Slack's direct listing can make IPO released – Kvarts

The traditional original public offering has lost its brilliance in Silicon Valley. Startups flooded in billions of venture capital presses by the day as long as possible. Venture capitalists grumble " ruined " IPO process. The average time for US technology companies to go public has risen from four years in 1999 to over 11 years today.

But startup can't hide forever.

Early insiders have to pay. Businesses need capital to grow. Public markets are still the only game in town that is able to fund all of the multibillion dollar ambitions at once. But startups looking to access a trillion of dollars of dollars as a sloshing around stock markets and avoiding the traditional IPO, now have another option: the direct listing.

20. June Slack becomes the first Silicon Valley loved one to try It follows in the footsteps of the Swedish streaming giant Spotify. Slack's direct listing (under the ticker WORK on the New York Stock Exchange) is expected to value the company at around $ 17 billion.

Slack is in an enviable position. It grows fast. Revenue is fierce and predictable. It finished the last quarter with $ 792 million in cash, so with its current $ 136 million burning rate a year, Slack has six years of cash in the bank, according to S-1. And now it is celebrated by startup investors looking for a way to dike Wall Street while rewarding early shareholders.

In a direct listing, the company does not issue shares or sell shares. Founders, employees, and early shareholders rather sell their shares directly to public investors, avoiding Wall Street fees or any lockout period that traditionally prevents insiders from acting on a stock exchange listing. It is a rarely used but increasingly popular tactic. For a select group of well-known companies, it is the future.

The problem with IPO pricing

For the most sought after public companies, the Wall Street roadshow is a passenger ride. Investment bankers charter private jets and shepherd CEOs before potential investors in dozens of cities. "It's grueling," says John Mullins, a senior professor at London Business School. "You track three to four times a day across the country, worldwide, and explain to brokers why this is the best side sliced ​​bread." Bankers divine an opening share for the company ("more than an art than a science," as a source told us and others confirmed). Dealmakers extract offers to favored customers, usually institutional funds.

If all goes well, the CEO makes the pilgrimage to the New York Stock Exchange or Nasdaq to call the clock on the opening day, and the company increases millions if not billions of dollars. If the bank manages the stock exchange listing, the shares go wrong, the shareholders remain holding the bag. Too high, and employees end up with devalued shares and worthless stock options. Too low, and early investors miss an opportunity to sell at a higher price, while the company issuing the shares has left money on the table. Anyway, it is lucrative for Wall Street. Even Uber's disappointing $ 8 billion IPO has reportedly earned bankers $ 106 million in fees.

Direct entries avoid this. They allow companies to maintain far more control over the IPO process. Insiders can sell their shares at any time, with bank charges of around 1%, rather than as high as 7%. Companies can then issue stock at any time, ensuring how the market looks at the company. Not every startup has the luxury of not making money for itself. But for those who can do without the capital and get the name recognition with investors, it's a no-brainer. "Every company would like to make a direct listing," says Mullins. "There aren't many drawbacks."

Assuming Slack's debut is successful, IPOs that have once power in corporate governments can instead become a demo day where anyone who has an internet connection – not just Wall Street insiders – can check out the company and make the first deal.

Arrival of direct listing

Spotify's successful direct listing in April was $ 29.5 billion. For the company, the exercise was just as much about marketing as liquidity. "Our focus is not on the first splash," spotify founder Daniel Ek told potential investors in a blog post in April 2018 and said he would skip the page screen to call the NYSE clock. "Instead, we will strive to build, plan and imagine in the long term."

It didn't stop there. Spotify CFO Barry McCarthy later wrote, in a post titled "IPOs are too expensive and cumbersome," that investment banks scratched them off. "Bankers told us they are trying to price new listings so they rise 36 percent when trading starts," he wrote. There is a huge discount for early-stage institutional investors, although banks will argue that the porous ceiling is needed to compensate investors for the risk of buying untested companies. McCarthy's conclusion? "The economy makes sense to investors, but the system penalizes successful individual companies."

Adam Augusiak-Boro, an analyst at EquityZen, says the Spotify model will spread. Instead of the 7% or so the fee that investment banks can charge to move investment bank planner plans around the world, companies like Slack can only hold a webinar.

On his live-streamed "Investor Day" May 13, Slack presented executives on the firm, addressed questions, and posted material for investors to consider. "The management is not distracted for a whole week, and you do not drag bankers across the country and cost hotels," said Augusiak-Boro, a former investment bank in New York.

It helps that products like Slack or Spotify are easy to understand and already installed on many potential investors' laptops and smartphones. Their global reach means that the world's brightest stars are already household names when they want to sell stocks.

Direct entries are not for everyone

Jai Das, president of Palo Alto-based Sapphire Ventures, says direct listings still do not make sense for most companies. "I think it's a way to go out in public markets if you don't need to raise capital," he said. For most money-burning startups, he argues, not raising capital during an IPO is not an option. Overall, Das says, "We probably see 1 to 2 [direct listings] every year, but it's going to be the exception, not the rule."

Alex Castelli, a managing partner of the tax company CohnReznick, agrees that "there is very little threat of direct entries replacing IPOs." Only for a specific part of "well-known companies that do not need capital and can tell their story to potential investors, "direct listings will make sense.

But are other companies better served by the traditional IPO process? Bill Gurley, a venture investor at Silicon Valley Firm Benchmark, recently quotes IPOs as Crowdstrike and Zoom as warning tests. Both technology companies saw their stock prices spike by as much as 80% after their stocks began trading, suggesting they left more than $ 1 billion of potential capital on the table. A price "pop" is not always a bad thing. Employees, for example, can pay out instead of being stuck with underwater options. But there is bad compensation for Gurley.

"CrowdStrike (and other underpriced offers) is the true definition of a" broken "IPO," he tweeted June 12. "Imagine if a CFO / CEO gave away half a billion dollars? Or just throw it away. How would it be looked at? This is similar, but it is institutionalized and therefore all are numb."

Gurley predicted that Slack's direct listing would provide a new era for start-up financing. "There is no reason why stocks cannot be priced in a blind auction," writes Gurley, and shows how investors in a direct listing determine the price of buying shares rather than relying on banks to appreciate them. "This is how 100% of stock market listings should be done. And hopefully one day."

Anyone who is right will change to the exchanges. The conditions change in ways that favor direct entries.

Initially, exchanges that provide secondary markets for private company shares are becoming more fluid. These exchanges, which allow accredited investors to buy and sell stocks before being publicly listed, and giving public investors a clearer picture of the value and operation of the company, are exploding in volume. EquityZen says it has placed 7,500 transactions over the past five years.

Meanwhile, for a company with enough buzz to consider going public, there is a good chance that large investors such as institutional funds have already raised hundreds of millions of dollars in transactions of the company's private shares, as they did with Slack. This price transparency means that the company can have far more confidence in praising its shares on the public exchanges.

For example, Spotify chose to sell shares through a direct listing of $ 132, very close to the latest advanced secondary stock price. The shares rose about 26% during the first trading day (it is now about 8% since the listing in April 2018), and the company saved millions on subscription fees.

Instead of a passenger, IPO may soon become just another collection round. Six months after its own direct listing, Spotify promotes its path as the future of all companies, even those who need growth capital. "Raising money from a stock exchange listing is a completely tactical decision and should be weighed against all the other financing options for private and public companies," the Finance Director said in October in October. "Businesses have more flexibility than they can realize when it comes to raising capital. And the same goes when it comes to being public."