Reading: IPO, SPAC, or direct listing? Picking a path to the public market4 min
IPO, SPAC, OR DIRECT LISTING? PICKING A PATH TO THE PUBLIC MARKET
Going Public – A Series by Accel & Soaked by Slush – Article II
There are more options than ever on the table for a company that is thinking about going public. Accel Partner Harry Nelis walks us through the alternatives in the second installment of our content series.
As a private technology company, picking the right time to go public is an important decision. But the choices don’t stop there. In today’s market, the decision to become a public company immediately leads to another: which route to a listing should you take?
Until quite recently, this question simply didn’t come up. In the vast majority of cases, the decision to go public meant hiring investment banks and following the IPO process of a public listing alongside a significant capital raise. This is a process that has remained relatively unchanged since Intel went public on 13 October 1971.
Now two additional options are on the table. A relatively small group of well-known companies has opted for direct listings, in which existing shares are listed on the market, and typically no new capital is raised. In parallel, there has been an explosion in the use of SPACs: acquisition vehicles which list and raise capital for the specific purpose of acquiring a private company and bringing it to the public market via merger.
“The three routes to market can all be viable options, and the right path will ultimately depend on companies’ individual circumstances.”
These are not niche options. Some of the most high-profile technology listings of recent years have taken the direct route to market, including our portfolio companies Spotify and Slack, and most recently the gaming platform Roblox. Last year saw SPAC activity boom, and the momentum has continued this year, with SPACs accounting for 67 of 91 listings on the Nasdaq in January.
The three routes to market can all be viable options, and the right path will ultimately depend on companies’ individual circumstances. In direct listings, the trading price is based on supply and demand, so a company typically benefits from better pricing and avoids the IPO “pop”. As the name suggests, it’s also a simpler and more direct route to market that may save costs. However, keep in mind that what a company may save in underwriters’ fees, it loses in the associated marketing and promotional support of its IPO underwriter. And it must be of a sufficient maturity to handle the mechanics involved in the listing without the support of a bank.
For both reasons, direct listing is most relevant to well-established brands with sophisticated finance operations in place, whose arrival on the public markets has been eagerly anticipated. If, like Spotify, you can be confident of immediate name recognition from potential investors, this may be the preferable route. But it’s a high bar to clear, and many less mature and less familiar companies will benefit from the support that comes with the traditional IPO process.
The SPAC path is one that’s being made popular by investor appetite: capital that’s actively seeking out companies to bring to the public markets. This represents another welcome source of liquidity for the private technology universe, but firms need to consider the pros and cons. In terms of advantages, merging with a SPAC gives a company more opportunity to shape its narrative to investors. Whereas the IPO process considerably limits the forward guidance that can be provided at the point of listing, the same restrictions don’t apply to those merging with an entity that has already listed. This may benefit companies with more complex business models, as they introduce themselves to the harsh scrutiny of public markets investors.
“But founders should not forget the most important thing: whatever path you choose to go public, it’s only the correct path if your business is ready to be a public company in the first place.”
There are also drawbacks. There’s typically a period of a few months between a SPAC announcing its intention to merge with a company and the transaction being completed. This exposes a company to fluctuations in the overall market for longer than the 1-2 week period involved in an IPO, after the final decision to proceed has been made. What’s more, in extreme circumstances, a deal can be blocked by shareholders and fall at the final hurdle. The widespread use of SPACs as a route-to-market for technology companies is also a novelty that has not been tested in a down market.
Picking the right route to the public markets will be an individual process for each company. A management team and board need to consider a range of factors, many of which will come down to specific technical and financial details. There’s no right answer, only the solution that makes sense for the company in question. It’s a welcome development that there are more choices than ever for companies looking to go public. But founders should not forget the most important thing: whatever path you choose to go public, it’s only the correct path if your business is ready to be a public company in the first place. The right route also depends on it being the right time.