Dakin Campbell is the Chief Financial Correspondent of Business Intern. He has been a journalist for over 15 years, having previously reported for Bloomberg, business weekand Markets.
Below, Dakin shares 5 key insights from his new book, Going public: How Silicon Valley rebels loosened Wall Street’s grip on the IPO and sparked a revolution. Listen to the audio version – read by Dakin himself – in the Next Big Idea app.
1. Know your hardware.
For decades, Wall Street investment banks have controlled how private companies first list their shares — known as initial public offerings. The modern playbook requires banks to act as intermediaries between companies selling stocks and investors buying them. Acting on both sides, banks are inherently in conflict and there have been attempts over the past decades to rewrite the rules. It wasn’t until Spotify’s top financial officer, a man named Barry McCarthy, found a way for Spotify to list its shares on the stock market. without having to issue new shares that tech startups eventually took over. Soon, other leaders, like Stewart Butterfield at Slack, Kim Jabal at Unity, and Prabir Adarkar at DoorDash, followed McCarthy’s lead. They were helped in large part by advisers like venture capitalist Bill Gurley and IPO guru Lise Buyer. The story of how they overcame adversity and a system stacked against them contains universal truths.
An essential building block for this revolution came from Barry McCarthy, a longtime student of financial markets. Twenty years earlier, McCarthy was an incoming executive at Netflix when he inserted a tape into the dashboard of his Ford Explorer. Driving across the country to Netflix headquarters from Princeton, New Jersey, McCarthy listened to an attorney explain the inner workings of the IPO process. The crash course was just one of many times McCarthy took the extra step to learn the mechanics of the market.
“The story of how they overcame adversity and a system stacked against them contains universal truths.”
His interest never waned, so when he became Spotify’s CFO, he had the curiosity and self-knowledge to come up with something different. When speaking to lawyers and bankers, McCarthy was often met with skepticism. It was only through his in-depth knowledge of the subject that he was able to stand up to the skeptics and stick to his plan. Spotify’s board leaned heavily on McCarthy’s expertise and eventually agreed to let him go. Without McCarthy’s complete mastery of the subject, Spotify would never have unleashed the wave of innovation that followed.
2. Challenge conventional wisdom.
It can be hard to critique what’s currently popular, but it’s often exactly what is needed to achieve a business breakthrough. As a research analyst on Wall Street in the 1990s, Lise Buyer gained a reputation for speaking what others were afraid to say. She was candid about the prices paid for Silicon Valley startups. At one point, Buyer even refused to follow the convention of imposing price targets on tech companies because their unproven business models and burgeoning market psychology made forecasting too difficult. When the market crashed in the early 2000s, its caution was proven.
Buyer joined Google, where she was a key architect of that company’s unconventional IPO, before starting her own company advising startups on the IPO process. A few years ago, she helped a company called Unity Software rethink key elements of the IPO. Throughout his career, Buyer has often chosen to ignore the road traveled to follow his own trajectory. This is one of the main reasons she has helped rethink the way companies approach financial markets.
3. Make your voice heard.
It can seem risky to raise your voice in a meeting or publicly defend something you believe in. That didn’t stop Bill Gurley. Like McCarthy and Buyer, Gurley had grown frustrated with the traditional mode of selling stock to the public. But he wasn’t a corporate executive, and he wasn’t present in the boardrooms of Silicon Valley. What the venture capitalist does had a reputation as one of the world’s most successful seed investors, tens of thousands of likes on Twitter, and an open invitation to appear on cable television commercial shows.
“Even if they didn’t choose to, managers now had permission to ask their bankers for alternative ways of quoting shares.”
Over an 18-month period, Gurley criticized the traditional IPO process, almost single-handedly pushing the issue to the top of the agenda in Silicon Valley and on Wall Street. When he then channeled those frustrations into a day-long symposium for startup founders and other venture capitalists, Gurley’s mastery of the narrative was nearly complete. From then on, dozens of startups considering going public asked their investment bankers about the model launched by Spotify. Even if they did not choose it (only 13 companies did), managers now had permission to ask their bankers for other methods of listing shares. These conversations probably wouldn’t have happened without Gurley’s deft use of his megaphone.
4. Follow your plan.
In the face of skeptics, it can be difficult to stick to your plan. But that’s exactly what Kim Jabal, the former CFO of Unity Software, did when she put her own stamp on the IPO. A former Google employee and longtime Silicon Valley tech executive, Jabal was a passionate believer in using data to make decisions.
When Unity went public, Jabal worked with its CEO and Lise Buyer to collect an additional amount of data. One of the things she focused on was the process of distributing shares to certain types of investors. Conventional wisdom said that companies should give a percentage to those who sell the next day, helping to create a market for the stock. However, the data showed that it was difficult to discern which investors would hold and which would sell. If the stock price rose on the first day of trading, selling investors would make an easy profit. Jabal decided to allocate a much lower amount to investors it expected to sell.
“Jabal was a passionate believer in using data to make decisions.”
The decision made Jabal’s investment bankers anxious and they pushed her to give more to investors who might sell. She remained true to her conviction and the company benefited from a successful offer. If Jabal hadn’t followed, Unity wouldn’t have established a model that has been used by many subsequent startups.
5. Know when to end your experience.
Many management experts suggest taking small risks to see if they work. But how do you know when to unplug an experience that isn’t working? Airbnb, the home-sharing company, was faced with the decision in the summer of 2020. Chief Financial Officer Dave Stephenson had persuaded the board to go ahead with a deal similar to Spotify’s. The process would have made Airbnb the first company to make this type of Nasdaq listing, making Airbnb a pioneer in its own right. The company wouldn’t have raised any money, which would have been nice. Airbnb didn’t need it. But then came the pandemic, travel dried up, and Airbnb hemorrhaged money.
Stephenson, who is practical and unemotional, saw reality and changed Airbnb’s plans. Instead, the company would do a traditional IPO. When it went public in December of that year, the transaction raised $3.5 billion and gave Airbnb the cash it needed to weather the pandemic. When the experience feels like it’s jeopardizing your business, Airbnb’s story suggests it’s okay to end it.
To listen to the audio read by author Dakin Campbell, download the Next Big Idea app today:
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