Apple Computer, Cupertino, 1980
On a mild December day in 1980, Steve Jobs made his way across San Francisco to an office building that rose above the city’s financial district. Passing through the terra-cotta archways that gave the facade a neo-Gothic look, Jobs sought out the office of Hambrecht & Quist (H&Q), a small investment bank with offices on an upper floor.
Jobs was the CEO of Apple Computer, a leader in what was then the budding business of making desktop computers. Apple’s revenue had climbed past $117 million during the fiscal year that had ended in September, more than the entire industry’s haul just three years earlier.
For months, Jobs had been preparing Apple for its initial public offering, the first sale of stock to mutual funds and other public investors. The CEO had come to the landmark Russ Building for one of Apple’s last acts as a private company: negotiating with his bankers over the price of the shares Apple would sell.
Months earlier, Jobs had selected Morgan Stanley and Hambrecht & Quist to manage Apple’s IPO. Hambrecht & Quist was an early investor in Apple. Jobs was showing loyalty to an early backer by insisting on the location even though Morgan Stanley was larger and more powerful.
As a former computer hacker known for wearing ripped denim jeans and tie-dyed t-shirts, Jobs arrived casually dressed. He joined a group of bankers in suits and ties gathered around a couch in a large office that belonged to George Quist, whose name was on the door. The other named partner, William Hambrecht, was also there, alongside the team from Morgan Stanley.
Jobs and his bankers had been holding weeks of meetings in what was known as a roadshow, talking to investors about their interest in Apple shares. The bankers initially thought to sell shares at $14, but as the investor conversations continued and orders poured in, they realized they could increase Apple’s share price without sacrificing investor interest. The question was by how much.
The Morgan Stanley bankers walked Jobs through the investor orders, collected in something known as an order book. As they did, Hambrecht later recalled, Morgan Stanley recommended a price of $18.
Jobs sat there silently and listened. He spoke when the bankers were finished.
“Now, you’re telling me that you want to sell the stock at eighteen dollars a share?” Jobs said.
“Yes, that’s our recommendation,” came the answer.
“You know,” Jobs said, “some people have told me they think it might open up maybe as high as twenty-seven or twenty-eight.”
Jobs was referring to the price that he thought Apple shares would fetch when they began trading on the stock exchange. He knew that Apple wouldn’t directly benefit when its stock price rose—the company would have already sold its stock and collected the proceeds. For that reason, he was interested in capturing as much of the price gain as possible in this meeting, when it would mean more money in Apple’s accounts.
Morgan Stanley’s bankers told Jobs that they would try to minimize any surge in the stock price, but that they couldn’t make any guarantees. One of them eventually admitted that the price could rise quickly, or pop, on the first day. “That is a strong possibility,” the banker said.
“Tell me, who will you sell this stock to at eighteen dollars?” Jobs asked. “That’ll go to your best clients, won’t it?”
The comment left the bankers momentarily speechless. Then they rushed to answer Jobs’s question. “Yes,” one of them said, “our clients will get a chance to own some stock at eighteen.”
The Morgan Stanley bankers explained that they were great clients and would hold the stock for a long time, providing Apple with a stable base of loyal shareholders it could rely on as it navigated the home computer industry.
Jobs looked at them. “Won’t they be terribly happy that they bought stock at eighteen that’s now selling at twenty-eight? And won’t they give you a lot more brokerage business?”
The Morgan Stanley bankers were quiet.
“And then you’re going to charge me an 8 percent fee to do it?” Jobs asked. The CEO wasn’t being confrontational so much as he was asking simple questions.
In a few short minutes, Jobs had exposed the perverse incentives at the heart of the IPO, a centuries-old process used by companies to raise money from public investors by listing their shares on an exchange. Investment banks sat in the middle, and Morgan Stanley and Hambrecht & Quist owed their loyalty not just to Apple but to the investors who would be buying the stock in the IPO.
Apple and the investors both paid the banks, but in different ways. Apple had agreed to pay them a percentage of the IPO proceeds, and the investors paid indirectly, through trading fees or brokerage commissions. It was known as “dual agency” and was frequently discouraged in the real estate market when brokers represented both buyers and sellers.
From the beginning, Jobs had been skeptical of the institutional bearing of the Morgan Stanley bankers, a bunch of suits with divided loyalties. Now that skepticism was boiling over.
At his insistence, Apple’s bankers finally decided to price Apple’s 4.6 million shares at $22.
“He was the first guy that I ran into that had really figured out what the IPO process was like,” Hambrecht said later. “I went out of there thinking, ‘Boy, that guy really has figured it out.’”
