As vocal as Benchmark's Bill Gurley has been about his preference for direct listings over IPOs, his venture firm has had limited success in getting its own portfolio companies to choose that route to the public market.
That may be starting to change. On Tuesday, analytics software vendor Amplitude debuted on the Nasdaq through a direct listing. Instead of raising fresh capital at a discount, the company allowed existing investors to sell shares at a market-clearing price.
Amplitude is only the second direct listing to come out of Benchmark's portfolio. Asana, the collaboration software company led by Facebook co-founder Dustin Moskovitz, was the first, a year ago.
"I think we'll see more deals within our portfolio and more generally," said Eric Vishria, a partner at Benchmark and an Amplitude board member.
Amplitude shares opened at $50 and rose more than 9% from there to close at $54.80, giving the company a market cap on a fully diluted basis of about $7.1 billion. Benchmark, the largest investor, owns 15% of the company, with a stake worth over $835 million at the close.
The direct listing trend began with music-streaming app Spotify in 2018. Slack followed in 2019, and Palantir and Asana were the notable names of 2020. This year, there have been at least six direct listings, including by Coinbase and Roblox, while eyeglasses company Warby Parker is also set for a direct listing this week.
Gurley has boldly advocated on TV, Twitter and his own blog for the approach, arguing that the IPO process is permanently broken and that it amounts to a handover of cheap stock from companies to Wall Street. He reiterated that sentiment in an interview Tuesday on CNBC's "Squawk Box."
"As I've mentioned many times before, the legacy IPO process has devolved into this process where huge one-day gains are transferred from the investment banks to their trading clients," Gurley said. "There's a modern way to do it. You can actually use supply and demand to determine price and allocation, and that's what the direct listing does."
The early pivot
Amplitude was initially called Sonalight. In 2012, the founders showed off their product as part of Y Combinator's demo day. They were pitching a Siri-like app for Android phones that would let users send text messages by voice.
The Sonalight team also built software to observe how people were engaging with their app. Other start-ups expressed interest in that technology, according to TechCrunch. It's a narrative that will sound familiar to anyone who followed the early days of Slack, which was created as an internal-messaging tool for a start-up that was originally focused on developing online games.
Sonalight gave birth to Amplitude. The founders went through Y Combinator a second time in 2014 and won a check from Vishria at Benchmark.
Vishria describes Amplitude as "Moneyball" for product development, referencing Michael Lewis' 2003 book on Oakland A's General Manager Billy Beane and his use of unconventional statistics to assemble the best baseball team possible on a budget.
Amplitude CEO Spenser Skates and co-founders Curtis Liu and Jeffrey Wang focused on refining an app or website by measuring activity at each step so product teams could make adjustments that might yield more desirable results.
Over time, Amplitude became a tool for various parts of a company's operations, such as marketing and support. Disney and Walmart signed on as customers, even as Amplitude had to compete with analytics software from heavyweights Adobe and Google.
Like software businesses across Silicon Valley, Amplitude hit a frightening snag in the early days of the pandemic last year as companies quickly cut their spending. Costs mounted, and revenue growth didn't keep up, according to Amplitude's prospectus.
Benchmark's advice was to prepare for a variety of scenarios.
"The one thing we didn't plan for in that initial phase was, 'Oh my God, this is totally going to amp up the importance of digital,'" Vishria said. "Everything is going to actually accelerate."
Revenue in 2020 ended up climbing 50% from the prior year to $102.5 million, and the company's net loss narrowed. Growth has accelerated this year, with revenue in the second quarter jumping 66% to $39.3 million.
'Not just making something up'
Skates started looking at direct listings in 2019, around the time Gurley began publicly advocating for companies to choose that option.
Skates attended an event that Gurley held in San Francisco, educating venture capitalists and founders on the mechanics and benefits of direct listings.
"I think a lot of the kind of qualities or characteristics or features of the direct listing really appealed to him," Vishria said of Skates. "I find with a lot of the technical engineering founders, they like the kind of cleanliness of it. The stock's going to open, we're going to match buy and sell, we're going to get a fair price. You're not just making something up."
After the event, Skates researched the process and talked with other board members about it. He said there wasn't universal agreement, but they all indicated they'd support him either way.
One director, Neeraj Agrawal of Battery Ventures, said he supported an IPO, having gone that route with Coupa, Nutanix and others. But ultimately Agrawal came to see that there wouldn't be a major difference in long-term shareholders and appreciated that there was less dilution for existing backers.
"The thing that was really clear to us is IPOs traditionally underprice companies, and not by a little bit, by a lot — hundreds of millions of dollars on average," Skates said. "As a fiduciary to our current shareholders, it's just totally unacceptable to give them a bad deal."
Agrawal called it "a watershed moment for direct listings in my world."
Amplitude did sell some stock earlier this year at what amounted to an IPO discount. Beginning in May, the company raised $200 million, selling shares at $32.02 apiece. As of Tuesday's close, the buyers, which include Sequoia and Battery, were up 71% in just a few months.
But one of the primary benefits of a direct listing is that existing shareholders, most notably employees, aren't locked up and can start selling stock right away rather than watching the company hand over shares to new investors, who can trade immediately.
"Public market funds — they don't need money. They're the richest people in the world," Skates said. "They'll be fine. You need to give it to your shareholders."
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