Category: Investment Page 1 of 2
As a person who likes to be in the trenches, I was geeking out on captable economics in the past few weeks and wanted to share more about it in this blog.
Measuring the performance of investing in private markets has always intrigued me as little information is available in the public domain. So I spent the last few weeks reading more about this and thought of sharing my understanding
I listened to 2 podcasts this week that really got me thinking clearly about the economics of an early-stage business and how it is perceived in the eyes of an investor and how it also impacts the founder and employees.
I thought it would be good to lay down the dots first and then try to link them just enough so that when the jig-saw is put together although each piece may not make much sense but together will give a clear picture for an entrepreneur from the shoes of an investor.
For both private company directors as well as CEOs as you begin to think about liquidity choices for your company you normally think of an IPO. There is, of course, another alternative you may want to discuss with your boards which is Direct Listing.
In the traditional IPO route, new shares are created and sold to the public. In this scenario, the company works closely with underwriters/bankers.
Underwriters/bankers assist with regulatory requirements, deciding the initial price of shares, and working to sell the shares to investors in their network. Prior to the IPO the company and underwriters go on a “roadshow” so the top execs can present to institutional investors to create interest in purchasing the stock once it goes public. This process may be lengthy and costly.
However, there is an alternative: Direct Listing. The Direct Listing is emerging as a popular alternative to the IPO, and while it does not come with the “safety net” of an IPO it does have many benefits. In a Direct Listing, no new shares are created. Only existing, outstanding shares are sold. This is particularly beneficial if a company does not want to dilute existing shares by issuing new shares. A direct listing enables willing buyers and sellers to directly transact with minimal lockup and bureaucracy. Existing investors and even employees who hold shares can directly sell their shares to the public. This is a fantastic option for companies who perhaps cannot afford the service of underwriters or do not want to be restricted by a lockup period.
I recently attended a presentation by Colin Stewart of Morgan Stanley on this emerging phenomenon, and here are some takeaways from the presentation:
- Private markets are more robust and accessible than in the past. In the current market landscape the time to IPO’s is becoming longer and deal sizes are smaller.
- Direct Listings may lead to an accelerated time line. In large cap companies Direct Listings may offer larger access to capital and can lead to lower volatility.
- There’s an emerging trend that institutional investors will be more familiar, comfortable and accepting of Direct Listings.
Historically, smaller companies such as food and biotech have gone public via a direct listing. Typically during a regular IPO 10-15% is sold. Spotify broke the mold being a massive tech based consumer company to go the direct listing route. Spotify sold 17% of their outstanding shares on the first day of their direct offering. Slack, another notable software company that opted for a direct listing, sold 22% of their outstanding shares, and were the 5th lowest in volatility for massive tech IPO’s. Despite the risk associated with Direct Listings, both Spotify and Slack experienced less volatility than smaller float IPO’s such as Zoom.
Some benefits of a Direct Listing include: less share dilution, being able to circumvent mandatory lock up periods and other regulatory requirements. These items may be increasingly attractive enough that companies may begin to favor Direct Listings over customary IPO’s.
This emerging trend is something that companies considering going public may want to review before hiring underwriters and going through the task of going on a roadshow, and meeting all of the regulatory requirements associated with an IPO.
Here is a great podcast by Bill Gurley
This article was written based on an article by @betsy_atkins and first appeared on Forbes
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What Peter Offringa has put together here is nothing short of a networking primer and this level of analysis is what an investor should be doing before investing their hard-earned money. For me, this is just a beginning, $FSLY and $API were on my watchlist and I will not dither from ETF’s which is my goto strategy for US markets. Next is $API
I don’t believe everything thats folks at Marcellus say but their honesty and hard work is evident
Investing in capital markets has been one the most rewarding in the medium to long term but I have been a strong advisor of the basic financial hygiene that one needs to maintain before venturing into markets. I use markets as a broad term here since it covers ETF’s, bonds, stocks, mutual funds which are available to invest in through brokers.