
Slack Plans to Follow Spotify on Unconventional IPO Route - prostoalex
https://www.wsj.com/articles/slack-planning-to-pursue-direct-listing-11547202723
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joecasson
One of the big roles an Investment Bank plays in organizing an IPO is building
brand awareness and product understanding with potential investors. Places
like Slack and Spotify likely feel that 1) their product has sufficient market
awareness and 2) is fairly intuitive to understand. So, why spend the $$$ on
an expensive middle-man if you don't need it? (Provided that you can hire a
competent legal team to organize the process for you!)

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kevinyun
Is point #1 necessarily true? (Asking upwards, not down)

I would imagine that most companies that are gearing up for IPO feel well-
known to the tech community, but are mostly unknown to the outside world.

For example, with Slack, if I asked my non-tech friends, most would would have
no idea what that is.

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stanfordkid
The key is awareness with large institutional investors which is more about
building trust. The banks have a monopoly in terms of trust with sovereign
wealth funds or mutual fund managers... since they do multiple deals over a
long period of time.. they are incentivized not to screw them on any single
deal.

Increasingly though these entities are more interested in direct connections
with management teams, thus cutting out middle men like Goldman Sachs.

This dynamic is what drives entities like Goldman Sachs to invest in late
stage rounds so as to build a deep understanding of the business prior to IPO.

It’s so great that more companies are going “straight to the money”.

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JumpCrisscross
> _banks have a monopoly in terms of trust with sovereign wealth funds or
> mutual fund managers_

Deep well, not monopoly.

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mrnobody_67
The risk with any IPO where you see a 30-40% pop means the company sold shares
below what they were worth, diluting the cap table more than necessary,
because they needed dollars in the bank.

Since Slack has tons of cash in the bank, they don't need to raise any capital
- just provide liquidity to shareholders/employees.

So this makes 100% sense for them. If they need to raise money later, they can
do so at the market-clearing price, rather than the low-ball number that the
investment bankers usually give them so they can allocate "instant profit" IPO
shares to their wealth management clients...

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misiti3780
how do you know how much cash they have in the bank ?

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jzl
They've said it themselves multiple times:

[https://techcrunch.com/2018/08/21/slack-confirms-it-has-
rais...](https://techcrunch.com/2018/08/21/slack-confirms-it-has-
raised-427m-at-a-post-money-valuation-of-over-7-1b/)

 _In previous rounds, Slack’s CEO and co-founder Stewart Butterfield has said
that the company raises “opportunistically.” That is, it doesn’t have to raise
money because it’s already making money and still has some in the bank, but as
long as VCs are knocking, it’s worth taking the funding if it’s coming in at
good valuations because you never know what might lie ahead._

[https://bits.blogs.nytimes.com/2015/04/16/is-slack-really-
wo...](https://bits.blogs.nytimes.com/2015/04/16/is-slack-really-
worth-2-8-billion-a-conversation-with-stewart-butterfield/)

 _And as a board member and a C.E.O., I have a responsibility to our
employees, to our customers. And as a fiduciary, I think it would be almost
imprudent for me not to accept $160 million bucks for 5-ish percent of the
company when it’s offered on favorable terms. We don’t have an immediate use
for that money. But it increases the value of our stock and can allow
potential employees to take our offers, and it reinforces the perception for
our larger customers that we’ll be around for the long haul. All of that
stuff._

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semi-extrinsic
As per usual, Matt Levine has interesting insights on the possibility of a
Slack Direct Listing.

[https://www.bloomberg.com/opinion/articles/2019-01-11/direct...](https://www.bloomberg.com/opinion/articles/2019-01-11/direct-
listings-are-a-thing-now)

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pwaivers
> "While much of Wall Street missed out on fees from that deal—a typical IPO
> has far more underwriters than a direct listing has advisers—the three were
> paid about $36 million in total for their work on Spotify."

Why does it cost so much to IPO?? $36 million for a cheap IPO seems excessive.

~~~
throwawaymath
Without condemning nor condoning the cost of IPOs in general: it's because
it's very expensive to "make a market" for public consumption of a previously
(ostensibly) unknown security. The modern model of IPOs may not be as
applicable these days due to the rise of private equity, but the essence of
the problem is that you're herding a lot of very expensive cats to do due
diligence on a thing involving a lot of money.

When you're deploying a small army of lawyers, investment bankers and
accountants, the costs tend to add up really quickly. To respond to your
specific question about the cost of the IPO in proportion to its size: there
is a floor on how expensive a traditional IPO will be when all IPOs have a
certain minimum amount of due diligence required. Even if the IPO itself is
not remarkably large, there is something of an "activation level" that you'll
pay just to initiate the process and get everything moving.

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econner
What kind of due diligence is required? Isn't the concern here mostly how the
stock should be priced?

And why then are private funding rounds so much cheaper to get done? Diligence
still has to be done for private funding. Why is more diligence required for
an IPO?

~~~
throwawaymath
It's hard to give a comprehensive answer to your first question since it would
require so much background knowledge of valuation. But in short:

 _> Isn't the concern here mostly how the stock should be priced?_

Yes, and this is extremely nontrivial :) There are many competing incentives
_and_ metrics to evaluate. Public investors want to buy at a discount relative
to future growth. The company wants to get as much money as possible.
Investment banks don't want to be associated with fraudulent or poor
performing IPOs. They also want to ensure there is sufficient liquidity to
make the market move on the new security when it's listed while making
everyone happy. And aside from these logistical obstacles, you have the
standard financial problem of price discovery and valuation for a security
which is fundamentally new.

