The Rise of Direct Listings in the Venture Capital Ecosystem
August 20, 2019 | Blog

The Rise of Direct Listings in the Venture Capital Ecosystem

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.

Why would a company choose a direct listing?

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.

How have direct listings become possible?

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
at IPO
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
Sources: SharesPost Research; SEC EDGAR

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CONFLICTS

This report is 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 financial advisors before making any investment decisions. 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 prudence 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 the subject matter therein, including all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be during their employ directly or indirectly related to their specific views contained in this report.

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be 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, involving a high degree of risk, and investors should 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 investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or 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.

Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is 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 financial advisors before making any investment decisions. 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 prudence 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 the subject matter therein, including all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be during their employ directly or indirectly related to their specific views contained in this report.

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be 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, involving a high degree of risk, and investors should 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 investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or 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.