Bill Gurley

Supported by Greenhaven Road Capital, finding value off the beaten path.

The podcast with Bill Gurley and Patrick O’Shaughnessy about direct listings and initial public offerings was financially, technologically and psychologically interesting.

I don’t know if Gurley’s emphasis is appropriate, but it’s clear what he needs to do, reframe the situation.

Gurley and O’Shaughnessy expect that as people get reps, direct listings will appear more normal. That’s the key for Gurley’s focus. He doesn’t need to “think slow” but rather “think fast.” Kahneman’s book by the same name includes the idea that what-you-see-is-all-there-is. Humans evolved to think like this because it works. It’s effortful to compare any two things and it’s doubly so for something brand new.

“Thinking fast” we use frames to form reactions. Direct listings need better framing. Here are five ideas about how.

Time as framing. Gurley is upset because $171 billion dollars has been lost to underpricing IPOs. “The core process of how we pull off an IPO was designed four decades ago.” Gurley is pushing against we’ve always done it that way logic.

Let’s not immediately dismiss we’ve always done it that way because traditionally it works, it’s why we’ve always done it that way. To dismiss an idea we must head to the woods and ask about this Chesterton Fence. For IPOs we should ask, ‘What’s different?’

As Michael Munger explains, the answer is transaction costs. Munger even uses similar language to Gurley to describe the sharing economy, “What’s being sold is access to excess capacity.”

Solution: Proponents of a direct listing should compare it to other technologies that reduce transaction costs. This should be easy enough, falling transaction costs are everywhere.

Reputation as framing.

Gurley compares IPOs to big southern weddings. That sounds about right.

“If you’re going to be anxious (because you’re the under skilled player) you’re very likely to fall back on tradition because it’s the safest bet. It’s like the old saying, ‘You don’t get fired for buying IBM.'”

Reputation is like an account. Do different things and the balance goes down. Succeed and the balance creeps up. Fail and the balance plummets.

In a foreword for a book about Warren Buffett, Howard Marks lists all the things that makes Warren a great investor. He’s smart, he’s unemotional, he’s focused, etc.

However, there’s something Buffett has that’s much rarer. Marks told Tim Ferriss, “he’s not afraid of getting fired. He doesn’t have to worry about the interim consequences of error. Most people do.”

Solution: Convince entrepreneurs that a direct listing is the last stage on their pioneering journey. They’ve already succeeded by being different and this is the final step.

Brand as framing.

Patrick O’Shaughnessy is a good podcast host because he lets the other person talk. Undoubtedly while listening to Gurley, Rory Sutherland’s ideas came to mind. Patrick doesn’t bring it up, so I will.

Sutherland was the first to point out that people don’t buy brands because they’re good. People buy brands because they aren’t bad.

Gurley says that the best brands in banking (Goldman, Morgan) are the worst pricers of IPOs–leaving the most money on the table. That fits Sutherland’s theory. Brands, Rory writes, are “insurance against disappointment.”

Limiting downside rather than optimizing upside often make sense. When he travels to London to catch a flight, Rory traverses the backroads rather than the highway. The trips are longer on average but avoid outlier incidents. A highway accident, though rare, will create a delay where he’ll miss a flight.

Solution: Every weakness is also a strength and every strength a weakness. Brands which are classic, leaders, and large are also old, rent-seeking, and immobile.

Money as framing.

The problem with the IPO is too much money. O’Shaughnessy said, “Everyone is showered with money too, so they feel like they’re doing pretty well.”

On an absolute basis, Gurley is right but on a relative basis, he’s fighting human psychology.

Behavioral economists make careers noting that humans don’t calculate expected values. Would Zoom’s Eric Yuan introduce any amount of risk (DL vs IPO) to go from being worth 3 billion dollars to 3.2?

Loss aversion and heuristical thinking isn’t the only issue here. There’s also the diminishing value of money. Remember this idea each sports off-season as athletes prioritize teammates, situations, and locations over more money.

How can someone ‘give up’ millions of dollars? They’ve already got millions. As the billionaire who wasn’t Chuck Feeney noted, “You can only wear one pair of shoes.”

Solution: Reframe money as time or per person. Gurley praises the work of Daniel Elk for the Spotify listing.

Media as framing.

If an IPO is underpriced and ‘pops’ then, “the press reinforces this and thinks the pop is good.” It certainly seems good

Ben Hunt warns of the “constant hot take culture” and references The Island of Blue and Green-eyed people. What matters for the islanders, the hot takes, and Hunt’s sheep is what everyone thinks everyone thinks. Who helps tell the story? The media.

Sometimes though, the media is wrong. This error is most glaring when the delta between media-knowledge and insider-knowledge is largest. The management of this framing is the reason Sam Hinkie lost his job but Jeff Luhnow kept his.

When the media frames things one way (Hinkie’s an idiot, IPO pops are good) other people adopt that as their frame too and it’s hard to change.

Solution: Direct Listings need a better story around them. Seth Godin said that global warming was a terrible story and that “atmosphere cancer” told a more accurate one.

Framing matters. I’d wager we’ll hear a lot more about this from Gurley in the future. He’s trying to reframe how people see things. Now you’ve been reframed too. Thanks for reading.