
Oversubscription of 10-30x (i.e. only 3-10% of committed investors get to buy shares) is required for liquidity. This requires lowering prices to generate this demand and turning down allocations for most investors so that they can provide a “pop” (increase in share price) immediately after the trading starts.
“Most prestigious” investment banks create the biggest “pop” because they choose the right companies to bring public.

Uncomfortable Truth

Underpricing shares at IPO for the sake of perceived “liquidity” is a flat out value transfer from existing shareholders to the new ones.
“Pops” are a sure sign that shares were underpriced at IPO. Indeed, this creates good publicity, but at what cost to shareholders?
Companies have relationships with their own cohort of analysts, investment banks can’t bang their drum.
“Most prestigious” investment banks bring public the companies that can afford their fees [in absolute terms] – precisely the companies with money. Self-selection.
After the IPO no one remembers or cares who the investment bank was.
Pricing by investment banks is determined by the price (and upside) appetite of IB’s largest 10-15 most prized accounts, not by the auction (supposedly closer to the market price).
2018: 112 IPOs, $54B raised, $7B (17% markdown) was left on the table.
In down markets it’s easy to confuse clients into pricing low.

Securities prices (incl. IPO shares) to be established by market means [MK: how to do it without an already established market for these shares? Auction?]
Selling investors/shareholders must be able to buy new shares at IPO, too.