Apple’s stock quickly rose above $29 when it started trading on December 12, before leveling off to finish at $28.75. It represented a 31 percent gain. The San Francisco Examiner marked the event with a front-page story in the afternoon edition. Under a headline that read, in part, “Wall St. gets bite of Apple,” the newspaper played up the offering’s success. “Wall Street gave Apple Computer Inc. a warm—not hot—reception in its first public stock offering today,” the story ran. “According to analysts, that was nearly a perfect launch for the stock in the Cupertino-based maker of personal computers.”
Apple’s IPO heralded its arrival into the scrum of the world’s financial markets, where companies go to raise money by selling stocks and bonds to professional, and amateur, investors. Few are as important as the IPO market, where shares are sold for the first time.
For years after Apple’s offering, the IPO market stayed largely unchanged. A pattern began to emerge in the technology industry, as hardware and software companies became a larger part of the economy and attracted a broader swath of investors. The shares of the most popular companies, those providing industry-disrupting technology or access to an expanding internet, soared high above the IPO price when they began trading. Investors receiving the shares in the IPO enjoyed near-instant profits. And startup entrepreneurs wondered if they could have gotten a higher price.
Reformers tried repeatedly to fashion something different. Inspired by Jobs’s insight from 1980 and a belief that there was a better way to calculate an IPO price, Hambrecht struck out on his own in the late 1990s. He set up a new company called WR Hambrecht + Co. and designed a modified Dutch auction to sell shares. Hambrecht’s OpenIPO, as he called it, collected bids in secret and auctioned off shares starting at the highest price and moving lower until the entire offering was sold. Then all buyers paid that lower price. It was used by nearly two dozen relatively small companies to go public over the following few years. Hambrecht struggled to attract widespread acceptance amid skepticism from larger companies and pushback from investment banks that enjoyed handsome fees and wielded immense power within the established system.
When the search giant Google was ready to go public a few years later, cofounders Sergey Brin and Larry Page thought they might try their hand at IPO disruption. They sought out Hambrecht’s advice, and though he stayed involved, they forged their own path with a modified auction structure. But when Google had to slash its share price to get the deal done, critics had all the ammunition they needed to bad-mouth the new approach and persuade entrepreneurs to stick with conventional wisdom.
If either Hambrecht or Google had found success, it could have ushered in the largest change to the IPO market in decades, presaging a new era in how technology companies raised money to fund innovation: a radical restructuring of the power dynamics that existed among the venture capitalists that fund startups’ early growth, the public investors who later fund it, and the investment banks standing in the middle. Instead, the system remained largely unchanged.
In 2018, a promise of wide-scale innovation again visited the IPO market when Barry McCarthy, the CFO of music streaming service Spotify, succeeded in redesigning the process. Borrowing inspiration from earlier efforts, McCarthy worked with bankers, lawyers, and regulators to list Spotify’s shares directly on the exchange, bypassing underwriters and fashioning a new role for investment banks that kept them at arm’s length.
Far from being a flash in the pan like OpenIPO or Google’s auction, McCarthy’s creation caught fire. Nearly a dozen large technology firms have now directly listed their shares on an exchange. Dozens more executives, such as those at video gaming software company Unity and food delivery app DoorDash, considered a direct listing before deciding to disrupt aspects of the traditional IPO process itself.
Unity introduced auction-like features inspired by Google’s offering, while DoorDash did away with something called a greenshoe, an agreement that gave banks the option to buy more shares at the IPO price. It acted as insurance for companies but often simply delivered more profits to banks. Other startups challenged the traditional six-month period in which company insiders were forbidden to sell shares.
It didn’t stop there. Inspired by the innovation of the direct listing, businessmen and investors dusted off a little-used technique to raise money from investors and use it to buy other companies. Known as blank check companies, their growing acceptance provided firms yet another way of accessing the public markets.
Along the way, innovative entrepreneurs received cover from vocal venture capitalists, such as Benchmark’s Bill Gurley, one of the world’s most successful technology investors, and independent advisors like Lise Buyer, a veteran of Google’s offering who dispenses IPO advice from an independent advisory firm.
In taking on the status quo, this collection of startup executives, investors, and advisors upended a system embedded with powerful financial incentives. In 2020, investment banks earned $1.8 billion in fees for underwriting $38.7 billion in technology IPOs, or almost 5 percent of the money raised, according to Dealogic. The 2021 figures through mid-November for fees and proceeds, the amount brought in by companies selling shares for the first time, were roughly double those amounts.
Finally, the revolution that Bill Hambrecht and others tried to start in the late 1990s appears to be taking hold. As it does, some of the financial markets’ most powerful players may see their roles dramatically altered. To understand how the change came about and where things are going, it’s important to explore the challenges and choices faced by the pioneers who dared to challenge the status quo.
This is their story.