CHAPTER 17

Unity, San Francisco, February 2020

Roughly two weeks after Goldman convened its conference, the bank reported its financial results. It followed the release with a routine conference call, during which CEO David Solomon answered questions from Wall Street analysts. He used the forum to downplay the threat that direct listings posed to the company’s IPO practice.

“Whether or not this is the best path or a path that could be open to lots of companies approaching the market is still something that’s questionable,” Solomon said. “The noise around this really disrupting the IPO market or potentially disrupting the economic opportunity for the leading banks like ourselves and a handful of others in the IPO market is overstated.”

Solomon didn’t mention that for years, there’d been concerns about the shrinking revenue in the firm’s equity underwriting unit. And he didn’t acknowledge the splash the direct listing had already made in the world of tech.

Back in San Francisco, Unity executives including Jabal brought what they had learned from the two conferences into serious discussions with their advisors. They were coming around to the idea that the direct listing would mean a lot of extra work at the executive level. Unity would have to couple it with a private fundraising, making twice the amount of work. That meant other options needed to be brought to the table.

Those options were at the top of the agenda for an October 16 meeting with Credit Suisse. It was not one of the top IPO underwriters, an honor that had belonged to Goldman Sachs and Morgan Stanley for years. But the firm’s bankers liked to pitch themselves as creative thinkers who were flexible in how they designed transactions. They touted their role in the Google IPO as a display of willingness to think outside the box. And they were early believers in the usefulness of blank check firms, having helped Palihapitiya with his first offering.

Credit Suisse’s Matthew Walsh, who led the firm’s IPO and stock underwriting business on the West Coast, along with his colleagues Homan Milani, Kirk Kaludis, Scott Palkoski, and an associate, Danielle Zhang, met at Unity’s offices for a critical meeting. The group had something to show Unity; it might come off as a gimmick, or it might just give them an inside track on getting a choice role on the IPO.

At its heart, investment banking is a commodity business. Goldman Sachs and Morgan Stanley enjoyed brand recognition, but most investment banks offer similar services. There’s only so much space for creativity in capital markets. As a result, bankers often have the same ideas.

To stand out, they do things that, in the light of day or in the glare of the media spotlight, may look foolish in retrospect. Kwan’s gift of a pair of sneakers to Ek in advance of Spotify’s direct listing had landed without much embarrassment. More than one team of investment bankers tried to earn a place on Lululemon’s 2007 IPO by wearing yoga pants to pitch meetings. Grimes drove as an Uber driver for years as Morgan Stanley angled for a lead position that it ultimately got on Uber’s IPO.

This time, Credit Suisse created an entire presentation within Unity’s software. They loaded it onto a hard drive and attached a screen, which they housed in a black box fastened to a cart of some sort.

Once inside and out of the elevator on an upper floor, the Credit Suisse bankers wheeled their cart into a conference room near Jabal’s desk, plugged it in and pressed a button. The screen lifted out of the box. Palkoski had been working hard to create a virtual pitch and a demonstration of the bank’s new corporate offices using Unity’s game engine.

Once they had booted up the program, virtual city streets appeared on the screen. As one of the bankers navigated the program, the group watched as street-level billboards or signs expanded almost like a video to show a likeness of slides that were in the bank’s hardcopy PowerPoint pitch deck. The bankers also showed a rendering of their redesigned 650 California Street offices, the blueprints for which they had loaded into the program ahead of time.

One person remembers Jabal laughing. The bank’s pitch reminded her of a story from the 1990s when Quattrone, when he was running technology investment banking for Credit Suisse, used a farm animal in his pitch for investment banking business.

“This is even better than a goat,” she told the bankers.

Jabal was misremembering. It was a mule. When Intraware Inc. CEO Peter Jackson was interviewing investment bankers for that company’s IPO in late 1998, he complained that he would “feel like a mule” getting loaded up to go from city to city to meet with investors. The joke was a play on a company slogan that asked clients if they were “tired of dragging your ass?” to trade shows. The morning after he made the comment, Quattrone’s group sent a mule to the company’s offices, with a bottle of wine tied around its neck, and a message that suggested that if Jackson didn’t want to drag his “ass” around the country, he should pick Credit Suisse. Intraware chose the bank as one of the lead managers of its offering.

Jabal may not have realized it, but one of the architects of that stunt was none other than the woman sitting near her in the room that day. Lise Buyer.

As the Credit Suisse bankers demonstrated the ease with which they could navigate the company’s product, they extolled its virtues. And they explained how they planned to position the company and its stock to institutional investors. They knew that Jabal and Buyer were considering alternative approaches, but the team wasn’t as enamored with the direct listing product as some Valley insiders were. They pitched a modified auction structure.

