What Slack’s Direct Listing Can Teach Us About WeWork’s Valuation

Morning Markets: Let’s talk about Slack, direct listings, secondary market valuations, and WeWork’s impending public valuation.

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Slack’s direct listing wound up going just fine. The work productivity services company set a reference price of $26 per share, trading between $34.81 and $42 per share since. Currently, worth $37.50, Slack is valued at $18.9 billion according to Yahoo Finance.

For direct listing detractors, it’s hard to fault Slack’s public debut. The firm is now public with little fuss and a strong valuation compared to its final, private-market price of a little over $7.1 billion set during its mid-2018 Series H. But is that the figure against what we should compare to Slack’s newly-public valuation?

Probably not, and that’s where the fun begins. Slack had a different price tag on the secondary markets compared to how its investors valued the firm. Here’s CNBC from April of this year, mere months before the direct listing:

As Slack gears up to hit the markets through an unconventional direct listing, stock activity is increasing on the private markets at a price that values the company at nearly $17 billion, according to Forge Global, a firm that matches private companies and their employees with investors.

In Slack’s last financing round in August, the company sold shares at $11.91 apiece for a valuation of $7.1 billion.

Now I am not entirely sure how the $17 billion figure was calculated, and it’s not clear if the secondary market valuation and Slack’s new, public valuation are counting shares the same way. We cannot, therefore, directly compare the firm’s secondary market value and its new, public value.

But, CNBC notes that Slack was trading for $28 per share on the secondary market. That’s above its direct listing reference price ($26), and below its stable-ish public market value in the low 30s per share ($37.50 before trading today).

So, Slack’s secondary market transactions were pretty good, really, at determining the value of the company compared to where it would float. That’s not to say that Slack is correctly priced today, indeed the firm is valued at 35 times its ARR (most recent quarter revenue time four). That may be a bit high!

But what we care about is that Slack has shown that there is at least some wisdom in secondary market prices for companies. So let’s extend the point into an analogy.

WeWork

I was offline for a bit to get married, missing the chance to write about some excellent valuation information concerning WeWork from The Information. Here’s the core bit:

WeWork’s stock on the secondary market […] has been hovering at levels that would value the firm between $21 billion and $23 billion, according to brokers. That’s a drop of around 30% in six months, and also less than half the level at which it recently raised new funding.

You can see where we’re going with this.

I do not know how to value WeWork for a few reasons. It’s hard to tease out how much cash the firm’s completed, and at-capacity buildings generate (more on the issues with that math here). And given that, it’s impossible to tell how profitable WeWork’s business is, as I think we wind up with expansion costs murking up the operating results.

SoftBank has a guess concerning the valuation of WeWork. And, as we can see from the above quote, secondary market investors have their own figure in mind. What Slack’s direct listing hints at is a connection between the value set by secondary market investors and what public market investors (I presume those circles overlap) are willing to pay for shares in any particular company.

In the case of WeWork, this tells us a few things. First that secondary markets are willing to pay a premium for WeWork shares compared to its public-market comp, but not as much as its most recent equity investors. That’s both good news for WeWork — there are investors out there hungry for its shares at a price above $20 billion — and bad news, given the gap between its secondary market price and what private investors have paid for its equity.

The secondary market value of WeWork is more bullish than I expected, which is why I wanted to highlight it. Due to congenital pessimism and general lack of mirth, I have mentally valued WeWork closer (in multiple terms) to Regus, a company that is public and operates in a similar (albeit different) fashion. The market is saying that I am overly cautious, at least while WeWork continues to grow at an incredible clip.

I’ll stop there to avoid overloading the Crunchbase News edit team first thing on a Monday, but bear in mind that SoftBank wants to raise another Vision Fund. It’s not going super well, we hear. And nothing helps raise a new fund like liquidity. So there’s pressure on WeWork to go public, and we now know where the battle lines are drawn, in terms of price.

Thanks to Slack’s secondary market record viz its IPO, we can guess where the public markets want to value WeWork. The question then becomes how much can WeWork grow before it goes public, and how high it can push its tradable valuation against its privately-set worth.

We’ll see!

Illustration: Li-Anne Dias.