Direct listings work well for large unicorns like Spotify and Slack
January 18, 2019 | Blog

Direct listings work well for large unicorns like Spotify and Slack

When Spotify said it would direct sell its shares to the public last year, pundits were skeptical. Up until that point, only smaller companies pursued direct listings, not a major unicorn like Spotify.

“It’s no coincidence that virtually every direct listing in recent memory has involved companies with less than $100 million in value that are essentially orphaned in the public markets,” David Golden, the co-head of Revolution Partners venture capital firm in San Francisco, wrote at the time. “Historically, the direct listing has been the public market debut of last resort.”

In other words, a direct listing bestowed upon a company a black mark, a kind of stigma. Only lesser quality companies would pursue this method, the thinking went.

However, Spotify proved the opposite: high valued unicorns don’t need underwriters. The music streaming service’s listing was a major success. And now Slack Technologies, privately valued at $7.13 billion, is reportedly planning a direct listing.

Unicorns upend traditional wisdom about IPOs

The emergence of unicorns has undermined a long-standing belief about IPOs. Companies seeking to go public traditionally needed to hire a big investment bank to underwrite the shares, go on a roadshow to promote the stock to institutional investors, and convince analysts to initiate coverage.

But do private firms already worth billions of dollars and trade on the secondary markets like SharesPost really need promotion? In the past, even big companies like Google and Microsoft were bit of black boxes prior to going public. For ordinary investors, there was really little financial information on the business, including market value, until these companies filed a prospectus.

Now that shares of unicorns regularly trade on the secondary markets, investors can gain insight into these companies long before a S-1 and access research reports from SharesPost, CB Insights, and Pitchbook. Indeed, Spotify disclosed secondary trading data in its prospectus. Institutional investors like mutual fund giants Fidelity and T. Rowe don’t wait for unicorns to go public; they already own shares in top unicorns like Uber, Lyft, and Airbnb.

Private unicorns command so much attention that even companies with some red flags face little difficulty attracting investor interest.

Take Snap Inc., the maker of the Snapchat photo app. The company offered to sell shares with no voting rights, a major break from publicly traded stocks. I spoke to an analyst who predicted institutional investors would buy Snap shares anyway because the company was so high profile.

“They have to own these shares,” the analyst said.

The real risk to direct listings is volatility. Should the price of a company that just went public go astray, underwriters can step in to stabilize trading by purchasing or selling shares. With companies that choose to direct list, a lot of shares hit the market at the same time, which increases the change of price swings.

But Spotify’s trading activity proved to be stable. We’ll see what happens with Slack: recent volatility from global trade disputes and the prolonged government shutdown makes going public at this time a little more problematic.

Smaller companies that need promotion the most struggle to get it

Here’s the irony though. Smaller companies, whom Golden the venture capitalist noted were the only firms that previously did direct listings, are the ones that most need the help of investment banks and underwriters the most when going public.

These companies lack the size and sizzle of big unicorns and therefore need help promoting their shares to institutional investors and the broader public. But investment banks have increasingly consolidated into a few giant firms who are only interested in big deals, said Adam Epstein, founder of Third Creek Advisors, a firm that advises small cap companies on corporate governance.

“You could have a smaller company growing revenue a healthy 10 percent a year,” Epstein said. “But others might say: ‘Who cares? Why are you even going public? It’s a total waste of time.’”

The number of IPOs in the United States have been steadily falling over the past three decades but the number of unicorn and mega IPOs have been rising.

While global IPO volumes declined by 21 percent last year from 2017, proceeds grew 6 percent, thanks to a growing number of unicorns (40 IPOs, raising $32.2 billion in total) and mega IPOs that went public, according to a report by Ernst & Young. Proceeds from unicorn IPOs accounted for 61 percent of all IPO raises last year in the United States, the report said.

Even if a small company goes public, it still faces an uphill climb to gain traction with investors, Epstein said. Unicorns may get all of the attention but about 80 percent of all publicly traded companies command are small or micro-cap stocks worth less than $500 million.

On Nasdaq alone, 45 percent of companies on the index are worth less than $300 million. Yet one third of those companies have no research coverage.

Given its size and prominence, Slack will likely face no such problem. Like Spotify, Slack’s direct listing is likely to attract plenty of investor interest.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.

Thomas Lee

Thomas Lee

Thomas Lee is the Senior Writer at SharesPost. He was previously a business columnist at the San Francisco Chronicle. Lee has written for the Star Tribune in Minneapolis, St. Louis Post-Dispatch, and Seattle Times. He is author of “Rebuilding Empires” (St. Martin's Press), his book on the future of big box retail in the digital age.
PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.