“It wasn’t just we’re doing a fancy light show, or a fancy video, or a fancy demo. It was, ‘Here’s the demo, here’s what we built, here’s what we understand about the product and how we plan to position it to Wall Street,’” Buyer recalled.

Most banks didn’t let associates speak at pitch meetings, but Credit Suisse gave Zhang, the junior banker, a chance to say a few words. Jabal, the feminist, remembered her experience at Goldman Sachs and respected the gesture.

As the bankers walked out of that meeting, Jabal and Buyer were impressed. Credit Suisse hadn’t been at the top of their list. It wasn’t at the top of Riccitiello’s, either. The CEO was inclined to choose Goldman Sachs and Morgan Stanley.

Jabal persuaded Riccitiello that he had to meet with the bankers. They had spent a lot of time and effort getting to know Unity’s product, and they had good ideas about how to position the company’s story with institutional investors, she told him.

William Blair’s Carl Chiou was one of the next advisors to visit Unity’s offices. Jabal had seen Chiou speak at the Palace Hotel in October and knew that he was an unorthodox banker who would bring a fresh perspective. Chiou had developed a strategy of using Blair’s independence as a wedge to get into deals that would have otherwise gone to larger investment banks. Blair was a small, Chicago-based investment bank owned by its employees. Because Blair didn’t rely so heavily on trading, Chiou held to a belief that there were better ways to structure IPOs.

His pitch was simple. Chiou told clients that there was an advantage to working with a research-driven firm like Blair, because it enabled Chiou to share data and opinions with company executives uninhibited by any conflicts of interest that larger banks might have. His involvement would also help clients evaluate the advice from the larger banks, which often persuaded inexperienced management teams to do IPOs in a certain way. In Chiou’s experience, the benefits from larger banks’ process didn’t favor his corporate clients as much as it benefited the investors who were the larger banks’ client base.

Chiou gave Jabal his frank assessment of the benefits and pitfalls of a direct listing. While Buyer was a bigger skeptic of the direct listing, Chiou evinced optimism. As he gained Jabal’s trust, his advice would play a critical role in Unity’s IPO.

Back in New York, executives at the NYSE considered changing the exchange’s listing rules so companies could raise money at the same time they went public through a direct listing. If they could pull it off, exchange officials thought that the new listing might eventually replace the IPO. John Tuttle, an energetic NYSE executive whose Michigan upbringing led him to believe passionately in making finance available to individual investors, took to calling it the “People’s IPO.”

On November 26, 2019, NYSE officials filed their proposal with the SEC. The “primary direct floor listing,” as the exchange called it, would allow companies to sell newly issued stock for the first time during the price auction that took place on the morning that shares started trading. As in a direct listing, the shares would be sold at whatever clearing price was determined by the market.

The exchange shared the news on Twitter, anticipating SEC concerns around competition and giving a nod to Commissioner Clayton’s concerns about capital markets access. The proposal read: “The proposed amendments would not impose any burden on competition, but would rather increase competition by providing new pathways from companies to access the public markets.”

The proposal would have to be fully vetted by the SEC, a process that would require the agency to approve the initial submission and open up a months-long comment period to solicit perspectives from the industry and members of the public. The SEC would then consider those comments over its own multi-month period of review. Only then would it render an opinion.

On December 6, the SEC rejected the proposal over small administrative concerns, leading the NYSE to resubmit its proposal several days later. The agency opened the comment period immediately and accepted the NYSE’s submission later that month.

Though the rule change would directly benefit companies like Unity that wanted to do a direct listing but also needed to raise money, it was a direct threat to Wall Street underwriters and institutional investors. Two trade associations representing their interests moved quickly to oppose the measure. The American Securities Association, which describes itself as “the only trade association that exclusively represents the wealth management and capital markets interests of regional financial services firms,” came out swinging in a letter by CEO Christopher Iacovella. According to Iacovella, “underwriters serve a critical function that protects investors and keeps our markets functioning in the most efficient and effective manner possible.” He listed the critical services underwriters provided: they helped market a deal to investors, gauged investor demand, determined the clearing price, underwrote the offering, allocated shares, and, once the deal priced, lent explicit support by making a market in the shares, providing equity research, and conducting outreach to investors.

The trade association also took aim at the supporters of direct listings, painting them as conflicted players who overlooked the poor stock performance that Spotify and Slack had suffered since listing their shares. “The primary advocates of direct listings are private investors in highly valued ‘unicorns’ that stand to benefit the most from selling their shares directly to the general public,” the ASA wrote. “But two high-profile direct listings—Spotify and Slack—haven’t worked out particularly well for retail investors. Spotify continues to trade at or below its April 2018 direct listing price, while Slack is down roughly 45% since its direct listing in June 2019. Given that many of America’s retail investors ended up buying these stocks at high valuations from large institutional holders, the SEC must examine potential investor harm associated with direct listings.”

