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During the boom of IPOs, fast-growing companies go public for one reason: to raise money. Lyft, Pinterest and Zoom are just a few of the closely watched start-ups that have made their debut in recent months, collecting billions in public markets to fuel their growth.
But now, there is a new twist: to become public without any fundraising.
Mail giant Slack asked for a direct list last week. It is a much cheaper method of advertising to the public in which only existing shares are sold, no money is collected for the company and the underwriters who help with the marketing of the transaction are removed. But to have the chance to achieve a direct registration, companies must cross a higher bar. They must be willing to say that they do not need more money, that they do not need to tweak their marketing and that they are still worth it. worth to be bought. And there are not many candidates entering this pool. "In summary, the actual number of companies that can handle a direct list is really small, maybe even 10," says Barrett Daniels, partner at Deloitte & Touche.
Slack follows a small group of other companies who have chosen this path. The only big format is Spotify, which made a direct list last year. And although it was once considered a method used by small businesses, Airbnb, worth $ 35 billion, would also consider direct enrollment later this year. The agreements were made against the backdrop of a surge in private financing that has allowed some aging giants to spend a lot of money, but have kept their investors and their first employees stuck in their paper wealth. Now that markets are reaching new heights, some are looking for money to buy stocks.
And at a time when Silicon Valley startups are implementing a "Fail Fast" directive, companies that are not looking for money are desperately scarce. But in 2018, Slack reported cash of about $ 841 million, which allowed it to last another 8.6 years at the current rate of cash consumption (at the time, in present-day Silicon Valley). Its sales are also relatively good, with growth of about 82% in 2018, while losses were reduced. Similarly, Spotify was not desperate for cash: it was a positive cash flow when it was quoted directly. (This is a stark contrast to companies like Uber and Lyft, which are growing rapidly but have less time to realize their vision without fundraising.)
"Direct SEO companies are just companies that do not lose money or grow phenomenally," says Elliot Lutzker, a partner in corporate and securities law at Davidoff Hutcher & Citron. In the absence of subscribers, it is also useful to be a renowned brand by giving companies reasonable badurance that they will have enough buyers in the public sphere, says Daniels. In the case of Spotify's IPO, the Securities and Exchange Commission requested badurances that the banks' advisors involved in the transaction were not acting as underwriters and were seeking to sell shares to clients. . Meanwhile, the typical week-long roadshow has been largely relegated to a single day.
Eric Jensen of Cooley LLP, however, believes that the increase in the number of mega listings of direct listings may indicate that more and more companies are creatively proposing their actions in the future. In a conversation with TechCrunch in January, Spotify's CFO said that if the music company listened to more funding, it would do so via a subsequent direct offer that would produce better effects at a lower cost to the company. Indeed, it has been a long time since start-ups and Wall Street have long struggled against the price of an IPO, which makes it a space conducive to disruption. "It's an art, not a science," says Jensen.
And it is certainly not lost sight of the startups that go public via IPO sell a lot on Wall Street. Subscription fees for companies that raise more than $ 150 million typically account for 7% of the supply, said Professor Jay Ritter of the University of Florida. Second, banks tend to allocate IPO shares to their "most profitable customers," says Ritter. "This allocation discretion encourages hedge funds and mutual funds to pay excess fees on other transactions, for example by paying 5 cents per share instead of 0.5 cents per share. . Surplus commissions are known as soft dollars and represent a major source of profits for investment banks, "he said. Subscribers sell new shares to institutional investors at prices lower than those that would have been set in public markets – hence the infamous and controversial public call for "pop" savings. While Wall Street can argue the difference between the bid price and the first day of closing value will bring more institutional investors, companies that have become public could argue that it leaves capital on the table.
No doubt many other startups will look at Slack's offer if the direct route is really the best.
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