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Direct Listings, Airbnb, And Why Losing Money Is Bad

Morning Markets: Direct listings are hot, but will they work for as many companies as VCs hope?

According to the inimitable Dan Primack, some leading private investors are prepping a confab to discuss direct listings. According to the Axios report, “[t]here’s a growing investor consensus that the traditional VC-backed IPO process is antiquated and broken.”

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The argument that traditional IPOs misprice technology firms is hard to argue against. This morning shares of Datadog are up around 50 percent. It’s the company’s first day as a public firm. It could have raised more money in its offering if its bankers were better at their jobs. But, instead, the company is now public but not as wealthy as it could have been for the dilution it endured.

Direct listings are an attractive alternative. By merely starting to trade, tech companies powered by oceans of private capital can get out the door without running into a pricing problem. No more guessing the fair market price; direct listings launch you at that fair value.

But there are complications. This morning while taping Equity with my friend Kate Clark and our guest, Kleiner Perkins’ Mamoon Hamid, we riffed on the matter. I posited that many unicorns — i.e. our IPO or direct listing candidates — are not in the financial situation to execute a direct listing. As such offerings generate no new capital for the listing company, I figured that traditionally unprofitable unicorns would need to raise capital in the regular fashion, precluding them from direct listings.

Instead, unprofitable unicorns would need to raise new cash by selling a block of shares to select investors at a set price before trading publicly.

Hamid, however, made a good point that there is so much late-stage private capital in the offing that late-stage unicorns could easily raise $100 million or $200 million, and then direct list. This method would cut out some of the banks, some of the fees, and some of the faff. I am struggling to find something bad to say about the argument, other than that I do feel that direct listings from companies that are better-known will probably do better than direct listings from companies that aren’t.

Airbnb, for example, is a prime direct listing candidate. It’s valuable, well-known, and well-capitalized. What’s the chance that Airbnb needs to raise a chunk of money in an IPO to survive? Slim, I think.

In a sense, it could become a negative signal if a tech company goes the traditional IPO route. After all, if the startup in question really is top tier, wouldn’t it just raise a chunk of new cash privately and then direct list?

But what about capital intensive firms that want to debut at a high price while raising lots of fresh money. Asset-light but cash-destructive companies like Uber and WeWork fit this mold. They are examples of companies for whom direct listings are uniquely unsuited; this type of company needs to raise lots more to keep going.

But if our small joke about direct listings possibly morphing into the Cool Kids IPO holds true, we can see how the supporting argument could form. After all, it seems that lately the more money a company has needed to raise in its traditional debut the more issues that there have been. SmileDirect makes this point.

This year, at least, old-fashioned IPOs are still perfectly acceptable. The recent, if perhaps underpriced, Ping Identity, Cloudflare, and Datadog offerings make that plain.

Illustration: Dom Guzman.

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