The group asked the SEC to impose automatic liability under the new rule, just as underwriters have with traditional IPOs, holding banks accountable for “material misrepresentations or omissions” in the offering document for an IPO. The ASA acknowledged the SEC’s underlying reason for encouraging innovation in the IPO process—to stem the decline of publicly listed companies in the United States—but said that the benefit wasn’t worth the cost.

“A rigorous underwriting process promotes accountability for all those involved with a public listing and it gives hardworking American retail investors the confidence and trust to participate in our capital markets,” the ASA said. “The SEC must proceed with caution if it intends to weaken investor protections through the expanded use of direct listings. Otherwise fallen unicorns, like Theranos… would have been able to use this process to access public capital while massively defrauding America’s retail investors.”

On January 16, the Council of Institutional Investors submitted its letter, raising concerns that investors buying shares in direct listings might enjoy fewer legal protections than those engaged in IPOs. The trade association cited an ongoing legal case that it said was cause for worry. Slack’s poor performance had led investors to sue, and the company defended itself in U.S. district court in California by claiming that buyers of its directly listed shares couldn’t sue the company for omissions or material misstatements under the 1933 Securities Act.

“We have become more concerned that shareholder legal rights,” wrote Jeff Mahoney, CII general counsel, “may be particularly vulnerable in the case of direct listings.”

Slack argued that investors couldn’t prove that they had bought shares covered by the registration statement it issued as part of its direct listing, because a mix of shares were sold. Some of those were covered by the offering documents, while others weren’t. Slack also argued that investors couldn’t pursue damages, because it hadn’t put an offering price on the cover of the registration statement. Thus there was no way to determine how much the plaintiffs lost.

“If Slack and other public companies are successful in limiting their liability to investors for damages caused by untrue statements of fact or material omissions of fact within registration statements associated with direct listings,” the CII wrote, “we cannot support direct listings as an alternative to IPOs.”

In January, John Tuttle traveled to the SEC to talk about the proposal. One thing Tuttle learned was that the agency had concerns about some of the distribution requirements for companies that might go through the direct listing process. The NYSE official didn’t want the proposal to fail because of red tape.

“I don’t want to get hung up on this distribution criteria,” Tuttle told his team once he’d returned to New York. He suggested removing that part of the proposal. “Let’s file an amendment, pull it out of there, but let’s also get much more specific in our filing about mechanics, based on their feedback, of how the primary direct listing would work, meaning one price, one time.”

Over the following months, dozens of comment letters piled up at the SEC. Tuttle continued his dialogue with agency officials. Any verdict would come too late to influence Unity’s transaction.

In January 2020, Unity executives met with Goldman Sachs to talk about direct listings and other structures the company could use to list. An advantage Goldman Sachs had over other banks was its long-term relationship with Riccitiello. Goldman didn’t need to win over Unity so much as lay out a potential plan for them.

The bankers showed up with pitchbooks that looked the same as they had when Jabal was working for them in the early aughts. The CFO laughed, noting that they were still spiral-bound and only slightly larger. Some people in the room were struck by Goldman’s lack of creativity. At least in that department, Credit Suisse left them in the dust. It appeared as if Goldman took it for granted that Unity would work with them. While the firm’s investment bankers discussed various offering structures, it was clear to several people in attendance that Goldman favored a traditional IPO.

Interestingly, Goldman had been thinking about alternative approaches as far back as 2012. In a slide deck dated June 1 of that year, less than two weeks after the LinkedIn IPO, the firm’s investment bankers presented other options for taking companies public. While they stopped short of advocating for one of the alternatives, the bankers spent three slides framing the potential alternatives and listing the merits and deficiencies of each.

The bankers acknowledged that “the volatility in outcomes in recent technology IPOs merits further discussion of the IPO execution process,” noting that both investors and corporate issuers disliked the volatility. “There may be alternative execution strategies, although novel, that can improve pricing outcomes without negatively impacting the quality of the shareholder base.”

A straight auction, “in theory, will reflect true demand for the stock,” minimize the first-day price surge, and reduce “the opportunity to ‘game’ the process,” the bankers wrote. On the other hand, an auction might discourage “thought-leading long-term investors” from getting involved because they wouldn’t get an advantage.

