Here at SA国际传媒 News, we cover a lot of tech and tech-adjacent startups as they go public. The process by which they鈥檝e done so has been pretty much the same: through an Initial Public Offering (IPO). But lately there鈥檚 been more and more talk of going public through a direct listing, so we thought we鈥檇 break down exactly what that means.

An initial public offering entails the sale of newly-issued securities to underwriters and their clientele, whereas a direct listing is more like a secondary sale of existing shares designed to give founders, prior investors, and vested employee shareholders a path to liquidity.

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Both ways of going public achieve the same thing (bringing a private company to public investors) but there are key differences between the two. Let鈥檚 explore.

What Is A Traditional IPO?

What we鈥檒l call here a 鈥渢raditional IPO鈥� is the process through which most companies historically have gone public. The steps go something like this: File an S-1 with the Securities and Exchange Commission, set a goal of how much you want to raise with your IPO, set a price range of how much you want to sell each share for, settle on a price and sell a block of shares for that price to institutional investors, and then commence trading on the public markets.

On the first day of trading, investors watch closely to see what price the stock opens at when the market itself opens for trading, and what price the company closes at when trading closes.

Generally, it鈥檚 a good sign to see the company鈥檚 equity open above the price at which it sold shares during its IPO process. However, companies generally don鈥檛 want their newly-tradable equity to open too much higher than the set price, because that could mean money was left on the table (i.e. the company could have raised more money from investors by selling shares at a higher price) .

What Is A Direct Listing?

A direct listing is just what it sounds like: direct. It brushes off most of the pre-trading steps that traditional IPOs take and gets straight to trading. There鈥檚 no setting a price range, settling on a per-share sale price (though a reference price is determined), going on a roadshow to woo investors or selling a block of shares to institutional investors before hitting the market.

Conventional wisdom says that direct listings are best suited for companies that have a lot of brand recognition: If the majority of the public is familiar with your brand, you don鈥檛 need to put a lot of work into selling it. Conversely, if your company wants to go public but isn鈥檛 as well-known as, say, Spotify (perhaps more of a problem for B2B companies), a traditional IPO may be better.

According to Jay Heller, Nasdaq鈥檚 Head of Capital Markets, an ideal candidate for a direct listing is a well-known company that 诲辞别蝉苍鈥檛 have a need for capital, has a seasoned management team with an established track record, and is willing to give financial metrics and forecasts ahead of time.

Direct listings have benefits like no lockup periods (a time restriction preventing early shareholders from selling stock), but they also have challenges like liquidity and potential volatility, Heller said.

What Else Is Different?

A major difference between IPOs and direct listings is the role of banks. In an IPO, there鈥檚 a capital raise when banks commit to buying shares of a company at a set price, according to Heller. With a direct listing, banks aren鈥檛 acting as underwriters, but more like financial advisers.

鈥淚n an IPO the banks are setting them up on roadshows, working with investors,鈥� Heller said in an interview with SA国际传媒 News. 鈥淚n a direct listing, banks have no say on that…to get out and tell the story, it鈥檚 really on corporate鈥檚 responsibility to facilitate that.鈥�

That makes it more challenging, Heller added. With an IPO, banks help a lot with generating interest from the investor community. With a direct listing, a company has to do that on its own.

鈥淵ou need a shareholder base with a direct listing.That鈥檚 probably large and they have a desire to sell,鈥� Heller said. 鈥淏ecause with a typical IPO, the company is offering a set amount of shares at a certain price. With a direct listing you really need your early shareholders to come in to the marketplace on day one to provide for liquidity, and that鈥檚 really tough.鈥�

Execution on the day a company makes its debut on the public markets is very much the same for both direct listings and IPOs, Heller said.

Which Companies Have Listed Directly?

Not many companies, though obviously there have been some. Direct listings have been more in the spotlight recently because a couple of high profile unicorns went public that way. seems like it was the OG (though it certainly wasn鈥檛 the first) when it had a direct listing in 2018, and chose to go the same route when it went public earlier this year. They aren鈥檛 the only ones, but may be the most visible. Nasdaq has been listing directly since 2006, Heller said, pointing to insurance company Watford Holdings as a direct listing on Nasdaq this year. There鈥檚 been talk of Airbnb (another well-known unicorn) doing a direct listing when it goes public in 2020, and startup executives and venture capitalists gathered to discuss the prospect of tech companies going public via direct listings earlier this fall.

A company that wants to go public should do its due diligence on its options, and really think about what it鈥檚 trying to achieve and the purpose of the listing. Is it trying to raise capital? Provide liquidity?