As for these questions:

 _> And why then are private funding rounds so much cheaper to get done?
Diligence still has to be done for private funding. Why is more diligence
required for an IPO?_

Private funding involves proportionately greater amounts of money from fewer
overall investors. It does not as a rule involve the general investing public.
By law _public_ investments must be secure against a number of risks that can
be accepted in private investments. You're offering a novel security to a
large population of amateur investors who cannot tolerate as much risk as
professional investors who either represent institutions or are independently
wealthy. Insulating IPOs from that kind of risk requires a lot of due
diligence.

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popotamonga
I hope when they get enough money it doesn't take 15 seconds to switch from
one slack organization to another. Working for x different companies at the
same time can be infuriating.

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sfink
Separate tabs don't work?

If not, then switch to Firefox, and use Container Tabs. :-)

Then again, considering Slack's memory usage, that might not be such a great
idea...

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briandear
Their Mac App is electron garbage. I have no idea why they can’t use some of
that cash and hire real Swift developers. I know even a “simple” app isn’t
easy, but for a company with their resources, it can’t be that difficult. I
love Slack, but despise their app. Using a web browser is a pain for me
because I want things like email and chat to be separate from whatever browser
I might be using. Also if done right, an actual native app (not some React
pseudo-native app) is much more performant.

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JumpCrisscross
There are three things an IPO traditionally did:

1\. Raise money for the company;

2\. Let existing investors sell; _and_

3\. Jumpstart price discovery by stoking investor interest on the secondary
market.

These were done simultaneously. That made IPOs risky and expensive and, in
turn, IPO bankers rich.

Nowadays, the venture secondary market is thriving. Something like $4 billion
of Spotify stock traded in the weeks preceding its IPO. That--singlehandedly--
removes the urgency from points 2 and 3.

Raising money is hard. But not as hard as Nos. 1 through 3 together. No. 1
alone is less risky, and thus less expensive, than a traditional IPO. For
venture-backed companies worth over $1 billion, the only reason to pursue a
traditional IPO is because (a) management is currying favors with bankers or
(b) they're trying to pull a fast one on public investors over a wrecked
private market valuation.

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pavlov
Isn't there a fourth reason for tech companies to IPO these days: let RSU-
holding employees sell? The secondary market doesn't seem to solve that.

With the amount of RSUs tech companies are giving these days, the pressure to
IPO is not negligible.

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JumpCrisscross
> _Isn 't there a fourth reason for tech companies to IPO these days: let RSU-
> holding employees sell? The secondary market doesn't seem to solve that._

There are solutions. They're messy, but they exist. In any case, both a
traditional IPO and side-winding IPO address RSU-holders' problems. And at the
end of the day, having sat in on more than my fair share of underwriting
discussions, employees' preferences never factor into timing nor strategy. If
employees need cash, companies have an easier way to solve that problem.

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macinjosh
Hopefully with the influx of cash they can hire someone to implement a dark
mode.

~~~
matchbok
Hopefully with the influx of cash they can hire someone to implement a real
native app that doesn't fail.

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throwawaymath
Why would they? People will use Slack regardless. It's not a business
imperative for them to make their desktop performance competitive with native
applications. They'll probably get a much better return for their effort if
they continue doing feature engineering.

~~~
matchbok
I mean that makes sense. But they have a huge team and I really can't think of
any new feature in the last 2 years.

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aaomidi
So this is the reason Slack was cracking down on accounts of people from
sanctioned countries.

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gigatexal
Good. Screw the bankers. Who needs them anyway? These CL pansies already have
the mindshare and plenty of connections to people who already invested between
them and selling directly to the public why would they need costly banks to
help them IPO?

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AmericanChopper
>Good. Screw the bankers. Who needs them anyway?

I’d say many companies who don’t have the same level of mindshare and brand
awareness, perhaps?

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gigatexal
Sure. But I’d love to see a startup do something akin to ipo-as-service to
distrupt the fat margins and conflicts of interest the on the side of the
investment bankers

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AmericanChopper
I’m not sure you understand the role of bankers in IPOs. They financially
underwrite the IPO, which is a huge financial risk. They’re also responsible
for book building the entire thing, leveraging access to their network of
institutional investors. Their fees aren’t cheap, but for a company that needs
to IPO, they’re _often_ very worthwhile. I’m also not sure where you think the
conflict of interest is, if they over price then then lose money, and if they
underprice, then they lose money... I’m not sure this is a market that’s
especially vulnerable to disruption either. Unless you wanted to create a
network for book building directly with individuals, but I couldn’t see the
value proposition for the listing company here, as getting the pricing right
with unsophisticated investors sounds like an enormous risk for your averaging
listing company.

~~~
gigatexal
Eh I guess you’re right on many points. There’s just something interesting
about not using the traditional banks to get listed on the public market. And
as more companies stay private but VC backend for longer perhaps we will see
more of these less traditional ways of getting listed.

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ssttoo
I see a lot of Slack billboards in West LA. Nobody cares. I don’t care. I
guess it’s brand recognition efforts prior to the IPO. All the best to them in
their future endeavors..

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i386
No paywall link [https://outline.com/bwtHqv](https://outline.com/bwtHqv)

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bwb
awesome move!

