Why Silicon Valley is walking away from Wall Street

It is not often that 3,500 people get to ring the opening bell of the New York Stock Exchange (NYSE) all at once.

It seems physically impossible. But that, virtually speaking, is how the video game technology company Unity chose to go public earlier this month: with thousands of workers hitting their space bars simultaneously to trigger the bong.

This was not the most unusual thing about Unity's public debut. Rather than allowing investment bankers to set the offering price for its shares and dole out guaranteed blocks to investors, the company created an online bidding system to perform both functions.

And instead of "locking up" its employees' shares for six months, it gave them free rein to sell off as soon as they wished.

Unity's method may be unusual, but its choice snub of tradition is not. On Wednesday the CIA-connected data-mining company Palantir and the workplace collaboration firm Asana will both launch on the NYSE through a direct listing, the same procedure used by Spotify and Slack.

More are doubtless on the way. The US Securities and Exchange Commission (SEC) has changed its rules to let companies raise new money this way, rather than just selling existing shares.

Meanwhile, numerous tech firms have opted to go public via Special Purpose Acquisition Companies, or SPACs, an arcane method that involves floating a shell company and using the proceeds to buy themselves out.

Such was the choice of fantasy sports company DraftKings, fintech firms Paya and Open Lending, and a clutch of green auto makers such as Nikola and Canoo. Since January there have been 75 such deals compared to only 7 in 2010. No wonder KPMG has called 2020 the "year of the SPAC".

All are signs of Silicon Valley's growing willingness, after years of tension and suspicion, to walk away from Wall Street.

"Look at the incredible divergence of technology companies versus other industries in the pandemic, ask yourself how on earth is the public supposed to participate in that growth?" says Eric Ries, a tech entrepreneur who is pushing perhaps the most radical alternative to ordinary markets in the form of a new Long Term Stock Exchange (LTSE).

"In the technology industry, we used to finance the growth with the retirement savings of ordinary people. And when we broke that connection, I think the long term consequences are quite dangerous."

'The traditional IPO is systematically broken'

The LTSE, which began trading earlier this month and is backed by powerful Valley venture capitalist such as Andreessen Horowitz and Founders Fund, is designed to fix Wall Street's alleged problems of short-termism, rampant speculation and the destruction of innovation in favour of chasing quarterly results.

According to Ries, companies that list there – as Airbnb is reportedly considering – will bind themselves to the mast of long-term commitments, and reap the reward of trusted investors, favourable PR and insulation from fear that can follow from panic selling and fluke market wobbles.

Of course, many in the Valley have a more pecuniary bone to pick. Bill Gurley, the six-foot-nine Texan venture capitalist who helped fund Uber, GrubHub, Stitch Fix and Zillow, has been crusading since 2018 to convince founders to defect from the classic Initial Public Offering (IPO).

"The traditional way of going public is systematically broken and is robbing Silicon Valley founders, employees, and investors of billions of dollars each year," he wrote last month.

Central in his gunsights is the notion of the public float "pop", in which a firm's share price jumps immediately after its debut like champagne froth bursting from a bottle. Traditionally, executives welcome this pop for the positive PR buzz it provides. Gurley and many others, however, regard it as "leaving money on the table".

"Everyone needs to realise this unneeded wealth transfer comes straight out of the pockets of employees, founders, and investors. That 'pop' you hear is money going out of your pocket and into the hands of the bank's best brokerage clients," he wrote in June.

Indeed, price-setting has long been wrapped up in arcane ritual. Critics have claimed that the bankers who handle IPO have a split incentive, serving both the company and their clients at the same time.

Gurley cites startling research by Jay Ritter of the University of Florida, who claims that the average public float in 2020 lost 31pc to the pop – a total of $7.8bn (£6bn), much of which would have otherwise gone to stock-holding employees.

That, says Unity's chief marketing officer Clive Downie, is exactly the reason his firm decided to eschew any lock-up period. "We value our employee base above and beyond anything else," he says. "We wanted this process to be employee-first: we're in it together."

He is cagey about Unity's decision to thumb its nose at the bankers, saying it was "not about problems" with the traditional method. "We're a very data-oriented company, and we wanted a process that allowed us to review data in a way that we do on a daily basis with all of our other business decisions."

He claims that data, too, helped convince executives not to worry about a mass employee sell-off: "We looked at that and adjudged there to be no cause for concern."

In the event, if Unity was trying to avoid a pop, it got its sums wrong. Shares closed at 31pc above their initial price on the first day of trading. (The mass bell-ringing may have been an illusion; Downie refused to say what would have happened if nobody hit their keyboards).

Defenders of the IPO

Not everyone has abandoned the IPO, with one prominent example this month being Snowflake. The Warren-Buffett-backed cloud services start-up had less a pop than a thunderous bang, with its shares almost doubling from their initial price and its market capitalisation hitting a peak of $70bn.

Wasn't that "leaving money on the table"? Perhaps, says co-founder and chief technology Benoit Dageville – but he doesn't really care.

"I'm at peace with that," he says. "We have plenty of cash to do whatever we want. Yes, you can always have more; you could have done it differently... for me, money is really almost not important, except that we need to have the means of our ambition. That's the thing I care about."

He agrees that public ownership could hurt innovation for some companies; just not for his. "If Snowflake stops innovating, we are dead. We are going to die very quickly, and all of these firms that have invested are going to lose a lot of money... we selected our investors because they understood that," he says.

Odd debuts could also be bad for corporate governance. The US Council of Institutional Investors, always sensitive to any limitation of shareholders' rights, told the SEC that opening up direct listings would allow companies to access new capital while dodging owner protections. A Financial Times analysis also found that the majority of SPACs now appear to be below their first asking price.

That is a particular concern with Palantir, whose SEC paperwork has been accused of hiding "red flags". Billy Duberstein, a portfolio manager at Stone Oak Capital, says that it has notched up big losses while paying enormous salaries to top executives, lending them money at favourable rates and paying for services affiliated with its officers and board members.

Moreover, Andreessen Horowitz has argued that Gurley's narrative is "almost completely false", claiming that high first-day share prices are a consequence of the unique circumstances of an IPO, in which there is enormous competition for one relatively small tranche of shares.

For Ries, though, the stakes are bigger than extra profits for founders and employees. He sees the hand of market short-termism in a panoply of current problems, from mass coronavirus layoffs to the United States' bungled response to the pandemic to police brutality.

He goes as far as saying that if long-term exchange had existed ten or 20 years ago, we might already have a vaccine for Covid-19. Many companies, he argues, began researching one for SARS years ago, but dropped it once that virus was contained, and he has heard endless similar accounts from researchers in despair over promising but difficult projects that were killed to save money.

"Every researcher has ten of these stories," he says. "You want to cry after a day of this."