鈥淚t鈥檚 really do you need capital or do you not, and if you do need capital then a direct listing is probably not for you,鈥� Heller said.

Nasdaq 诲辞别蝉苍鈥檛 have a preference either way a company goes public, Heller said, and it will support corporate pre-listing, the day of, and after it goes public. But companies need to do their research and choose the path that will set them up for success in the future.

鈥淚t鈥檚 not for everybody,鈥� Heller said of direct listings. 鈥淏ut that 诲辞别蝉苍鈥檛 mean that everybody shouldn鈥檛 be asking the questions.鈥�

滨濒濒耻蝉迟谤补迟颈辞苍:听

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When decided to go public not with a traditional IPO but with a direct listing, there were two main viewpoints that I saw. The first was laudatory. Good on Slack, the thinking went, for sticking it to the bankers and going public its own way.

The second, and this is where I mostly found my own thoughts, was less positive. Forget the fees, this perspective ran, why not raise more money when you can at a price that you like, bolstering the corporate balance sheet in the process? Hell, you could just make more acquisitions with the extra lucre.

That Slack had 补迟听lower prices while private that it did not need (Evidence: The hundreds of millions of dollars it was sitting on when it decided to go public.), why not raise during its public debut?

All that pre-talk is now ancient chatter. Slack did pursue a direct listing, it is now public, and we can take a look at where the company currently trades. So, here are the data points as I understand them:

• Slack’s : $11.91
• Slack’s direct listing reference price: $26
• Slack’s post-listing share price range: $34.81-$42.00

Slack is worth $36.62 as I write to you this morning. That’s perfectly fine given its range, sitting comfortably above its reference price, and miles above its final per-share price set while private (Note: There could be more going on there than just a sticker price, so don’t put infinite stock in the private price against the public price.) That’s what Slack wanted.

So, points to the company and its leadership for doing things their own way. It worked.

Lessons

Slack’s direct listing success does not mean that most companies going public should, let alone can, pursue a similar debut.

Indeed, most companies probably cannot and won’t want to. Let’s explain. They will not be able to as a direct listing requires a higher level of market awareness than most companies can muster. And, most companies won’t want to go public via a direct listing given that it is not a fundraising mechanism.

As we saw with Livongo recently, going public is still, for lots of firms, a way to put extra cash on the balance sheet to allow for more growth. Slack was stuffed to the gills with cash given to it by investors hungry for a quick double or triple or quadruple on a company that was hot even by Silicon Valley standards.

So Slack had huge mind share, rising market prominence, and towering bank accounts. That, in this case, led to a pretty great result for Slack; it got what it wanted without the pricing dance and inevitable media cycle around its pricing.

At the same time, let’s not expect the exception to the rule to become the expected path for all future companies.

One last thing. There seems to be among investors as many companies see their traditionally-priced IPO shares shoot higher in early trading. The general argument is that lots of money was missed. I can鈥檛 quite dissect what percent of that argument is correct censure of banks for mispricing IPOs, and what portion is more the market’s over-exuberance in the face of new offerings.

That could lead more companies to try something non-traditional than otherwise might have considered the option. We’ll see.

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Slack’s direct listing wound up going just fine. The work productivity services company set a reference price of $26 per share, trading between $34.81 and $42 per share since. Currently, worth $37.50, Slack is valued at $18.9 billion according to Yahoo Finance.

For direct listing detractors, it’s hard to fault Slack’s public debut. The firm is now public with little fuss and a strong valuation compared to its final, private-market price of a little over $7.1 billion set during . But is that the figure against what we should compare to Slack’s newly-public valuation?

Probably not, and that’s where the fun begins. Slack had a different price tag on the secondary markets compared to how its investors valued the firm. Here’s , mere months before the direct listing:

As Slack gears up to hit the markets through an聽, stock activity is increasing on the private markets at a price that values the company at nearly $17 billion, according to聽, a firm that matches private companies and their employees with investors.

In Slack鈥檚聽聽in August, the company sold shares at $11.91 apiece for a valuation of $7.1 billion.

Now I am not entirely sure how the $17 billion figure was calculated, and it’s not clear if the secondary market valuation and Slack’s new, public valuation are counting shares the same way. We cannot, therefore, directly compare the firm’s secondary market value and its new, public value.

But, CNBC notes that Slack was trading for $28 per share on the secondary market. That’s above its direct listing reference price ($26), and below its stable-ish public market value in the low 30s per share ($37.50 before trading today).