They also listed a different process, one that required investors to submit orders with both size and price details but within the confines of the traditional, or “subjective,” IPO process. A transaction with those qualities would provide a clearer picture of investor demand, increase confidence in setting the price when the orders were combined with “qualitative feedback,” and better allocate stock to long-term investors at a higher price, the bankers wrote. Two potential downsides would be an increased ability to rig the system and the potential for overlooking smaller institutions.

The bankers also devoted some attention to setting price and allocation using an algorithm, but largely dismissed it because of the difficulty of calibrating the algorithm correctly and getting investors interested in an entirely new process. It would, however, likely “level the playing field” for smaller institutions.

None of the alternatives that the slide deck contemplated looked anything like a direct listing.

“It’s been on the back of our minds for a while, really no one ever wanted to use it until John Riccitiello kind of had a very specific set of objectives for his IPO,” David Ludwig, the Goldman Sachs banker, said later. “We effectively pulled it out of a box to kind of create the process that he wanted to create.” Unity executives saw two benefits to doing something different. They assumed that a direct listing would create a fairer price for the company’s stock. It would also give employees a way to cash in on the company’s success quickly, rather than being forced to wait to sell until 180 days after the IPO.

But a direct listing wouldn’t allow Unity to raise money, something the company foresaw being necessary soon. Unity would need to raise the money from private market investors. Doing so at the same time as a direct offering would create a crushing workload for executives.

At this point, Unity executives were leaning against a direct listing. Because direct listings were a new process, there was still a lot of uncertainty around the model. Could direct listings work for everyone? Or did Spotify and Slack simply have strong brand awareness? Unity’s team met again with Credit Suisse on January 16 to discuss if they should go ahead with a direct listing or seriously consider alternative structures. On January 28, the bankers sent a follow-up email to discuss “public market alternatives” and attached a slide deck comparing the different paths to the public markets.

Before Unity’s executives could make a final decision, they had a cocktail party to host.

Goldman was hosting another event, this time the Technology and Internet Conference, across San Francisco. Looking to piggyback on it, Unity executives invited several dozen institutional investors to an event at Unity’s headquarters. It was an opportunity for company executives and investors to get to know one another informally. Since Unity had yet to file paperwork with regulators related to its future IPO, the party did not violate SEC rules governing how companies communicated with investors during an IPO process.

Nonetheless, it was part of a growing shift around how companies developed relationships with public equity investors. For decades, investment banks played matchmaker between hard-to-reach hedge funds and mutual fund managers and corporate executives who didn’t know those investors. The executives relied on bankers to identify the best investors and secure meetings in order to pitch their company IPO.

In the years after the 2008 financial crisis, however, many corporate executives began talking to investors much earlier in their companies’ lives, when they were still private, as part of fundraising rounds that increasingly featured public market investors crossing over into private markets. The practice gave investors who had traditionally only invested in public equities a way to get an early foothold in promising companies and the potential for the higher returns that conveyed. It also put company managers in touch with powerful investors years before they would otherwise have had reason to talk.

Unity was no different. Riccitiello had been building direct relationships with institutional investors for years, a philosophy Jabal embraced when she joined the company. They’d grown enthusiastic about the investor meet-and-greet after enduring a series of meetings at Goldman’s Las Vegas conference, where they held forth in a cubicle carved out of a larger room. It would be more enticing to invite investors to Unity’s headquarters, where the company could show off its offices and demonstrate its technology on its own turf. Buyer recalled that Google opened its doors prior to its 2004 IPO. She fondly remembered that event and lent her support.

On February 11, dozens of money managers arrived at the Unity office, finding a restored warehouse building on the fringes of the South of Market neighborhood that was home to San Francisco’s flashy tech scene. The invitees had been chosen carefully. They were on a curated guest list made up of those managers that Unity executives perceived to be the ideal buyers in its eventual IPO.

The reception area was dominated by a counter made of blocks of end-grain wood and, behind, a glass-and-steel staircase that led down into a high-ceilinged area framed by brick walls. The layout telegraphed that Unity was willing to use its money to create a hip space with appeal to Silicon Valley’s most talented software engineers and its most discerning investors.

As cocktails and hors d’oeuvres were handed around, Riccitiello offered words of welcome and executives gave a short presentation. Senior Unity project managers mingled and gave product demonstrations, including one on virtual reality that took place in a darkened lounge, referred to as a cave. This was a time not for hard pitches but friendly introductions that both sides hoped would be remembered when it came time for investors to stump up real money for the company’s shares.

For Jabal, the event was something of a data-gathering exercise. She sized up the investors, judged their interest and knowledge of her company and its industry, and took notes. She looked forward to getting more data when Unity hosted another cocktail party the following month, set to coincide with Morgan Stanley’s Tech, Media & Telecom conference, scheduled for March 2–4, 2020.