Bill Gurley of venture capital firm Benchmark says that when it comes to IPOs, investment banks have been getting the better of tech companies and start-up investors for a long time.
In a discussion on CNBC's "Halftime Report" on Tuesday, Gurley, whose firm is a big investor in Uber and WeWork, said the direct listing approach taken by Spotify and Slack is a model that more companies should consider. In a direct listing, companies don't use banks to distribute and price new shares, but rather open up the public market to stock owned by existing stakeholders.
"I think Silicon Valley has been on the bad end of a bad joke for about four decades now, in terms of the way the traditional IPO process works," Gurley said. "The more I study and contrast it with direct listings, the more I realize that."
Gurley pointed to research from Jay Ritter, an IPO expert and business professor at the University of Florida, which shows that top investment banks like Goldman Sachs, Morgan Stanley and Jefferies continue to underprice IPOs, meaning companies are giving away upside to new investors. Based on Ritter's data, he estimates that Silicon Valley companies have handed over more than $170 billion as a result of underpricing.
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"If you choose to go with the top underwriter, you get the worst execution," Gurley said. "So something's not right. There's a market inefficiency afoot."
Following Spotify's public debut last year, Chief Financial Officer Barry McCarthy detailed many of the problems with IPOs. In a blog post, he wrote that banks end up pocketing gains from a stock's first-day gains, instead of the company.
Still, neither Spotify nor Slack have been good bets thus far for public market investors. Slack has dropped about 20% in the last eight days, falling below its debut reference price of $26. Spotify opened at around $150 and is currently trading below $132.
Appearing alongside Gurley on CNBC on Tuesday, Altimeter Capital's Brad Gerstner said the broader market will soon recognize the underlying issues with the IPO process.
"One thing I'm certain is the spotlight Bill is shining on this is going to close the gap," Gerstner said. "The days of handing low-priced securities, diluting the company to a bunch of long-only shops in Boston and New York, I think those days are over."