Dec 11, 2018

Spotify inspires unicorns to ponder going public via direct listing

Illustration: Sarah Grillo/Axios

After Spotify successfully went public in April via a direct listing, we didn't see any copycats. But that might be changing.

The big picture: Recode's Teddy Schleifer reports that both Airbnb and Slack are seriously weighing the prospect of direct listings, having gone so far as to have reached out to top Spotify executives for insights. We also hear that Pinterest is among several other "unicorns" to have at least kicked the direct listing tires.

Airbnb and Slack make sense in that they each have CEOs who like to buck conventional wisdom but, as Schleifer also points out, each has challenges when it comes to a direct listing:

  • Airbnb makes more sense on paper, but a historical lack of employee liquidity means its cap table needs a serious dust-busting. Don't be surprised to see it do some sort of major secondary financing if it opts for a direct listing — otherwise, it could experience a first-day employee sale stampede that tramples the share price.
  • Slack makes less sense in that the Spotify model was partially predicated on being a household name, consumer-facing product. But Slack's B2B SaaS model should be pretty familiar to public equities analysts and investors, which is important since there wouldn't be an investment bank holding Slack's hand and telling its story.
  • It's also worth remembering that direct listings don't create a balance sheet windfall, and we don't know the cash position of either company.

One big key for Spotify seems to have been its public investors day, which any new issuer is likely to ape. You might also see them take a new outside investment that has a multi-year lockup, as Spotify did with Tencent. That latter move results in new dilution, but also helps provide some shareholder base stability.

  • For context, Spotify's listing reference point was $132 per share. It hit a first-day high of $165.90 before settling down to close at $149.01, and closed trading yesterday at $130.79 per share.

The bottom line: It's still unlikely that either Airbnb or Slack will deviate from market norms but, if anyone's going to do it, they're among a small group that makes sense.

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Illustration: Sarah Grillo/Axios

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