Erasmus Elsner
Apr 27 · 4 min read

Hi,

so after last week’s Zoom and Pinterest IPO, we had another really eventful Friday yesterday:

Apologies in advance, this post got longer than usually, but there’s a lot of great material in it imho.

Let’s first talk about the elephant in the room, the Uber IPO pricing. It’s markedly below the $120bn that was being discussed for a long time. However, at this point we all didn’t expect it to be eye-popping. Clearly the Lyft IPO and the post-IPO trading of Lyft is partly to blame for this, as well as the Uber S-1, which didn’t blow anyone expectations. So the more interesting part about this news, is in my opinion the $500m investment from PayPal, which is making a major marketplace play with this.

Remember that PayPal had a love-hate relationship with one marketplace, Ebay, throughout its entire firm history. In the early days, it scaled by targeting its product to the Ebay marketplace. It was for a long time not clear whether Ebay would not just crush them by developing their own payment solution. If you haven’t heard about this, I can highly recommend this Masters of Scale episode where Peter Thiel goes into the details of this. Fast forward, Ebay later acquired PayPal and then later spun it out. Now, with the Uber investment PayPal is getting involved with a major marketplace again.

Why does the PayPal investment make a lot of sense to me? Well, Uber is a high-frequency, low-dollar amount marketplace. Meaning that it has lots of transactions at a low price point (I’ll make a chart about this some other day). So why does this matter? Well, because this is where you have to process transactions at scale and where established payment providers can really shine. PayPal is already the main payment processor for Uber in the U.S. and the investment may help PayPal to push out other payment providers, like Ayden.

Now, let’s turn to Slack. This one I’m really excited about. Not really because of the company or their product. I don’t actually use their product anymore, since their App uses Electron it is not much more than a Chromium browser with several loaded webpages, >3.5GB in memory: you can literally roast a chicken over your macbook… But what excites me about this is that they are the second large tech company after Spotify to file for a direct listing. So what does this mean?

So remember when I talked about the IPO pop of Zoom and Pinterest last week. These were traditional IPOs, where new shares were issued and sold through an underwriter. When Forbes covered the IPO pop, they reported about the new net worth of Eric from Zoom and the VCs shooting unicorns. But this was missing the point, since founders, employees and VCs are all typically still subject to vesting periods after the IPO. So they didn’t cash out last week. Last week’s financial windfall was actually occurring at the underwriter level, namely the investment banks. The investment banks bought or underwrote the new shares in Pinterest and Zoom at the firm commitment price and then sold this inventory during the pop.

Now contrast this with a direct listing. Here, the company sells existing shares and does not require an underwriter to purchase the shares. The company does not get new money in, as an (immediate) result of a direct listing. As the S-1 of Slack shows, Slack is sitting on $841m in cash, so despite its massive burn rate it still has lots of runway. And as a result, the direct listing of Slack doesn’t provide the investment banks with a windfall, they only get some small fees for market making in the secondary market. The full financial windfall from the IPO goes to founders, employees and the VCs. In the case of Slack, the VCs are Accel and Andreessen Horowitz, which have rolled over their shares over from the initial version of Slack before the famous pivot from the gaming company “Tiny Speck”.

I discussed direct listings with Alex Konrad from Forbes back in February over Twitter, as he always described direct listings as solely a way to for the founders, employees and VCs to get some liquidity. While the immediate liquidity is definitely important, there’s much more to it: the company sets a public price history on the basis of which it can later raise more money without underwriters. So in my opinion this direct listing approach is disrupting tech IPO banking as we have known it for decades.

This is, if Slack actually goes public. Dan Primark yesterday rumored that a large enterprise software company may swoop them away before the IPO (much like SAP did with Qualtrics last November). No inside info here.

This is it for today.

Take care and ttyl,

Erasmus

Note: I do voice recordings of these posts while walking on Sand Hill Road (not really SHR, but some busy street). Check it out if you don’t like to read.

Sand Hill Road

A place to think about startups, venture capital and tech

Erasmus Elsner

Written by

Thinker on all things tech, finance and law

Sand Hill Road

A place to think about startups, venture capital and tech

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