⚰️ Is the death of the traditional IPO exaggerated?
San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
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San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
Hey there,
Vieje back here again after a short hiatus from writing the newsletter. My colleagues John and Eric from the Secfi Wealth team held down the fort while I spent the end of April and the beginning of May moving my family to New York. After being here for a few weeks, I finally feel mostly settled in despite still sleeping on my mattress on the floor because my wife can’t decide which bed frame to buy. I’ve been visiting Thuma’s website every day and adding it to my cart so her Instagram algorithm picks up the Thuma ads though. It’s a work in progress.
On another note - summer has unofficially begun and unfortunately given the uncertainty in the markets, we have not seen the big tech IPOs that many predicted at the beginning of the year. The good news is that there have been a few successful IPOs with eToro, Hinge Health, and MNTN going public in the last month.
These companies all went public through the traditional IPO process. From what we’ve heard, any other tech company that will list in 2025 will also likely go public through the traditional IPO meaning that there are no projected SPACs or direct listings.
Back in the last window in 2021, many investors were predicting that the traditional IPO method would slowly go away and that most companies would list through a SPAC or a direct listing instead. So far that prediction has not come true. Let’s dig into this a bit more and see how the method of going public may affect your company’s equity.
When a company goes through the process of going public, there are generally three ways to do so.
By far the most common way for a company to hit the public markets is through a traditional IPO process. As the company gears up for the listing, they will hire investment banks to go out and sell new shares of the company to their clients. These bankers will speak to their clients who are almost always large institutional investors, and gather orders for the shares at a predetermined price. The hope is that it is “oversubscribed” meaning that their clients want more shares than they have to offer. The bankers will then allocate the shares to their clients at that price, and the company will have an IPO date where their stock will be freely traded on the public markets.
Critics of the traditional IPO, which includes many VCs, have cited that these banks are purposely listing the price of the shares low to their clients in order to generate a “pop”. An investment bank’s clients typically buy the shares for a lower price than what the stock price debuts in the public markets creating a “pop” in the price. For a company, they may have sold shares at $50, but once the shares started trading the price could be $70.
The critics say that this takes away from the company and helps enrich both the bankers and their clients. In the last window, a handful of companies started going public through what’s called a direct listing to avoid this issue.
Under a direct listing, a company does not raise funds by issuing new shares of the company. Instead, as the name implies, they simply list the shares of the company to be traded on a specific date. A few popular tech companies such as Spotify, Slack, Palantir, Coinbase, and Asana chose the direct listing route between 2019 and 2021.
As the company lists directly, the market dictates the price of the shares prior to anyone getting preferential treatment to buy the shares. As part of that process, companies do not typically raise any funds (or only raise a little) in the direct listing as they are not issuing new shares to sell to investors. The existing shareholders simply decide if/when they want to sell the shares in the market.
Of course, a direct listing may not be the right path for a lot of companies. The ones that chose to go this route were fairly large well-known names that likely had a ton of investor interest. Back in 2021 and 2022, many companies opted to skip the traditional IPO and direct listing and instead go public through what’s called a Special Purpose Acquisition Company or SPAC for short.
A SPAC is simply a publicly listed shell company with the intent to acquire a private company and effectively take it public. These SPACs are formed by sponsors, most often institutional investors, who fund the SPAC with equity and/or debt. These companies are listed on the public markets and investors can buy shares in this SPAC. The intent is that these companies will eventually buy a private company with that cash and effectively take that company public. After the acquisition is complete, the new combined company will likely rebrand under the formerly private company’s name and trade on the public markets as usual.
Going public through a SPAC is a way for a VC backed startup who is not “IPO ready” to go public. A traditional IPO takes a lot of leg work in the year(s) leading up to that IPO and many private companies opted to go public via a SPAC in 2021 and 2022.
Of course, there’s been quite a bit of backlash on SPACs recently. The sponsors who organized and launched the SPAC stand to benefit quite significantly when this happens, and there’s an argument of whether this was actually in the best interest of the target company and their employees or not. Many companies who have gone public through a SPAC are trading much lower today than when they debuted.
Of course there’s no “right” way to hit the public markets. Each method has their pros and cons and it would be dependent on each company’s situation as to what is best for their goals. Unfortunately with a company hitting the public markets, things are never guaranteed to go according to plan.
While a company may sell their shares for less than the true price in a traditional IPO, there is the added benefit of generating hype and demand for the shares. Having an army of bankers out there marketing your company may be best in the long-run. A pop in the share price does result in a potential higher floor for employees.
A direct listing may work for well-known large companies with plenty of investor interest, but that may only be the case for a handful of companies out there. The market demand may just be so high that the pop can happen regardless through a direct listing. On the flip side, it could have the opposite effect if there is not enough demand. As with any method, there is always market risk and the share price could also go down.
In addition, there are “lock-up” restrictions to factor in for employees and investors. In a traditional IPO, bankers will often set a 6 month lock-up period meaning that no existing shareholders can sell until 6 months after the stock starts trading. That is not a defined rule though, and some companies have modified forms of that lock-up period.
Lock-up periods typically do not happen in the case of a direct listing though so employees have the added benefit of being able to sell just like everyone else on the first day of trading if they decide to do so. When it comes to a SPAC, the lock-up restrictions can vary quite greatly.
So why are companies only going public through a traditional IPO so far in 2025? Well it primarily comes down to market factors. Most companies likely see that hiring bankers to take them public through an IPO is the safest route right now given the uncertain market conditions. With a team of bankers, companies can test the waters and test demand – if things aren’t going well, they can pull the IPO back and delay things.
Given the high bar to go public today, selling the shares in an IPO at a lower price to see a “pop” when the shares start trading is likely a welcome sight for existing shareholders.
We’ll have to see if things change in the future as the market conditions hopefully improve a bit. There are a handful of companies out there that have enough investor demand to go public through any method they choose. I’d predict that Stripe, Databricks, and Anduril will likely hit the public markets through a direct listing when they choose to do so.
For now though, we’ll likely see a handful of additional companies listing through the traditional IPO in 2025.
