CHAPTER 28

NYSE, New York City, December 22, 2020

Around this time, the DoorDash team began to sour on one aspect of the Unity-designed order-entry system. They had come to believe that Unity’s process, in the push to keep the system blind, had missed out on a key lever companies could use to push their IPO price higher: the use of bankers and salespeople to share market feedback or whisper campaigns.

DoorDash believed that selective feedback could be used to encourage investors worried about missing out on a transaction to increase their bid. The knowledge that other investors were submitting higher bids was often enough for an investor worried about losing an allocation or receiving a smaller one to place a higher bid. In other words, issuers could command a higher price if investors had a fear of missing out on the IPO.

The theory works the same in home buying. A smart broker selling an in-demand property will communicate with potential buyers as bids come in. He might give buyers he has developed a good relationship with the chance to increase their bid at the last minute to win the house—asking them, for instance, if they are willing to lose the house over $10,000. In this way, he can walk a selling price higher, to the benefit of his client. It’s critical that the asset being sold, whether it’s a house or an IPO, is popular with a certain group of buyers. It has to be a hot deal, in other words, for the feedback to work in this way.

Unity executives had worried that investors wouldn’t share their true bids, and would bid lower, if they knew they would get a last-minute opportunity to increase their bid. On the other hand, many people believed that investors talked to each other regardless of whether they were hearing from a company or its bankers. They wanted to know what others were thinking about the stock, though they were always very careful not to give up too much information, for fear that other investors might get a better allocation. Investors benefit by working together and sharing their bids with each other, but in practice the competitive dynamics are too much to overcome. Nonetheless, the investors are often aligned in their interest in getting as many shares at as low a price as possible.

There was an array of competing forces working against a company looking to raise as much money as it could through an IPO. To at least one person involved in DoorDash’s offering, the process felt adversarial, like it was the company against everyone else. To get through it, the person felt, each party to the process needed to understand how incentives affected the advice they were receiving from the others.

Faced with the uncertainty of where their bid compared to others’, investors would submit artificially low prices, Adarkar came to believe. Investors feared having buyer’s remorse if they later found that they were the highest bid. If that was the case, instead of keeping investors in the dark with a blind auction, companies and their bankers could use feedback to encourage them to increase their bid to get an allocation. Auction theory tends to agree. Research has shown that knowing what others are bidding—being furnished with more information—makes bidders bolder in the prices they are willing to pay.

The theory suggested that open auctions might be better for companies looking to get every last dollar. Unity’s executives had resisted that because of their belief that if the largest institutional investors knew they were going to get a last-minute heads-up, they would submit artificially low prices and pollute the integrity of the auction. William Blair’s Carl Chiou had argued in favor of designing an open system for Unity’s IPO but ultimately had been overruled.

As DoorDash executives thought through the mechanics, they heard similar concerns from potential investors. They made it clear to Adarkar and others in his finance department that they didn’t like the blind order-entry system. Some felt cut out of the process and worried that they wouldn’t get enough shares in the IPO.

DoorDash also worried about losing valued shareholders if those shareholders bid too low. Several of the largest public market investors were already invested in private rounds. Xu and Adarkar knew them and wanted them in their IPO.

As investors input their final orders into Goldman’s system, the DoorDash executives made the difficult but ultimately correct choice, they felt, to selectively brief investors on where they should bid. As the IPO neared, Adarkar and his bankers called the top five or ten investors and told them the price at which they would probably need to bid to get a meaningful allocation. Other investors were kept mostly in the dark. Goldman’s bankers weren’t pleased about the change in plans. They asked the DoorDash executives to keep it quiet. If word got around that Goldman’s so-called blind auction could be gamed by investors who would get a last look, it would train investors to wait to put in their best bids until they got a call. The moment the DoorDash executives allowed the bankers and salespeople to start providing feedback, in other words, the resulting communications would begin destroying the exact value of the system, which was to get a true understanding of investors’ interest at various price points. It would render useless the system Goldman had built.

“The communication back is challenging from a longer-term perspective for the hybrid auction, because if people get the expectation that they’re going to get the call, then it does change their strategy,” said one of the people involved in the process. DoorDash “probably had the good fortune of being fairly early in this.”

After the close of trading on December 8, DoorDash executives and their Goldman bankers, including Jane Dunlevie and Will Connolly, gathered over Zoom to decide on an IPO price and allocate shares. The executives were already satisfied. Investor bids were more than where the company felt like it needed to price its shares. From the updated range, the executives could see that investor demand extended well above $100.

And yet they wanted to be smart about the price they chose. While the pandemic had been a tailwind, they didn’t know what the future might hold. As a result, they were wary of pricing the stock too high and effectively promising a higher rate of growth to investors who bought at the higher price. If they disappointed investors with their earnings, the stock would come crashing down, they feared, and hurt their credibility with investors.

In the end, the executives felt confident at a price of $102, a modest 10.3 percent increase over the midpoint of the upwardly revised range. DoorDash became just one of the few companies, including Snowflake, to price its IPO at $100 or more.

“When they get to a certain price and feel like they’ve achieved a fair valuation or a valuation that’s consistent with their target valuation,” Goldman’s Connolly explained later, “some companies say, ‘Well, okay, I’ve gotten to this point. I’m less worried about the efficiency point, and now I’m more focused on: Can I also have this shareholder or that shareholder that I really like?’”

At $102, DoorDash knew it would be able to allocate shares to some of its favored investors. If they moved the share price higher, they risked leaving some of them behind.

In a role reversal, Goldman’s bankers worried that the company might be setting itself up for a large pop the following day, and they advocated for a higher price, according to one person involved in the discussion.

