The Direct Listing and the Future of Going Public

By Amanda Cardini, Editor-in-Chief

Last year digital music platform Spotify went public in a bold, unconventional way. The company filed its IPO through direct listing rather than through the traditional method of using financial experts to underwrite the IPO. The move set a precedent for future tech firms, with the media crediting Spotify for “reinventing the IPO” and “disrupting Wall Street.” Less than a year later, software company Slack announced that it plans to follow suit. Reports surfaced in January 2019 of the “collaboration hub” maker’s goal of going public through direct listing by the end of the year. Speculation is building that other large tech companies like Uber, Lyft and Airbnb will do the same.

Investopedia states one of the main benefits of traditionally using IPO underwriters is that it provides companies with the advantage of opening at a realistic price. It also provides some initial sales, as underwriters can buy from the company and sell shares to other investors. However, these benefits come at a cost; the professionals charge a percentage fee for their services, which allows them to pocket a portion of the earnings from the IPO.

CEO of Spotify, Daniel Ek. Courtesy of the Wall Street Journal

A direct listing offers a different set of advantages. The elimination the underwriters means there is no fee charged, which is something many startups want or need to avoid due to their lack of capital. This process also allows the company to set the value of its shares on its own, rather than relying on underwriters to determine it for them. But this method is also accompanied by a general lack of security. The absence of underwriters means that there is no official support for the stock price, which can create doubt in the public. It also means no new shares of stock are issued, preventing the company from raising new capital. The promise of new capital is often a primary reason for going public in the first place.

One of the things that made Spotify’s IPO so surprising is the fact that Spotify is no startup. The company launched in 2008, giving it a full 10 years before going public in 2018 during which it acquired over 4,000 employees and close to 200 million monthly active users. Spotify’s public shares opened at $165.90. Today, its share price is listed at $143.49.

Slack is in similar boat, with close to 2,000 employees and over 10 million daily active users. You may be familiar with the workplace chat creator that officially describes its mission as eliminating the need for email. Many companies now use Slack as their communication platform, as evidenced by the fact that the company had over 500,000 enterprise customers at this time last year.

A look at Slack’s chatrooms. Courtesy of Slack

At the last count, Slack seems to have an uncontested hold over the market. Despite gaining ground recently, the company’s biggest competitor, Microsoft Teams, still reports a smaller number of users by a couple hundred thousand. Slack’s next biggest competitors, Facebook’s Workplace and Google’s Hangouts, are not as close to closing the gap. While these alternatives may offer some advantages (such as Microsoft Teams, which comes as a free version in the Microsoft 360 suite, eliminating the need to switch to a new product for many Microsoft-loyal consumers) Slack has still continuously come out on top.

It will be interesting to see whether an IPO accelerates this success. When looking at Spotify’s share price alone over the last year, it can seem as though perhaps the company has flopped since its direct listing. But Slack can hardly be compared; although both companies are within the tech industry, Spotify deals with artist contracts and royalties, making it a much more complex, and potentially less lucrative, business.

Slack on the other hand has simply created a good product that many companies need and love for its user-friendliness. It was also arguably the first of its kind to really catch on among businesses of all types as a necessity for workplace communication. With competitors that are still struggling to catch up, it seems likely that the company will see continued success after going public. And if they do, it likely won’t be long before Uber, Lyft and Airbnb follow suit. By proving that there are benefits to be had from a direct listing, these companies may just be changing the game for any public listing hopefuls.

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