A Direct Listing

I saw this question pop up in my Twitter feed this morning:

I don’t know anything about Spotify’s plans so I am not going to comment on that.

But the idea of doing a direct listing instead of an IPO is a super interesting to me.

Here is what I said to a friend of mine over email on this subject last week:

we don’t need IPOs to raise money anymore

the private markets work great for that now

but we do need a way to allow small investors to own the stock and we need a way to give employees, former employees, early investors, etc liquidity

So the idea of taking the fundraising function out of the going public equation is super interesting to me.

The questions that come to mind to me are; who will make a market in the stock?, who will write research on the stock?, how will companies build an understanding of their company prior to the listing?, will there be a lockup for existing investors?

The “IPO road show”, which is the roughly two week process before the IPO, is both a sales process to raise the money and a great opportunity to build excitement for the stock and understanding of the business. I guess a direct listing could include a road show as well. I think it probably should.

And the underwriters, who make a big commission on the IPO, commit to trade the stock and write research on the company in return for “being on the cover.” There needs to be some other way to get the investment banks involved in the stock to ensure that there is a market for the stock and research is done on the stock.

Finally, you wouldn’t want the entire cap table to come into the market on the first day of the direct listing. So that means there would need to be a lockup of some sort for the existing investors. But if there is no primary raise, then you would need some shares to trade, so maybe you let some of the existing cap table off of lockup on the direct listing and the rest over time.

I suppose this has been done before. If that is true, then there is a history of prior listings to look at to understand how this is done and how it worked. But as I said earlier in this post, I am super interested in this idea and I would like to see some big companies that don’t need capital but want a public stock try this.