So, Slack’s secondary market transactions were pretty good, really, at determining the value of the company compared to where it would float. That’s not to say that Slack is correctly priced today, indeed the firm is valued at 35 times its ARR (most recent quarter revenue time four). That may be a bit high!

But what we care about is that Slack has shown that there is at least some wisdom in secondary market prices for companies. So let’s extend the point into an analogy.

WeWork

I was , missing the chance to write about some excellent valuation information . Here’s the core bit:

WeWork鈥檚 stock on the secondary market […] has been hovering at levels that would value the firm between $21 billion and $23 billion, according to brokers. That鈥檚 a drop of around 30% in six months, and also less than half the level at which it recently raised new funding.

You can see where we’re going with this.

I do not know how to value WeWork for a few reasons. It’s hard to tease out how much cash the firm’s completed, and at-capacity buildings generate (more on the issues with that math here). And given that, it’s impossible to tell how profitable WeWork’s business is, as I think we wind up with expansion costs murking up the operating results.

has a guess . And, as we can see from the above quote, secondary market investors have their own figure in mind. What Slack’s direct listing hints at is a connection between the value set by secondary market investors and what public market investors (I presume those circles overlap) are willing to pay for shares in any particular company.

In the case of WeWork, this tells us a few things. First that secondary markets are willing to pay a premium for WeWork shares compared to , but not as much as its most recent equity investors. That’s both good news for WeWork — there are investors out there hungry for its shares at a price above $20 billion — and bad news, given the gap between its secondary market price and what private investors have paid for its equity.

The secondary market value of WeWork is more bullish than I expected, which is why I wanted to highlight it. Due to congenital pessimism and general lack of mirth, I have mentally valued WeWork closer (in multiple terms) to Regus, a company that is public and operates in a similar (albeit different) fashion. The market is saying that I am overly cautious, at least while WeWork continues to grow at an incredible clip.

I’ll stop there to avoid overloading the SA国际传媒 News edit team first thing on a Monday, but bear in mind that SoftBank wants to raise another Vision Fund. It’s not going super well, we hear. And nothing helps raise a new fund like liquidity. So there’s pressure on WeWork to go public, and we now know where the battle lines are drawn, in terms of price.

Thanks to Slack’s secondary market record viz its IPO, we can guess where the public markets want to value WeWork. The question then becomes how much can WeWork grow before it goes public, and how high it can push its tradable valuation against its privately-set worth.

We’ll see!

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The company is in the process of working towards an exotic direct listing on June 20th, eschewing the traditional IPO process. Instead, Slack will begin trading on the 20th of June without selling a bloc of new equity and setting a normal IPO share price.

How it performs when it does begin to trade will hinge on its financial performance, so let’s sink our teeth into what is new from the company and its accountants.

Q1, Finalized

In a preceding S-1/A filing, Slack detailed an expected range for its first quarter. Just for fun, here’s that particular bit of data (you can hunt it up in-context ):

Those ranges are incredibly tight, you’ll notice. Slack had revenue pegged within a million dollars and calculated billings to a mere $2 million range off a higher base.

How did Slack bear out? Here are the comparable results to the above-expected metrics:

• Slack Q1 Revenue: $134.8 million
• Slack Q1 Calculated Billings: $149.6 million

Slack, therefore, landed at the top of its Q1 revenue estimate, and just $100,000 under its upper-end calculated billings result. Someone buy its accounting team a raft of cupcakes, this was a clean brace of projections and results.

But all of that doesn’t tell us what we really need to know, which is how聽fast Slack is growing, and how much money it currently costs the firm to do so. So let’s check in on precisely that. From today’s filing, a few metrics and their pertinent deltas:

• Slack Q1 year-over-year (YoY) revenue growth: 66.6 percent
• Slack sequential-quarterly revenue growth: 10.7 percent
• Slack Q1 net loss: $31.9 million
• Slack year-ago net loss: $24.9 million
• Slack Q1 net margin: -25 percent
• Slack Q1 free cash flow (FCF): -$34.2 million
• Slack year-ago FCF: -$15.0 million

Alrighty, so what? The short answer to what all that means is that Slack is allowing its net deficits and cash burn to rise as it scales revenue.

Normally during an IPO run-up, I note that rising losses as the cost of growth makes for a harder-to-find path to profitability and that that could ding the firm’s final pricing and so forth. Here’s the thing, though: Slack doesn’t really care what you or I think.

The firm isn’t pricing; it’s direct listing. And it closed out its most recent quarter with more than $792 million in cash. If you look up the definition of “Fuck You Money,” most dictionaries now return a copy of Slack’s IPO filings. At a burn rate of $34.2 million a quarter, Slack has just under six years of cash available. It will not never, ever run out of money unless it loses focus and crashes itself into the side of a mountain.

