Silicon Valley's founder-led startups have lost their shine with IPO investors. But the obsession with direct listings won't fix the bigger problem.

Adam Neumann

With his long hair, proclivity for walking around barefoot and
reputation for partying,
WeWork founder Adam Neumann
could have been straight out of
central casting for a fictional “tech CEO” in a movie. 

That over-the-top persona is also what made Neumann a liability
for WeWork in the eyes of straight-laced, conservative IPO
investors. Neumann never had the chance to meet, or spook,
investors in a pre-IPO roadshow for WeWork— he was ousted from
the CEO job the week the roadshow was supposed to kick off, and the
IPO was subsequently shelved.

WeWork’s cancelled IPO is now at the center of a broader Silicon
Valley reckoning, as venture capital investors and others obsess
over an IPO alternative called a “direct listing.” The direct
listing has been framed as a way for tech startups to list their
shares without being beholden to an outdated process created by
Wall Street bankers and designed to benefit their clients. 

But direct listings are still a new, relatively untested concept
that may not provide the all-around salvation some expect. And
while venture capital investors bash an IPO system they say is
broken, their sudden zeal for direct listings is, in at least one
major sense, the result of a problem they created themselves.

The “founder friendly” movement in which VC investors deferred
to startup founders, no matter how quirky or extravagant, has
produced a crop of richly-valued companies with unconventional
executives in the top job. And as many of these companies now look
to go public, they’re finding that an offbeat founder CEO is not
always a selling point during a roadshow.

A direct listing provides a convenient way to skip that

“When you do a direct listing, you don’t have to put them up
there,” said one VC firm founder about inexperienced or unpolished
management teams. “There’s a negative side that the VCs see, but
they can hide it behind the direct listings,” he said.

In a direct listing, a company simply lists its shares on a
public exchange and the stock begins trading. There’s no banks
underwriting the offering, setting a price and selling it to
institutional shareholders, as happens in an IPO. And while
insiders, like VC investors and early employees, can sell shares
right away in a direct listing, the company itself does not raise
any capital.

Lise Buyer, the founder of IPO advisory firm Class V Group,
describes direct listings as an interesting alternative to IPOs
that will work for certain companies but that’s currently wrapped
in a lot of hype: “It’s the new shiny object that is aggressively
and brilliantly marketed.”

“Ride the positive narrative” and avoid the hedge fund questions

For now, direct listings exist more in the realm of theoretical
and wishful thinking than reality. To date, only two companies —
Spotify and Slack — have opted to go public this way. 

according to a recent Bloomberg report
, Airbnb, the
home-sharing service valued at $31 billion, is leaning towards a
direct listing instead of an IPO when it goes public in 2020.

That could help the company avoid uncomfortable questions about
its management team’s qualifications.
Brian Chesky, the cofounder of Airbnb
who serves as CEO, has a
background in industrial design and has never held a high-level
role at any other company. Although Chesky has grown Airbnb into a
juggernaut, his public company experience, and lack of the
traditional engineering or business background, would likely get a
hard look during an IPO roadshow, the founder of the investing firm

“You could make a case for companies to just ride the positive
narrative and just go out there with a direct listing because you
don’t want to answer all these extremely scrutinizing questions
from some hedge fund guys,” said Synovus Trust Company portfolio
manager Dan Morgan about startups with novice or quirky CEOs.

Brian Chesky

In years past, a seasoned executive might have been brought on
to take the reins as the startup neared its IPO. But with founders
now revered, and in some cases calling the shots thank to special
supervoting shares, many of the most valuable startups are helmed
by founders who may or may not have the chops to run a public

“A CEO/Founder with a quirky personality would be fine to do a
direct listing and avoid all the scrutiny of a road show,” Morgan

Still, he stressed, everything changes after company’s first
earnings call as a publicly traded organization. And in the case of
WeWork, he believes that even a direct listing wouldn’t have saved
it from a brutal reception in the public markets: “The model was
not sound as there appeared to be no roadmap to profitability.”

The times have changed and IPO “needs innovation”

Of course, plenty of unorthodox founders have made it through
the roadshow process and gone on to lead successful publicly-traded
companies. Facebook CEO Mark Zuckerberg famously caused a stir

by wearing a hoodie to the pre-IPO investor roadshow.
years later, the stock is up 374% and Facebook is worth $514

And the two companies that have recently gone public through
direct listings were not trying to hide unpolished or inexperienced
CEOs from criticism.
Slack founder and CEO Stewart Butterfield
is one of the tech
industry’s most respected, serial entrepreneurs, with a track
record that includes creating photo sharing site
Flickr and selling it to Yahoo for $20 million in 2005.

Slack had an optimal business model and enough brand recognition
pull off a direct listing
in June, said Jyoti Bansal, a startup
founder and tech investor who is a big believer in the potential of
direct listings.

Slack CEO Stewart Butterfield poses for photos outside the New York Stock Exchange before his company's IPO, Thursday, June 20, 2019.

Bansal attended a special,
invite-only summit earlier this month
devoted to the merits of
direct listings. The event took place in San Francisco and was
organized by several VC firms in the wake of the disappointing Uber
and Peloton IPOs, and the WeWork implosion.

“The way the IPO is done today is almost like a 25-year-old
concept. It just needs innovation” said Bansal, who is the
cofounder and CEO of enterprise startup Harness and cofounder of
venture firm Unusual Ventures.

“Twenty-five years ago the primary purpose of IPO was that
people didn’t have access to growth capital, so you had to go to
public markets to get growth capital. Now, everyone has it,” he

Class V’s Buyer says the notion that direct listings are a
cheaper and more democratic process than traditional IPOs is
partially true. Since the company isn’t raising funds, it doesn’t
need to work with a traditional underwriter and thus does not need
to pay the associated fees. Still, she noted that a company must
pay some banker fees, register with regulatory bodies like the SEC,
and participate in an audit, all of which are costly

Spotify paid $32 million in fees for its 2018 direct listing,

according to Inc,
compared to the $102 million that Uber paid
in its traditional IPO.

No lock-up is a big benefit — for some

Clearing the path to a liquidity event is critical for VCs who
have sunk tens or even hundreds of millions of dollars into

Buyer also noted that direct listings — which allow employees
to sell all their vested shares right away, without the traditional
several month “lock up” period of an IPO — could incentivize
valuable employees to cash out and jump ship.

“I don’t think it helps with [employee] retention. It actually
is perhaps the opposite,” Buyer said of direct listings.

And for recently-hired employees with unvested stock, a direct
listing can leave them at a disadvantage if the stock sinks.

In the case of both Slack and Spotify, the companies achieved
peak share prices in the first weeks or months of trading, and have
only lost value since. That means early investors were able to cash
out at near-peak pricing while employees with unvested stock and
retail investors were left holding shares that were only becoming
less valuable.

“Those who sold on Day One at Slack got a better price than
those that sell today,” said Buyer.

is going to be a record year for $100 million-plus startup
investment deals — and it has the unexpected side effect of
forcing startups to grow up way faster

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Silicon Valley's founder-led startups have lost their shine with IPO investors. But the obsession with direct listings won't fix the bigger problem.