10 Reasons Why Slack is Pursuing a Direct Listing IPO

Slack’s IPO could very well mark a turning point in how companies conduct a public offering. Slack is the first high-profile, U.S.-based, VC-backed company to pursue a direct listing of its shares.

Slack could be valued at more than $15 billion at its IPO, making it the largest enterprise software IPO for a U.S. company — ever. When we look back, Slack’s pre-IPO private markets’ activity may mark a turning point in how companies conduct a public offering.

We believe Slack’s direct listing is further democratization of capital markets by providing equal access to information and its shares to all market participants. If Slack’s direct listing IPO goes smoothly, then the company’s pre-IPO activity could provide a template for others to follow. 

Slack’s direct listing comes with a series of risks and caveats such as potentially asymmetric supply-demand and heightened price volatility. But, we believe these are the 10 reasons why Slack is planning to go public via a direct listing despite such risks:

1.  Slack doesn’t want to raise additional capital: To date, Slack has raised $1.36 billion. Most recently, the company raised Series H funding ($427 million) in August 2018. Clearly, the company isn’t planning to raise more capital, given the direct listing approach.

2. Slack’s IPO plans aren’t dramatically affected by the government shutdown in January 2019: The SEC was largely shut down during January and continues to play catch-up. As the SEC continues to review formal IPO filings, the reported IPO timetable for companies such as Lyft has likely been affected.  

3. Slack’s fundamentals hint at a pathway towards profitability: Largely inline with no.1 above, we believe Slack’s numbers would tell a compelling story of strong underlying fundamentals with a pathway towards profitability.

4. Spotify’s direct listing in 2018 was an encouraging signal for Slack: We believe Spotify’s IPO emboldened a lot of Silicon Valley unicorns, including Slack. Initial trading activity for Spotify shares implied relatively low volatility driven by healthy price discovery.  

5. Slack could save up to $200 million in IPO costs: With a direct listing, Slack does not have to pay hefty fees to investment banks. Typically, issuers pay about 6 percent to 8 percent of the offering price to underwriters.

6. No lock-ups for new or existing shareholders: A direct listing IPO doesn’t typically come with strings attached to new or existing shareholders. During Spotify’s IPO, shares held by Tencent Music Entertainment were locked up, and remaining shareholders and employees could sell their shares. In other words, more than 85 percent of Spotify shares were available for trading on the first day.

7. No incremental dilution for existing investors: Since Slack wouldn’t offer primary shares in the direct listing, existing investors wouldn’t face dilution in their ownership. In fact, we wouldn’t be surprised if existing investors, particularly the late-stage ones, buy additional Slack shares  at the direct listing. 

8. Slack’s pre-IPO secondary trading would help rational price discovery: Rather than setting a specific price in closed-door meetings between bankers and institutions, Slack will let the public decide what it’s worth. And, we believe the company’s pre-IPO trading activity sets up a clear precedent for post-IPO price discovery.

9. Slack doesn’t view incremental branding from a traditional IPO as a net positive: Historically, IPOs were viewed as branding events by companies. However, Slack has more than 10 million active users globally and is already a well-known brand name among consumers and businesses alike.

10. Slack truly believes in its mission statement: Slack’s mission statement is to “increase transparency, efficiency, and culture.” Clearly, in pursuing a direct listing IPO Slack is sending a positive signal to current and potential investors — Slack truly believes in increasing transparency, and, effectively, planning to eat its own dog food!

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