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Slack Plans to Follow Spotify on Unconventional IPO Route (wsj.com)
126 points by prostoalex 64 days ago | hide | past | web | favorite | 61 comments

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!)

Spotify ended up spending the same amount of money on expensive middle men:


To me it just seems like a form of fancy marketing.

That's not what the article says. It says they paid some money in fees, and more than the average IPO. It does not say they paid more or the same as a percentage than the average IPO. I can't find any information on how much money they/their shareholders ultimately raised, so it's difficult to contextualize that $30M number. But, for example, if only ten percent of the shares were sold in the IPO, that would amount to $500M in sold shares. The typical IPO nets 5% in fees, which would be $35M. On the other hand, if 20% of the company changed hands in the IPO, that would amount to $70M in expected fees.

To me, ten percent seems pretty conservative, so I'd say it's a safe bet Spotify saved money. I expect Slack would not do the direct listing if they didn't also expect to save money on the deal.

Hmm I'd like to agree with you, but I "think" the opposite is true for 1). Trying to pitch a bunch of potential investors on a newer but more risky business model without strong enough financial track record can be an uphill battle. Then again, who thought Amazon might be a good biz model when they went public? :) Might as well just go with direct listing, plus the added benefit of saving on banker fees. Oh, and no need for the executives to do tiring traditional IPO roadshows that require travel to major financial hubs all over the world.

Update: By also doing a direct listing, shareholders, pre-IPO employees included, won't have to wait 6 months to sell their shares.

Banks also provide medium term price stability for high volume IPOs, these are not high volume IPOs however, so there is an inherent stability.

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.

You should ask your non-tech friends before asserting their opinions.

I would have thought the same, but I spent the past winter holidays speaking to a number of interested friends / family members about our company, which is fairly technical. The first question I always asked as a lead-in was, “have you ever heard of or used Slack?”

The answer was yes across the board.

They’re the fastest growing SaaS company ever. Don’t underestimate the power of exponential growth over the period of even a few months.

Most of my "non-tech" friends are familiar with Slack as a company, even if they haven't professionally used it themselves.

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”.

> banks have a monopoly in terms of trust with sovereign wealth funds or mutual fund managers

Deep well, not monopoly.

I am not so sure about this. I think more and more non-tech things are going towards Slack. A lot of non-technical companies use Slack, and it is in constant use as a University student as a improved group chat.

You can approach institutional investors yourself, vs going with a banker and paying them up to 10% of the offering gains + risk them pricing your shares too low (i.e. 30% first day pops).

The amount of money a company potentially loses is massive.

Anecdata: I have seen advertisements for Slack on magazines like Economist. Also, my HoA community has a Slack workspace.

How often do they use @channel, @here and @everyone? ie the bane of my existence?

You can configure by channel to ignore those in your notifications preferences.

The bank cartels will punish them. Startup ceos ought to have known this since Google’s IPO debacle.

Debacle? An 18% first day bump seems pretty reasonable to me.

You don't want the price to blow up!

Sure, you don't want to leave money on the table, but an 18% pop is pretty standard even for normal book building. Seems weird to call Google's Dutch auction a debacle when it had the same result as standard book building.

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...

It is worth noting that investment banks don't just buy shares "below what they were worth", the shares are underwritten, which is priced in.

> risk with any IPO where you see a 30-40% pop means the company sold shares below what they were worth

Can't find the study at the moment, but it basically showed first-time VCs like a pop. Long-time VCs don't care. For an investor holding through an IPO, the dilution from the pop far outweighs the positive press from it. Those headlines sit comfortably in a Fund II pitch deck.

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

They've said it themselves multiple times:


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.


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.

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


> "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.

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.

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?

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.

Depends on the capital structure of the corporation, the financing deals it has, and the nature of the business it runs.

To simplify quite a bit: You're going to need to make sure the earnings it has aren't juiced, that it owns what it says it does, that it isn't going to violate any agreements it has, and that the people running it aren't questionable.

When we zoom in, recognize that you need actual evidence to move forward - and that's way more expensive than you'd imagine at first glance.

It isn't enough to write "Jim said we own a plot of land with nice trees", either. To unpack that one element of due diligence, you'll need the deed to the land, the land registry document confirming ownership, a report from an arborist attesting to the fact that the trees are of the right quality and type, an accountant's quality of earnings determining the value of the tree-fruit, etc.

Why don’t they just let the market decide. Avg Joe can launch an ICO in his pajamas and these bankers think it’s hard? Puh-leaze!!!

Not sure why this is downvoted, perhaps the tone? But I think it's a very fair question.

Why not let the market decide?

Monopoly and the SEC. ICOs are such a big threat to the economy, the SEC has a "ICO desk" to track people down. Meanwhile, charging millions of dollars for boilerplate advice is business as usual and companies pay it because the SEC won't allow them to try anything else. SEC is a criminal organization themselves and they help keep the investment bankers wealthy through each economic boom while they contribute very little to the boom itself. Wall Street is a much bigger and more successful scam than crypto could ever hope to be.

Why did you inject all the stuff about ICOs and evil Wall Street into the discussion? There are credible ways to critique the cost of IPOs without devolving the discussion by calling the SEC a "criminal organization." Your comment strikes me as more ideological than critical.

Because it's topical and accurate.

Thus far most ICOs have been _actual_ scams, so ironically, it's topical and accurate insofar as highlighting why IPOs are a lengthy and costly measure...

> it's topical and accurate insofar as highlighting why IPOs are a lengthy and costly measure

And I'm saying they wouldn't have to be if it were not for a convenient relationship between the SEC and major investment banks. I mention ICOs to highlight the difference in treatment. There is something in between shady ICOs and hugely expensive IPOs and the banking industry has very little interest in discovering what that is because their salaries depend on it.

I think my most basic point is just "It could be cheaper to raise money but investment banking prices are held artificially high through regulatory intervention". Make of that what you will.

I think that's actually a fair point and would agree with you on that wholeheartedly.

I don’t quite follow. Legal and accounting fees are a fraction of the bank fees, but they’re what’s actually tied to the regulatory scheme.

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.

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...

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.

Have you tried using Franz? https://meetfranz.com/

I don't really believe product that requires another product to supply such an easy task.

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.

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.

> 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.

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

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

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.

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.

It's already there, just change your skin to a dark one.

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

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?

>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?

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

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.

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.

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..

No paywall link https://outline.com/bwtHqv

awesome move!

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