The next morning, as Goldman gathered orders to open DoorDash’s stock for trading, the bank struggled to come up with enough supply to meet the demand.

At 10:19, market makers on the floor of the NYSE sent the first price indication, suggesting that shares might open between $125 and $130. Demand continued to outstrip supply over the next hour and a half. At 11:50, the shares were still rising, and it now looked like they might open at between $180 and $185.

It took nearly another hour for market makers to release the stock, at which point it opened for trading at $182. That was 78 percent higher than the IPO price.

At least two factors explained the surge: a lack of supply and retail interest. The company had only sold 33 million shares, less than 15 percent of the total outstanding. And in their diligence to allocate those shares to long-term investors, Adarkar and DoorDash’s team hadn’t left many with investors who were willing to sell. The lack of a greenshoe kept underwriters from selling additional shares.

Another explanation for the huge pop was the influence of retail traders who had become a much bigger part of the market. According to the estimates of bankers and trading personnel, retail trading may have accounted for about 20 percent of daily trading activity, double the typical 10 percent or so, at the end of 2020, fueled by government stimulus checks and the popularity of trading apps like Robinhood.

As the NYSE brought trading to a close that day and Airbnb executives gathered with their bankers to price their own IPO, DoorDash closed at $189.51, an 85 percent pop. The steps that DoorDash’s executives had taken to dampen the share surge had not succeeded. Some of that was expected. They had chosen $102 knowing that investors had placed orders at much higher prices. And some of it was the influence of retail traders.

The IPO market would have one more news event before the end of the year. Less than two weeks after DoorDash’s IPO, regulators at the SEC finally rendered a verdict on the NYSE’s proposal for the creation of the primary direct floor listing, which would allow companies to raise capital alongside a direct listing. The agency had approved the proposal in August, only to issue a stay when the Council of Institutional Investors asked that the matter be put before a vote of the SEC’s commissioners.

On December 22, the SEC ratified its decision from August to approve the NYSE’s rule change. In its discussion, it said that it did not interpret the law as requiring an underwriter in a securities offering. The involvement of a financial advisor, such as in a direct listing, would be sufficient to provide investors protection under the law, the agency wrote.

The SEC spent several pages explaining why it did not view Slack’s legal defense around the traceability of shares to be something special to direct listings or worrisome enough to keep it from approving the NYSE’s rule change. The explanation addressed the concern that the Council of Institutional Investors had shared in an early comment letter. And then the SEC wrote about the benefits it saw in the direct listing, particularly around its ability to involve a broader swath of investors and set the price of shares in a much more transparent matching of supply and demand.

First, investors “who might not otherwise receive an initial allocation” in an IPO might “be able to purchase securities in a Primary Direct Floor Listing,” the agency wrote. “The proposed rule change therefore has the potential to broaden the scope of investors that are able to purchase securities in an initial public offering, at the initial public offering price, rather than in aftermarket trading.”

Second, “because the price of securities issued by the company in a Primary Direct Floor Listing will be determined based on market interest and the matching of buy and sell orders, Primary Direct Floor Listings will provide an alternative way to price securities offerings that may better reflect prices in the aftermarket, and thus may allow for efficiencies in IPO pricing and allocation.”

Two of the five commissioners voted against the proposal. Commissioners Allison Herren Lee and Caroline Crenshaw, holding the two seats reserved for Democrats during a Republican presidency, issued a statement saying that “the lack of a traditional underwriter means investors will lose a key protection: a gatekeeper incented to ensure that the disclosures around an initial listing are accurate and not misleading.”

Nonetheless, the decision brought an end to thirteen months of haggling and set the stage for a radical transformation of the IPO process. The NYSE was ecstatic. “This is a game changer for our capital markets, leveling the playing field for everyday investors and providing companies with another path to go public at a moment when they are seeking just this type of innovation,” NYSE president Stacey Cunningham said in a statement. Appearing on CNBC that day, she said it was a welcome change to the process of going public, and likely to lower the cost of capital for companies entering the public markets.

“Just think about all those examples when we see an IPO pop on the first day, and there are shares allocated the night before and it gets priced at a certain level,” she said. “Then the next day it’s up 100 percent and people say, ‘Well, that’s a great IPO. Look how wonderful and exciting this company is.’ It’s not a great IPO if you were the one that sold shares the night before, because you could’ve gotten a much better price if everybody was participating in that offering.”

It was here that John Tuttle, who had watched the innovation unfold since helping Farley with Spotify’s early analysis, offered a broader take on the significance of the moment. “I call it the People’s IPO,” Tuttle said. “It’s about the people. That’s who markets serve. If you think about how much wealth creation has happened because of the capital market system, and the ability to empower entrepreneurs and allow investors to be part of that success, the more people we can bring to that dance, the better it is for the world.”

Gurley, too, couldn’t help but weigh in on what had been an eighteen-month campaign on his part to get direct listings taken seriously. Appearing on CNBC’s Closing Bell later that day, Gurley said that the SEC’s approval would eventually bring an end to traditional IPOs. “I can’t imagine, in my mind, when you can do a primary offering through a direct listing, why any board or CEO or founder would choose to go through this archaic process that has resulted in massive one-day wealth transfers straight from founders, employees, and investors to the buy side.” He added, “In the future you’ll be able to go on Robinhood and if you want to participate in an IPO, you can.” He had taken to the Robinhood app just months earlier to test his point, purchasing ten shares in Palantir’s direct listing. “Let’s not let these intermediaries and gatekeepers hand-allocate who gets this underpriced stock,” the venture capitalist said.

In an email to a reporter who asked whether the narrative around IPOs had truly been altered, Gurley wrote just four words: “It just changed. Forever.”