Slack is probably pretty content with its new-normal quarterly Sales and Marketing spend of $66 million to $68 million. Why not? Putting up double-digit percentage sequential-quarterly growth is bonkers for a company doing north of $100 million in quarterly revenue.

It’s not like Slack’s margins are in trouble either. In its most recent quarter, Slack had gross margins of a little more than 86 percent. Find a problem with that; I dare you.

Slack is spending plenty to pick up more than $10 million in high-margin ARR every quarter it can expect to grow by 38 percent each year (the firm’s 鈥渘et dollar retention鈥� in its most recent quarter was 138 percent). Oh no, the horror.

I’m excited about this one.

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The firm鈥檚 new S-1, an S-1/A, notes that the company鈥檚 鈥淧roposed Maximum Aggregate Offering Price鈥� was over $196 million. What does that mean? Well, it 诲辞别蝉苍鈥檛 mean that Slack is going to raise that much. Recall that in a direct listing, the company going public does not sell shares.

So, what鈥檚 up with the $196 million figure? According to the filing, the sum was 鈥淸e]stimated solely for purposes of calculating the registration fee pursuant to Rule 457(a) of the Securities Act.鈥� The document goes on to note that as 鈥渢here is no proposed maximum offering price per share of Class A common stock [in the direct listing, Slack] calculate[d] the proposed maximum aggregate offering price […] based on the book value of the Class A common stock.鈥�

In a sense, then, the $196.48 million sum isn鈥檛 material for our needs. However, the S-1/A did include some important news.

Slack is changing its stock ticker from 鈥淪K鈥� to 鈥淲ORK.鈥� And while it is likely a coincidence, it鈥檚 fun to note that Atlassian, a project management software company that has invested in Slack, trades as 鈥淭EAM.鈥�

If you aren鈥檛 overly familiar with direct listings, a non-traditional route to the public markets employed successfully by Spotify, don鈥檛 worry. It鈥檚 somewhat new for all of us. But, , Slack鈥檚 expected trading date, is just around the corner.

We’ll have more the closer we get to that date. Direct listings are rare, a little confusing, and somewhat exciting. Especially when a company as large, and famous as Slack chooses to forgo raising more money and instead opts to just start trading. But hey, if you don’t need the money, you probably don’t want the dilution.

We don’t understand why Slack was called a genius for raising money while younger, and therefore at higher prices, “just because it could,” but is now being hailed for not raising money, at a higher equity price and therefore cheaper in terms of dilution, in its public debut. If you can figure that out, email us.

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Welcome to the end of the week. You are probably pretty excited to go home and go straight to bed; the news cycle has been exhausting now for months. But it’s still morning out here in San Francisco, so let’s get caught up heading into the soporific weekend.

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Slack’s Impending Investor Day

What do you call a roadshow that isn’t? An “online presentation to prospective shareholders,” according to .

Yes, since is not going public in the traditional manner, the office messaging unicorn instead intends to host a webinar of sorts on May 13th, detailing its business and performance thereof. We’ll tune in. Recall that Slack is pursuing a direct listing, akin to what Spotify pulled off recently.

Uber’s IPO Date: A Reminder

We haven’t forgotten about the Uber IPO, never you worry. Indeed, IPO is still in the offing and we’re currently it to price on May 9th, and begin trading on May 10.

News out indicates that Uber has , albeit at the lower-end of its valuation. Given that, the company’s anticipated hope of raising its range may prove difficult. Expect more news to leak out early next week ahead of pricing.

And then prepare yourself for the anti-climactic existence of Uber as a public company, working to beat quarterly figures and keep growing while reducing deficits. Just like most recently-public tech shops.

Stripe Embraces Remote Work

The SA国际传媒 News team has been hard at work in recent months covering all sorts of places. Here’s some recent work on Austin, New Jersey, and Latin America, for example.

But we’re not the only band of nerds with eyes on the horizon. , the wealthy online payments company, has decided to set up its next development hub, well, nowhere. Here’s :

Stripe has engineering hubs in San Francisco, Seattle, Dublin, and Singapore. We are establishing a fifth hub that is less traditional but no less important: Remote…. Stripe will hire over a hundred remote engineers this year. They will be deployed across every major engineering workstream at Stripe.

Hiring engineering staff in the bay area is gladiatorial work, and those folks aren’t merely concentrated in four other cities. So, Stripe is making a big stab towards hiring people where they already are. Expect more of this in 2019.

