Stewart Butterfield, the CEO of Slack [Photo: Christophe Morin/IP3/Getty Images]

Slack Direct Listing

Spotify’s trend of direct listing is changing how IPOs might function for Tech Unicorns

Slack, which operates a popular workplace instant-messaging and collaboration app, is likely to debut a direct listing in June, 2019 via the NYSE it was revealed in early April, 2019.

I’m happy for Slack, it’s one of the best things the internet has facilitated in recent memory. Is the IPO process ripe for disruption? Spotify and Slack are pointing to a new trend of direct listings. These aren’t the IPOs your Dad taught you about.

While Spotify was not the first company to take such an approach, it was by far the most prominent one. How do you go public without being an IPO? The plan for direct listing will potentially make Slack the second big technology company after Spotify Technology SA to bypass a traditional IPO.

Cash Positive Direct Listing IPOs

Spotify or Slack don’t need to raise capital, so they did not need to go out to banks. They are letting the market decide! Slack has recently filed paperwork for its own direct listing.

Stewart Butterfield, CEO of Slack, talks during the business messaging company’s event in San Francisco | Thomson Reuters

A direct listing is a riskier kind of IPO for a Tech Unicorn. Spotify and Slack are part of a new trend that cut out the banks from the IPO process. In a direct listing, a company’s shares are simply just listed on an exchange.

Direct Listings could Disrupt Traditional Bank led IPOs

As there is no prior book-building activity by financial advisers, there are no lock-up periods or other price stabilization mechanisms in place.

  • A direct listing enables a company to use the liquidity from the shares to acquire other companies.
  • It’s a fundamentally different business model that could impact the entire future of IPOs.

Companies avoid paying fees by direct listing shares, but there are some risks. The cutting out the banks part though, you have to admit, is appealing. The Wall Street Journal published a great article on this, but it’s behind a paywall.

Why Spotify and Slack went Direct Listing

TechCrunch summarized 5 main reasons why a company might want to go with a direct listing IPO (as in the case of Spotify). They are:

  1. List Without Selling Shares– Spotify has plenty of money with $1.3 billion in cash and securities (Slack has around $900 million btw), has no debt since it converted that into equity for investors, and has positive free cash flow
  2. Liquidity — Investors and employees can sell on the public market and sell at a time of their choosing without investors shorting a lockup expiration, while new investors can join in
  3. Equal Access– Bankers won’t get preferred access. Instead, the whole world will get access at the same time. “No underwriting syndicate, no limited float, no IPO allocations, no preferential treatment”.
  4. Transparency — Spotify (and maybe Slack) want to show the facts about their business to everyone on their own terms, rather than giving more info to bankers in closed door meetings
  5. Market-Driven Price Discovery — Rather than setting a specific price with bankers, Spotify will let the public decide what it’s worth. “We think the wisdom of crowds trumps expert intervention”

Economic Markets Adjusting to Peer-to-Peer Market Sentiment Impact

A direct listing differs from a traditional IPO in that it cuts out the usual underwriting process that involves lining up investors ahead of time and lets the open market play a larger role in setting the share price. Well, guess what?The open market sounds a lot more like the peer-to-peer emphasis cryptocurrencies have, instead of big banking.

When your traditional model of what an IPO is is being disrupted, it’s super interesting.

Here shares will be offered directly to public investors without any Wall Street banks underwriting it. Is that a good or bad thing? The performance of Spotify and Slack is like a pilot for the future of how unicorns continue to monetize. The disasters of companies like Snap Inc. and Lyft on the stock-market, I’d argue, point to the need for a new model. Hype, sentiment and a story aren’t enough to be “ready” for an IPO.

Cutting Out the Middle Man

A direct listing for Slack means it will allow Slack to avoid paying the hefty fees that are involved in the process, and also can give shares more liquidity by avoiding the lock-up periods associated with going public through a traditional IPO.

A direct listing is great for a company that simply wants to reward longtime employees and its longtime investors with a bit of liquidity and take a chance on market sentiment for its product and business.

Slack was valued at $7.1 billion by private investors in 2018. Slack has name recognition and a private-market valuation that demonstrates that and is super popular among Millennial startups. From Facebook Workplace to Microsoft Teams, nobody has been able to touch it.

The Future is Bright for Direct Listing IPOs

Spotify and Slack aren't unique, there will be many more direct listings. Millennials simply don’t trust Wall Street like they used to. Millennial-led companies which are cash positive have real incentives to test the direct listing IPO market.

Choosing the New York Stock Exchange likely gives the company some comfort, because unlike the Nasdaq, the NYSE has designated market makers on the floor of the exchange who can manage prices if the stock becomes really volatile in its first day of trading, according to WSJ sources.

2019 is the Best IPOs Moment in Many Years

2019 is a pivotal year for the future of IPOs, so Slack is going to give Wall Street an exciting summer. While I think the Lyft and Uber IPOs will be a mega bust, some of this crop should be winners:

  • Lyft
  • Uber
  • Pinterest
  • Postmates
  • Palantir
  • Airbnb
  • Slack (direct listing on NYSE)
  • Robinhood
  • Casper
  • Cloudflare
  • WeWork
  • Rackspace

Slack’s listing plans coincide with possible IPOs this year by other marquee Silicon Valley companies and how it fares will provide a valuable alternative path for future Tech IPOs that are part of a new wave of Millennial-led companies. Lyft’s IPO price was grossly over-valued and the market is punishing it for that. Hopefully Uber won’t make the same mistake.

Slack already raised $427 million in 2018, so technically it didn’t need to go IPO at its 10-year mark of 2019, but it will mid-year. Slack is an exceptional company that is revolutionizing the way people collaborate, and it might change how we view the direct listing IPO forever.