Silicon Valley's grand plan to kill IPOs with direct listings has been sidelined by the coronavirus. But experts think the movement is going to rebound post-crisis. (SPOT, WORK)


airbnb brian chesky

  • Direct listings — an alternative, more streamlined process that companies can use to go public — were gaining favor over traditional IPOs before the coronavirus pandemic slammed the economy and upturned the markets
  • The crisis has throttled the momentum behind direct listings, because it’s basically closed the market for public offerings from tech companies.
  • At least in the near term, direct listings may be less attractive to some companies that previously were considering them, because right now they can’t raise money through them.
  • But many IPO experts remain optimistic about the longer term prospects of direct listings, particular as ways are being considered or developed to allow companies to raise funds through or in conjunction with them.
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Silicon Valley’s assault on a prized Wall Street franchise — the path to the public stock markets — has been put on hold amid the coronavirus lockdowns.

A pack of privately-held tech startups, led by Airbnb, were expected to cause a stir in 2020 by earning their tickers through direct listings, a novel process that bypasses the traditional, banker-run initial public offering. 

Now, with the pandemic raging, Airbnb’s business has been decimated, and the roster of companies planning to enter the public markets — whether through an IPO or any other method — is almost completely empty.

But don’t count direct listings out. 

While they may have to fight harder to gain widespread acceptance when the pandemic subsides, direct listings will continue to appeal to certain companies, particularly in the tech sector, and will reshape the IPO process, markets experts told Business Insider.

Even some bankers expect direct listings to be here for the long run — despite their grand entrance being delayed by circumstances. 

“The direct listing trend is one that we think will continue,” said Nick Giovanni, the co-head of Goldman Sachs’s global technology, media and telecom group, who describes himself as a supporter of innovations such as direct listings.

Direct listings offer a cheaper way of going public

Direct listings offer companies a streamlined, less costly way of going public that avoids the various steps of an IPO, such as having executives embark on a travelling roadshow for investors and hiring investment bankers to underwrite the offering and find buyers for the shares.

In a direct listing, companies simply list their shares on the open market and sell them directly to public investors. While companies still hire investment bankers, they tend to pay the bankers much less than they would in a traditional IPO. And with direct listings, there’s no lock-up period: insiders can sell shares right after their company’s stock gets listed, rather than having to wait as long as six months, as they would in a typical IPO.

“I think it is a really interesting option for a lot of companies,” said Rick Kline, a partner at Goodwin who co-chairs the firm’s capital markets practice and helps tech companies prepare for IPOs.

The big drawback of direct listings is that under the current rules, companies can’t raise money through them. Investors in the company can sell their shares through the process, but the company can’t sell any out of its own treasury. As the economy worsens, that may make direct listings less viable for cash-strapped startups.

A special panel of venture capital investors organized by Business Insider offered a mixed outlook for direct listings, when queried about the topic recently. Six of 17 VCs on the panel expressed a positive outlook for direct listings, even in the current economic environment, while 5 VCs were bearish on direct listings as an option for startups (and six VCs said they didn’t know).

Direct listings were gaining momentum until the crisis struck

Bill Gurley, the high-profile partner at venture firm Benchmark, has become something of an evangelist for direct listings, holding a conference last fall to promote them and repeatedly boosting them on Twitter and in public appearances.

Thus far, there have only been two notable direct listings in the US — Spotify’s offering in 2018 and Slack’s last year.

But with Gurley leading the charge, direct listings seemed to be gaining favor in Silicon Valley. IPO experts widely believed that a trickle of tech companies would use the process to go public this year and that would open up the floodgates. Gurley himself said in January he knew of four to seven direct listings that were in the works.

Stewart Butterfield

“Direct listings were gaining a lot of momentum,” Kline said.

With the economy in freefall and the markets in turmoil, very few public offerings of any kind are being done right now. There have been just four US IPOs so far in April, none of which involved a US tech startup. By contrast, in the first three weeks of April last year there were 19 IPOs, including Pinterest and Zoom.

Many public offering experts don’t expect the tech IPO market to rebound until this summer or early fall at the earliest. Even if it does, many companies that had been planning to debut this year may not be able to go out because of the hit they’ve taken to their businesses. Public investors are likely going to want to see at least a couple quarters worth of post-crisis results before they’ll buy into their offerings, the experts said.

Just a few months ago, Airbnb was widely believed to be planning a direct listing for later this year. But with governments around the world limiting the movement of their citizens to prevent the spread of COVID-19, the travel sector has been slammed, and Airbnb has seen a surge in cancellations and a dearth of new bookings. In recent weeks, it’s raised $2 billion in an effort to shore up its coffers.

“We were preparing to go public. We had a plan, and I felt great about the plan. And all of a sudden, it felt like I was captain of the ship and a torpedo hit the side of the ship,” Airbnb CEO Brian Chesky said on the Masters of Scale podcast recently.

Chesky did not elaborate on the status of those plans, but many observers do not expect Airbnb to go public this year. 

“You can get the best of both worlds”

In addition to not wanting to miss out on the opportunity to raise cash, companies that may have been interested in direct listing might avoid them now because the process is still unusual, said Goodwin’s Kline. With the markets so choppy, many may just stick with the tried-and-true traditional IPO, he said.

“In the current environment, I would be surprised if the first few companies that reopen the IPO market looked to do a direct listing,” Kline said, continuing, “it has to be less attractive than six months ago.”

But direct listings are likely to regain their attraction and momentum once the crisis passes and companies’ businesses rebound, experts said. A key to that could be figuring out how startups can raise money in or in conjunction with a direct listing, they said.

Last year, the New York Stock Exchange asked the Securities and Exchange Commission to allow companies to sell shares from their treasury in a direct listing. Although the SEC initially rejected the proposal, the NYSE amended it and the agency is now mulling whether to approve it.

“There would be a number of companies that would be interested in that,” should the SEC allow them to raise money in a direct listing, Goldman Sachs’ Giovanni said.

Meanwhile, several IPO experts have discussed a possible workaround that would involve a company selling shares to certain investors in a so-called private placement immediately before or at the same time as it went through a direct listing.

“You get the best of both worlds,” said Duncan Davidson, a partner with Bullpen Capital.

For all its business problems right now, Airbnb could help pioneer that model, Davidson said. Once the epidemic passes, people are going to want to travel again, likely by car to places far and wide, he said. That’s likely to result in a huge surge for Airbnb, as people seek out cheap places to stay, he said.

By early next year, Airbnb’s business should be really strong, and the company should be well positioned to go public. The hybrid listing model would be an ideal vehicle to do that, he said.

“If Airbnb goes out and proves this model works, a lot of other companies will follow it,” Davidson said.

But direct listings are likely to pick back up even if Airbnb isn’t a part of the post-crisis vanguard, the experts said. And as they gain in popularity, they’re likely to influence how traditional IPOs are conducted, putting pressure on investment bankers to lower their fees and to reduce or eliminate the lock-up periods.

“The impact of those direct listings on the way IPOs are done I don’t think will go away,” Kline said.

Business Insider’s Meghan Morris and Dakin Campbell contributed to this report.

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SEE ALSO: Airbnb is facing an unprecedented threat from the coronavirus. Here are the veteran execs on Airbnb’s board of directors who will be critical to CEO Brian Chesky’s success or failure.

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