By Julie Bort
- Two events happened recently that will cause more highly valued startups to consider going public with direct listings, cutting the big investment banks out of the process.
- One is a new rule that will allow NYSE companies to raise money in a direct listing, and the other is that two more highly valued startups are taking their chances with this method.
- Venture investors are seen as the ringleaders of this movement.
- But not all of them care, such as Mitchell Green, founder of Lead Edge Capital, who is, ironically an investor in two of the four tech direct listings: Asana and, previously in Spotify.
- Some tech investors have been pushing hard for more companies to go public by the direct listing route because VCs are among the big beneficiaries of direct listings.
Mitchell Green, Founder & General Partner at Lead Edge Capital
Direct listings, where companies allow existing shareholders to sell their shares on the public market without the use of investment bankers, give existing investors more freedom to sell their stock earlier. They can sell during the honeymoon period before the company’s stock gets impacted by its ability (or inability) to meet Wall Street’s demanding quarterly expectations.
In fact, prominent VC Bill Gurley, a partner at Benchmark who has been leading this charge, has tweeted about it endlessly and even organized an event with tech CEOs and VCs last year to get more of them to see the direct listing light.
Still, not all VCs feel the same.
Mitchell Green, founder of Lead Edge Capital, (a growth fund with $2 billion under management) had been involved in two of the four pending direct listings, Spotify and upcoming Asana.
He says when it comes to how tech companies go public he “doesn’t care” and isn’t pushing for any of his billion-dollar “unicorn” investments to consider direct listings.
“I don’t care and support whatever the company wants to do. Each company is different, and it’s wonderful that companies now have more options than ever to raise capital and get investors liquidity,” Green tells Business Insider.
In addition to Asana, he’s invested in unicorns Toast, Guild Education, Talkdesk, Amplitude. (He’s also backed Alibaba, which had a great traditional IPO, and Uber, which did not).
A threat to the big banks
Two big things happened recently in the world of venture capital and high-valued startups that could get many more so-called unicorns to consider going public via a direct listing, without hiring investment bankers.
1. A herd of startups each valued at more than $1 billion, otherwise known as unicorns, began the formal process to become public companies with two of them choosing direct listings, Asana and Palantir. They follow Slack and Spotify, which did direct listings last year.
2. The SEC temporarily agreed to a new rule to allow companies that list on the NYSE to raise capital as part of their direct listing. Previously, a direct listing only allowed existing shareholders to sell shares to the public on the first day of trading, not the company. The NASDAQ has also applied to the SEC for a similar rule change.
But the rule faced immediate opposition from the Council of Institutional Investors and the SEC has, for the time being, suspended the rule, the Wall Street Journal reported.
A direct listing, which eliminates commissions the company would otherwise pay an investment banker, allows existing investors, including VCs, to sell shares immediately and not observe the lock-up period imposed in a traditional IPO (although in Palantir’s case, the company is still imposing such a period for a portion of insiders’ shares).
Without an investment bank, companies don’t get the banker’s help to meet and pitch deep-pocket institutional investors, the ones most likely to buy giant swaths of theirs shares out of the gate. And the institutional investors don’t get a chance to buy large allocations of the stock at a price the company sets before trading begins.
And that means that, until last week, a direct listing was only considered a good choice that excluded most tech companies: ones that didn’t want to use an IPO to raise funds and were so well-known they didn’t need a roadshow to pitch their companies.
Both Palantir and Asana filed their S-1 paperwork before the new rule and filled their coffers up with a final stock sale to private investors, so they don’t immediately need money. Neither needs help meeting intentional investors, either. Palantir’s founder Peter Thiel is a powerhouse venture capitalist and financier. He already knows the finance world.
Asana’s cofounder is Dustin Moskovitz, the billionaire cofounder of Facebook. Not only does he know all the right people — including Thiel, an investor in Asana— he is, himself, a deep pocket. Moskovitz has regularly used his wealth for his company like buying Asana stock over the years, or personally guaranteeing the lease on the company’s new San Francisco headquarters, Asana disclosed.
So both Palantir and Asana are poised to do well when they become public, even though they are not household names.
But, given the opposition, direct listings will only become the default method of going public if more startups and their investors clamor for it. And that remains to be seen.