Listen To Equity

If you want even more News Recap, . You’re welcome.

And that’s that, folks. Have a good weekend, get a nap, and I’ll see you bright and early Monday morning. (Oh, and if you want to sound smarter at dinner parties, .)

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There’s a lot to talk about today. earnings report is . , sending its own stock north as well. in its own Q1 earnings report but isn’t being dinged by the market. Yet, at least.

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And at a (SA国际传媒 down as a $70 million infusion on top of a $430 million pre-money valuation). I could go on as there’s a lot happening.

But the top news for us this morning is that debut filing is expected to drop this Friday. That’s tomorrow, so let’s explore the situation.

What We Know

Slack is pursuing a direct listing. A normal IPO, in contrast, involves selling a bloc of shares at a set price. The transaction raises money for the company going public and sets a starting price for the company’s equity. A direct listing doesn’t sell new shares and doesn’t have as hard a starting price.

Why not raise money? Slack doesn’t need the funds. It’s a with hundreds of millions of dollars in the bank. By targeting a direct listing it’s saying that it is willing to float, but unwilling to sell more shares of itself, avoiding further shareholder dilution.

The has :

The [SEC filing] will show that Slack is on pace for about $500 million in annual revenue this year, one of the people said. Slack isn鈥檛 profitable, because it continues to spend money on growth, the person said.

Fair enough. Slack at a $500 million run rate breaks down to about $125 million in quarterly revenue. Expect a Q1 result from Slack of around that size.

This means that the SA国际传媒 News estimate penned by myself is going to come in light. Here’s this publication in September of 2018:

So, Slack could head into its IPO, provided that it does so around the midpoint of the first half of the year, with roughly 4.5 million paid seats. Thanks to Slack鈥檚聽, we can pretty well guess that the firm would be at an ARR pace of around $450 million at that point.

Provided that Roof’s “on pace for about $500 million in annual revenue” implies a $500 million ARR pace in Q1, our estimate is a bit low. We’ll see when the final numbers land, but I’m irked that I undershot.

Regardless, the above means that tomorrow will mark one of the final steps towards Slack leaving the private world behind. See you then.

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The popular team-focused messaging service still favors a direct listing, , and could allow its shares to begin trading publicly in the June-July timeframe. For those keeping score, the Journal also reports that the New York Stock Exchange instead of the Nasdaq.

What does any of that mean, and why do we care? Let me walk you through it.

Why does it matter that Slack is pursuing a direct listing over a traditional IPO?

A direct listing is different from a normal IPO in that the company jumping the fence from the private markets to the public doesn’t sell a new bloc of shares. Back when money had a cost, IPOs were often important fundraising vehicles for companies looking to continue growing.

Slack has had access to all the money it could ever want while private, and more. Indeed, it that Slack had $900 million in cash on hand聽last year. That’s so much that it makes little sense for the SaaS giant to raise more in an IPO; why dilute yourself when you don’t need the money?1

There’s been talk (and I’ve been on the wrong side of this debate a few times) that direct listings don’t really save a company money in fees, making the IPO-alternate a bit silly; but in Slack’s case, I would bet $1 that it’s avoiding dilution more by pursuing a direct listing than it is hoping to save a few million while going public.

The above situation is a facet of the unicorn era that we currently live in, a period in which Slack聽could wind up with $900 million in cash on its balance sheet. That figure is as much to Slack’s credit (good job being capital efficient!) as it is a joke about investors (what are startups today, corporate聽foie gras?).

Why do we care that Slack is floating its shares at all?

Two main reasons. First, it’s a huge chunk of liquidity for its investor list (). And second, it’s a benchmarking moment for unicorns. As the first reason is self-explanatory, let’s explore the second.

Slack has long been a leading member of the unicorn club. Its nigh-insane revenue growth has made it a media and startup darling. Its public debut, therefore, will be a big deal. And it will be a big do for Slack聽and startups that are similar in terms of how they generate revenue. Software-as-a-service companies, better known as SaaS shops, will see how much they could be worth if they grew faster, and were more capital efficient when Slack does begin to trade.

The Slack direct listing is, therefore, not a benchmarking moment for companies in the middle of its market. Instead, if Slack’s S-1 looks the way that it’s expected to, its debut could set ceilings for SaaS companies. Your company will never be worth more than聽this much per dollar of recurring revenue, and so forth.

It’ll be fun for everyone but the overvalued.

Alex, it’s another unicorn debut, aren’t you tired of these yet?

Hell no.

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