Up until work messaging application Slack’s market debut yesterday, Spotify’s IPO was the only previous example of a major public listing opting for a ‘direct’ float with no pre-sale. Spotify’s went pretty well. Slack’s even better. The company’s shares opened on the Nasdaq almost 50% up on their expected valuation of $26, propelling market capitalisation to $23 billion when around $16 billion had been expected.
The success of Slack’s ‘direct listing’, an approach which shuns the usual safety net of a pre-sale establishing an IPO price investors are comfortable will raise the possibility of more of Silicon Valley’s graduates following the same route in future. A direct listing largely abandons what the big financial institutions typically tell companies they need to do in order to become a public company. It also, to a large extent, cuts them and their earning opportunities out of the process.
In a traditional IPO, bankers sell new shares to clients and other well-connected investors on the night before the first day of trading. In a direct IPO, a company instead lets its existing shareholders decide if they want to sell their shares on the free market after the opening bell. So Slack and Spotify didn’t raise any new money; instead they allowed their founders, staff and earlier investors the opportunity to cash in their shares at whatever price the market decided they were worth.
It’s been labelled as a risky approach by the establishment as the market has to “discover” what a stock should be worth when it debuts. Critics predicted that direct listings would feature enormous volatility with a stock’s price zig-zagging up and down before the market settled at a more stable value.
However, the two examples so far have seen the stock prices of both Spotify and Slack behave pretty normally on their first day of trading. Rather dully if anything. Even though Slack’s opening price was significantly up on what had been expected, based on forward guidance that $26 was expected, that was established on the basis on buy and sell orders that came in before the market opened. After that point there was a slight climb then a slight decline with the stock closing a $1.16 down on where it started. Lyft and Uber’s debuts, for example, were much more volatile despite both going through the traditional IPO process.
Of course, 2 direct listings so far is a limited data set and it is also argued that both were helped by the fact they were both well-known brands. But with Airbnb also now said to be seriously considering a direct listing, the big banks might be seeing less future IPO action than they have become used to. Especially from companies that don’t need to raise large sums of capital and have an established brand.