Direct listings have received a lot of attention recently due to their “disruptive” potential, as well as the back-to-back successes of Spotify and Slack. It’s true – a direct listing has substantial implications for issuers, investors, and investment banks alike. Below we’ll explore two big questions: why would a company pursue a direct listing, and how are such listings possible? But before we analyze these concerns, it’s important to make one key clarification.
Even if direct listings continue to occur (which we expect to be the case), this route is unlikely to become the norm anytime soon. For a company to even begin to consider such a course, they have to possess a number of specific criteria, including sufficient cash on hand (as direct listings do not raise any primary capital) and brand-name recognition in the financial community (since direct listings do not have marketing roadshows like traditional IPOs). Looking at our two data points, Spotify raised $1 billion twenty-four months prior to its direct listing, had positive cash flow from operations, and, per its registration filings, had 159 million active users — twice as many as its next closest competitor at the time, Apple Music. Despite $41 million in cash outflows from operations at the time of Slack’s direct listing, the company raised $427 million only ten months prior to the event. Furthermore, while Slack had just 10 million users (from 600,000 organizations), the company benefitted substantially from making its public debut in a year that has shown strong investor demand for enterprise software companies. In short, these two firms generally had the right mix of characteristics to allow them to pursue this unique path.
The primary drivers for a company’s decision to conduct a direct listing revolve around a desire for more control over the sales process and the inherent implications for existing shareholders. Traditional IPOs involve a limited number of underwriters offering a restricted number of shares — a recipe that provides brokers with near full control over allocation and pricing. This dynamic often leads to “money left on the table” for the company, illustrated by a substantial pop in price once the company’s stock is made available to the public. If you’re no longer surprised to see headlines of such pops at IPOs, it’s for a reason.
As depicted in the above chart, first-day pops for companies formerly backed by venture capital have been the norm. For the 23 IPOs that have taken place since June 1, 2018 within the prescribed criteria, the median first-day pop was 46 percent. This amounts to over $3.5 billion in implied proceeds left on the table. For perspective, the year with the next highest average IPO pop was 2013 at 20.8 percent, according to data from Jay Ritter. With their direct listings, Spotify and Slack avoided such an occurrence.
These direct listings also represented — for existing investors — something that was closer to a true liquidity event, free of the lock-up period associated with traditional IPOs. In theory, all shares were available for sale at the time of the listing, whereas 85 to 90 percent of IPO shares are typically restricted from sale during the 180-day lockup as desired by underwriters. Beyond the clear benefit to existing investors, this process also allows the listing company to achieve price discovery via market forces, without the stabilization efforts of underwriters.
The answer to this question demonstrates the evolution of the venture capital ecosystem over the past twenty years. The abundance of capital flowing to venture-backed firms both from traditional VCs and crossover from PE has allowed these companies to stay private longer, become more developed prior to considering an exit, and obtain better funding by the time of exit. While late-stage growth capital has usually been secured through proceeds from an IPO, companies are now finding all the growth capital they need via increasingly present “Private IPOs”, or $100 million-plus funding rounds. Broadly speaking, companies today have the ability to explore direct listings because they are more developed at the time of exit compared to the venture-backed companies of the preceding two decades.
|Company Name||IPO Date||Age
|TTM Revenue at Registration||Employee Count at IPO|
|Uber (NYS: UBER)||May-19||10||$11,270 M||22,263|
|Lyft (NAS: LYFT)||Mar-19||7||$2,157 M||4,680|
|Sonos (NAS: SONO)||Aug-18||16||$1,093 M||1,478|
|Pinterest (NYS: PINS)||Apr-19||11||$756 M||1,797|
|Slack (NYS: WORK)||Jun-19||10||$454 M||1,664|
|Medallia (NYS: MDLA)||Jul-17||16||$337 M||1,258|
|Zoom Video Communications (NAS: ZM)||Apr-19||8||$331 M||1,702|
|Bloom Energy (NYS: BE)||Jul-18||17||$273 M||1,409|
|Eventbrite (NYS: EB)||Sep-18||12||$256 M||1,016|
|CrowdStrike (NAS: CRWD)||Jun-19||8||$250 M||1,455|
|The RealReal (NAS: REAL)||Jun-19||8||$230 M||1,700|
|Avalara (NYS: AVLR)||Jun-18||14||$226 M||345|
|Tenable (NAS: TENB)||Jul-18||16||$206 M||1,054|
|Upwork (NAS: UPWK)||Oct-18||4||$202 M||395|
|Elasticsearch (NYS: ESTC)||Oct-18||6||$185 M||994|
|Moderna Therapeutics (NAS: MRNA)||Dec-18||8||$178 M||700|
|Anaplan (NYS: PLAN)||Oct-18||12||$174 M||1,102|
|Beyond Meat (NAS: BYND)||May-19||10||$165 M||400|
|Fastly (NYS: FSLY)||May-19||8||$158 M||489|
|PagerDuty (NYS: PD)||Apr-19||10||$118 M||524|
|NGM Biopharmaceuticals (NAS: NGM)||Apr-19||11||$109 M||164|
|Guardant Health (NAS: GH)||Oct-18||6||$67 M||348|
|Livongo (NAS: LVGO)||Jul-19||11||$61 M||385|
|Adaptive Biotechnologies (NAS: ADPT)||Jun-19||10||$59 M||346|
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