Six leading IPO experts talk about the revolution in how tech startups go public
by Arman Tabatabai
Last April, Spotify surprised Wall Street bankers by choosing to go public through a direct listing process rather than through a traditional IPO. Instead of issuing new shares, the company simply sold existing shares held by insiders, employees and investors directly to the market – bypassing the roadshow process and avoiding at least some of Wall Street’s fees. That pattens is set to continue in 2019 as Silicon Valley darlings Slack and Airbnb take the direct listing approach.
Have we reached a new normal where tech companies choose to test their own fate and disrupt the traditional capital markets process? This week, we asked a panel of six experts on IPOs and direct listings: “What are the implications of direct listing tech IPOs for financial services, regulation, venture capital, and capital markets activity?”
This week’s participants include: IPO researcher Jay R. Ritter (University of Florida’s Warrington College of Business), Spotify’s CFO Barry McCarthy, fintech venture capitalist Josh Kuzon (Reciprocal Ventures), IPO attorney Eric Jensen (Cooley LLP), research analyst Barbara Gray, CFA(Brady Capital Research), and capital markets advisor Graham A. Powis(Brookline Capital Markets).
Thoughts & Responses
Josh Kuzon
Josh Kuzon is a Partner at Reciprocal Ventures, an early stage venture capital firm based in NYC focused on FinTech and blockchain. An expert in payments and banking systems, Josh is focused on backing the next generation of FinTech companies across payments, credit, financial infrastructure, and financial management software.
I think the implications of direct listing tech IPOs are positive for venture capitalists, as it creates a channel for efficient exits. However, the threat of low liquidity from a direct listing is significant and may ultimately outweigh the benefits for the listing company.
Direct listing tech IPOs offers a compelling model for company employees and existing investors in pursuit of a liquidity event. The model features a non-dilutive, no lock-up period, and underwriting fee-less transaction, which is a short-term benefit of the strategy. Additionally, as a publicly traded company, there are longer-term benefits in being able to access public markets for financing, using company stock to pay for acquisitions, and potentially broaden global awareness of an organization. However, these benefits come with tradeoffs that should not be overlooked.
One concern is the circular problem of liquidity. Without a defined supply of stock, it can be difficult to generate meaningful buyside demand. A floating price and indeterminate quantity will dampen institutional interest, no matter how great the listing company may be. Institutions require size and certainty; not only do they desire to build large positions, but they need to know they can exit them if needed. Without consistent institutional bids, sellers are less motivated to unwind their stakes, for fear of volatility and soft prices.
I believe institutional investors and their brokers are crucial ingredients for a properly functioning public equities market structure. They help make markets more liquid and efficient and serve as a check on companies to drive better business outcomes for their shareholders. A lack of institutional investors could be a very expensive long-term tradeoff for a short-term gain.
For companies that have significant brand awareness, don’t need to raise additional capital, or already have a diverse institutional investor base, the direct listing model may work out well for them. Few companies, however, fit this profile. Many more will likely have to work a lot harder to persuade the capital markets to participate in a direct listing and even if successful, may ultimately come back to bite them as they evolve and require additional capital markets cooperation.
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