Slack Plans to Follow Spotify on Unconventional IPO Route
wsj.com
wsj.com
I would imagine that most companies that are gearing up for IPO feel well-known to the tech community, but are mostly unknown to the outside world.
For example, with Slack, if I asked my non-tech friends, most would would have no idea what that is.
I would have thought the same, but I spent the past winter holidays speaking to a number of interested friends / family members about our company, which is fairly technical. The first question I always asked as a lead-in was, “have you ever heard of or used Slack?”
The answer was yes across the board.
They’re the fastest growing SaaS company ever. Don’t underestimate the power of exponential growth over the period of even a few months.
The amount of money a company potentially loses is massive.
Increasingly though these entities are more interested in direct connections with management teams, thus cutting out middle men like Goldman Sachs.
This dynamic is what drives entities like Goldman Sachs to invest in late stage rounds so as to build a deep understanding of the business prior to IPO.
It’s so great that more companies are going “straight to the money”.
Deep well, not monopoly.
Update: By also doing a direct listing, shareholders, pre-IPO employees included, won't have to wait 6 months to sell their shares.
https://www.bloomberg.com/opinion/articles/2018-01-16/spotif...
To me it just seems like a form of fancy marketing.
To me, ten percent seems pretty conservative, so I'd say it's a safe bet Spotify saved money. I expect Slack would not do the direct listing if they didn't also expect to save money on the deal.
Since Slack has tons of cash in the bank, they don't need to raise any capital - just provide liquidity to shareholders/employees.
So this makes 100% sense for them. If they need to raise money later, they can do so at the market-clearing price, rather than the low-ball number that the investment bankers usually give them so they can allocate "instant profit" IPO shares to their wealth management clients...
https://techcrunch.com/2018/08/21/slack-confirms-it-has-rais...
In previous rounds, Slack’s CEO and co-founder Stewart Butterfield has said that the company raises “opportunistically.” That is, it doesn’t have to raise money because it’s already making money and still has some in the bank, but as long as VCs are knocking, it’s worth taking the funding if it’s coming in at good valuations because you never know what might lie ahead.
https://bits.blogs.nytimes.com/2015/04/16/is-slack-really-wo...
And as a board member and a C.E.O., I have a responsibility to our employees, to our customers. And as a fiduciary, I think it would be almost imprudent for me not to accept $160 million bucks for 5-ish percent of the company when it’s offered on favorable terms. We don’t have an immediate use for that money. But it increases the value of our stock and can allow potential employees to take our offers, and it reinforces the perception for our larger customers that we’ll be around for the long haul. All of that stuff.
Can't find the study at the moment, but it basically showed first-time VCs like a pop. Long-time VCs don't care. For an investor holding through an IPO, the dilution from the pop far outweighs the positive press from it. Those headlines sit comfortably in a Fund II pitch deck.
https://www.bloomberg.com/opinion/articles/2019-01-11/direct...
Why does it cost so much to IPO?? $36 million for a cheap IPO seems excessive.
And I'm saying they wouldn't have to be if it were not for a convenient relationship between the SEC and major investment banks. I mention ICOs to highlight the difference in treatment. There is something in between shady ICOs and hugely expensive IPOs and the banking industry has very little interest in discovering what that is because their salaries depend on it.
I think my most basic point is just "It could be cheaper to raise money but investment banking prices are held artificially high through regulatory intervention". Make of that what you will.
When you're deploying a small army of lawyers, investment bankers and accountants, the costs tend to add up really quickly. To respond to your specific question about the cost of the IPO in proportion to its size: there is a floor on how expensive a traditional IPO will be when all IPOs have a certain minimum amount of due diligence required. Even if the IPO itself is not remarkably large, there is something of an "activation level" that you'll pay just to initiate the process and get everything moving.
And why then are private funding rounds so much cheaper to get done? Diligence still has to be done for private funding. Why is more diligence required for an IPO?
> Isn't the concern here mostly how the stock should be priced?
Yes, and this is extremely nontrivial :) There are many competing incentives and metrics to evaluate. Public investors want to buy at a discount relative to future growth. The company wants to get as much money as possible. Investment banks don't want to be associated with fraudulent or poor performing IPOs. They also want to ensure there is sufficient liquidity to make the market move on the new security when it's listed while making everyone happy. And aside from these logistical obstacles, you have the standard financial problem of price discovery and valuation for a security which is fundamentally new.
As for these questions:
> And why then are private funding rounds so much cheaper to get done? Diligence still has to be done for private funding. Why is more diligence required for an IPO?
Private funding involves proportionately greater amounts of money from fewer overall investors. It does not as a rule involve the general investing public. By law public investments must be secure against a number of risks that can be accepted in private investments. You're offering a novel security to a large population of amateur investors who cannot tolerate as much risk as professional investors who either represent institutions or are independently wealthy. Insulating IPOs from that kind of risk requires a lot of due diligence.
To simplify quite a bit: You're going to need to make sure the earnings it has aren't juiced, that it owns what it says it does, that it isn't going to violate any agreements it has, and that the people running it aren't questionable.
When we zoom in, recognize that you need actual evidence to move forward - and that's way more expensive than you'd imagine at first glance.
It isn't enough to write "Jim said we own a plot of land with nice trees", either. To unpack that one element of due diligence, you'll need the deed to the land, the land registry document confirming ownership, a report from an arborist attesting to the fact that the trees are of the right quality and type, an accountant's quality of earnings determining the value of the tree-fruit, etc.
Why not let the market decide?
If not, then switch to Firefox, and use Container Tabs. :-)
Then again, considering Slack's memory usage, that might not be such a great idea...
1. Raise money for the company;
2. Let existing investors sell; and
3. Jumpstart price discovery by stoking investor interest on the secondary market.
These were done simultaneously. That made IPOs risky and expensive and, in turn, IPO bankers rich.
Nowadays, the venture secondary market is thriving. Something like $4 billion of Spotify stock traded in the weeks preceding its IPO. That--singlehandedly--removes the urgency from points 2 and 3.
Raising money is hard. But not as hard as Nos. 1 through 3 together. No. 1 alone is less risky, and thus less expensive, than a traditional IPO. For venture-backed companies worth over $1 billion, the only reason to pursue a traditional IPO is because (a) management is currying favors with bankers or (b) they're trying to pull a fast one on public investors over a wrecked private market valuation.
With the amount of RSUs tech companies are giving these days, the pressure to IPO is not negligible.
There are solutions. They're messy, but they exist. In any case, both a traditional IPO and side-winding IPO address RSU-holders' problems. And at the end of the day, having sat in on more than my fair share of underwriting discussions, employees' preferences never factor into timing nor strategy. If employees need cash, companies have an easier way to solve that problem.
I’d say many companies who don’t have the same level of mindshare and brand awareness, perhaps?