When Spotify decided to sell its shares in an IPO directly to regular people rather than to a pre-chosen group of its bankers’ friends — in a move known as a direct listing — it portended an inflection point in the relationship between Silicon Valley and Wall Street.
But on the precipice of a 2019 initial public offering year that will see some of the tech sector’s most iconic startups become public companies, no one has yet said that they are heeding McCarthy’s call. In fact, the two IPOs already on the docket for 2019 — from Uber and Lyft, both of which last week reportedly filed confidentially to go public — are expected to pursue standard-fare, by-the-books listings. Some bankers say the conversations around direct listings have largely died down after an initial bout of curiosity this spring.
There are, however, two companies that are weighing direct listings, Recode has learned: Airbnb and Slack. And their decisions will go a long way toward signaling whether Spotify’s move was an aberration or a trendsetter.
When it went public in April, Spotify’s new approach aimed to loosen Wall Street investment banks’ grip on startups’ jump to the stock market. Rather than selling shares to institutional investors for a set price on the day before the stock becomes available to everyone, Spotify’s direct listing allowed for the share price to be “discovered” naturally on opening day by the rate at which buyers were willing to buy and sellers were willing to sell. A company that directly lists doesn’t create or sell any new stock and therefore doesn’t raise any money — it’s just current shareholders selling their preexisting shares — which means it’s an option available only to the few who don’t need cash.
While it is a little early to assess the legacy of Spotify’s novel and provocative financial maneuver, which some on Wall Street were privately betting against, insiders and observers generally view the Spotify experiment as at least a non-failure. Despite Spotify’s seemingly risky offering, the direct listing has yielded a remarkably stable stock.
But there is exactly one and only one example of it working: Spotify itself. And as concerns about an economic recession crest, startups might be even less willing to roll the dice on something not in the tried-and-true playbook.
“The system actually — with all its quirks — works well,” Sandy Miller, a late-stage venture capitalist at IVP, said of traditional IPO listings. “We wouldn’t recommend [a direct listing] generally for our companies.”
Silicon Valley bankers tell Recode they have not detected much traction and are not, as of now, expecting any significant 2019 direct listings. Bankers say they fielded tons of questions about the hot new thing last spring when Spotify began to trade on the New York Stock Exchange, mostly from CEOs who were just plain curious about the hot new thing. Spotify’s leadership and investors, too, got flooded with inquiries.
But in recent months, once its sheen wore off? The conversations thinned to just those who actually should be considering it. Bankers won’t argue that the direct listing is dead, but predict that the follow-ups to Spotify are a few years away.
There are two prominent exceptions.
The first is the company that is most serious about reducing the role of bankers: Airbnb. The company and its finance staff have been closely studying how Spotify executed its IPO and are considering whether to do a direct listing, according to people familiar with the matter.
The conversations have been serious enough that the CEO of Airbnb, Brian Chesky, has consulted in recent months with the CEO of Spotify, Daniel Ek, about how Airbnb could possibly pursue its own similar listing, the people say. Airbnb declined to comment.
Chesky is said to be interested in making Airbnb’s public offering more than merely a financing event and is drawn to any approach that makes his IPO less traditional (like perhaps granting Airbnb hosts stock).
A direct listing for Airbnb, which was last valued at over $30 billion, would be another revealing moment in the Wall Street-Silicon Valley war. One of the highest profile tech companies in the world would be declaring that it doesn’t need bankers the way that bankers think they do.
Airbnb “could probably successfully do a direct listing,” said Miller. “I think they’re a decent candidate for it — but again, they’re the rare case.”
Airbnb, whose new chief financial officer hasn’t even started yet, very well could need to wait until 2020 for its IPO. But it has a few things that fit the direct listing profile to a tee: The company, as of now, does not need to raise any money as it would in a typical IPO. It has a trademark, global brand that gives it enormous visibility. It’s guaranteed to get coverage from research analysts either way.
One big holdup, according to the people: Airbnb has not allowed for much private stock trading over the last few years — unlike Spotify — which would make it harder for Airbnb to determine how exactly to price its shares on opening day before the mad rush to buy and sell begins. The lack of trading could also create pent-up demand from longtime shareholders to sell immediately.
Also seriously considering a direct listing in recent months is Slack, the workplace messaging company that recently hired Goldman Sachs to help lead its initial public offering work. Slack CEO Stewart Butterfield is said to be curious about the idea, though he has not yet made any final decisions, according to people familiar with his thinking. Slack’s offering isn’t expected until the second half of 2019.
Slack declined to comment.
Slack’s move would be somewhat atypical because bankers and investors believe that enterprise startups — companies that make revenue by selling products or services to other companies — are, on average, poor candidates for a novel debut that comes without the promotional marketing of a traditional IPO. Most ordinary Americans haven’t heard of most enterprise companies, and people like to buy stocks they’ve heard of.
But Slack is basically the only enterprise company where the direct listing idea makes any sense.
With eight million daily active users, Slack is the rare enterprise startup with a cult-like base of followers. It has a brand that is well-known enough for everyday investors to potentially be interested in buying some stock at the beginning of trading. In short, it’s the most consumer-esque enterprise company out there.
But for smaller companies — think of those with market capitalizations below $10 billion — a direct listing doesn’t seem doable.
Postmates recently hired JPMorgan to advise it on its traditional IPO slated for next year, according to a person close to the company. The idea of pursuing a direct listing never seriously came up, according to a second person close to the food-delivery startup. Postmates and JPMorgan didn’t comment.
Crowdstrike, the cybersecurity startup that worked to investigate the data hack into the Democratic National Committee, is preparing a traditional listing. Also expected to say no to the direct listing is Zoom, the video-conferencing company, a person close to the company said. Both declined to comment.
So despite all the direct listing fanfare, a 2019 wave this is not.