When Snap went public last year, it sold 200 million shares; none of them carried any voting rights. When Spotify went public earlier this month, it raised no money. When members of the public bought shares in Uber in 2016, by buying into a Morgan Stanley vehicle named New Riders LP, they received no information about Uber’s income, expenses, or balance sheet, and had no assurances that the company was financially viable.
These are just the latest examples of a long-standing trend: If you’re a successful technology company, the normal rules of Wall Street don’t apply to you. Indeed, Wall Street should count itself lucky if and when you deign to even acknowledge its existence. When Spotify listed its shares on the New York Stock Exchange, for instance, its CEO remained in Sweden, rather than flying over to perform the ritual bell-ringing. Instead, he wrote a blog post saying that the whole thing was a bit of a nothingburger, “just another day in our journey.”
Tech companies have done a very good job of cutting out much of the work that Wall Street normally reserves for its own highly-paid corps of bankers. That doesn’t just mean less money for the big banks, it also means less power, less influence, fewer opportunities to have a seat at the table. Bankers always love to be deeply embedded in any industry which is changing the world---but in tech, they’re still on the outside, with the rest of us, their noses pressed up against the glass.
This isn’t a new story. Since at least as far back as 2004, when Google went public using a novel “modified Dutch auction” technique, Silicon Valley has increasingly managed to avoid using many of the services traditionally offered by investment banks. In an IPO, for instance, those banks normally go through an elaborate book-building process, which drums up demand for shares and which also allows the banks to dole out coveted stock allocations to favored clients. (Kickbacks are not unheard-of.) When the price is set in an open Dutch auction, by contrast, bankers have much less discretion---and make much less in fees.
Similarly, Spotify arrived on the stock exchange with its revolutionary “direct listing,” in which the company itself sells no shares and therefore creates no 7% commissions for Wall Street banks.
Avoiding IPO fees is just the tip of the iceberg; the much bigger story is that VC-backed companies are avoiding IPOs altogether. They raise money by selling shares all the time; they just don’t use the public capital markets to do so and therefore don’t need to deal with banks, who are the gatekeepers to those markets. In just the first three months of 2018, venture capitalists poured an astonishing $28.2 billion into shares of private companies. That’s vastly more than the $17 billion that IPOs raised on the public markets during the same period, and it represents an ongoing capital flow which Wall Street barely touches.
Even the debt markets are going the same way. It’s almost impossible for a normal company to borrow money without going through Wall Street: Either it issues bonds in the capital markets, which means it needs to hire the services of a debt capital markets desk, or else it issues a loan, which involves borrowing money directly from banks. In its latest debt deal, however, Uber borrowed $1.25 billion directly from a bunch of non-banks (Apollo, Bain, Blackrock, etc.), effectively bypassing Wall Street entirely. That was in part because banks didn’t want to facilitate a new Uber loan, for risk that they might run afoul of regulations specific to their industry: Uber’s losing a lot of money, and regulators tend to frown on lending new funds to companies which can’t show any obvious means of being able to repay the money. But now that Uber has showed that this kind of deal is possible by going to companies that aren’t subject to the same rules, it’s easy to envisage other technology companies doing the same thing. After all, why pay multimillion-dollar bank fees if you don’t need to?
Hell, why issue securities at all? The Google IPO raised $1.67 billion for the search giant; in order to get that money, it needed to sell 19.6 million shares at $85 apiece. Today, however, there are other ways for technology companies to raise that kind of money. Earlier this year, Russian chat app Telegram raised $1.7 billion in an ICO, selling a cryptocurrency of its own devising. The ownership stake of its founders remains undiluted, and they don’t need to give up any board seats or ever repay the money. They certainly didn’t need to give a big cut to Wall Street.
In an efficient modern economy, there’s no reason for banks to dominate the economy to the extent they do. The financial sector is second only to technology in the S&P 500---to a first approximation, one dollar of every seven ends up, one way or another, in the pockets of Wall Street. That bespeaks massive inefficiency for a sector which is mostly, in the phrase of former banker and bank regulator Adair Turner, “socially useless.” It’s hardly surprising, then, that certain technology companies have worked out how to retain much of that value for themselves and their investors.
The surprise, rather, is that everybody else isn’t following the technology companies’ lead. This is one disruption that hasn’t scaled beyond the tech industry. Why didn’t Google’s Dutch auction IPO method take off? And why is it almost certain that, outside the technology sector, we’re going to see very few Spotify-style direct listings, Uber-style bankless loans, or Telegram-style ICOs? The answer lies in the balance of power. Large companies simply can’t function without a broad array of financial services, provided by highly professional relationship managers at each of the big Wall Street firms. The banks know that they’re needed, and they will treat you very well, just so long as you keep on sending them business. On the other hand, if you annoy them, they won’t hesitate to punish you.
By contrast, tech companies are younger, don’t rely on decades-old systems that presume that banks will always perform certain functions, and, having never had deep banking relationships to endanger, are unafraid to annoy the banks by excluding them from deals.
Cutting out the banks, then, is an area where companies across the rest of the economy, from energy to health care and beyond, have a lot to learn from Silicon Valley. Disintermediating Wall Street isn’t just a dream—and, really, there’s no reason it shouldn’t happen more broadly. This is an area where the rest of corporate America could use just a little bit of the tech world’s boldness.
- Spotify shunned a traditional IPO. Now it's just another public company.
- Blue Apron's modest IPO shows that Silicon Valley seems to be learning the realities of Wall Street.
- Meanwhile, cryptocurrency startups and projects used ICOs to raise $3.2 billion in 2017—fueling both hype and fear at venture firms.
