Direct Listings Survey Sees Smaller Firms Jumping In: ECM Watch
(Bloomberg) — Direct listings have so far been a path to public ownership primarily reserved for large tech companies and well-known brands like Spotify Technology SA, Slack Technologies Inc. and recently Warby Parker Inc.
A wider array of companies may soon be seeking this route over initial public offerings, according to a new survey of more than 11,000 founders, venture capitalists, and independent board members. Relatively few executives realize direct listings are an option for them, despite broad support for the process across the community represented by the respondents, the findings show.
The survey focused on direct listings using an alternative trading system, or ATS, which is a non-exchange venue that matches buyers and sellers of securities. But it could have broad implications for companies looking at ways for early investors to cash out, while also broadening the investor base.
“You don’t have to be a multibillion-dollar company to do a direct listing,” said Dave Hendricks, chief executive officer of Vertalo, a maker of digital tokens for financial assets, which conducted the survey in partnership with Qualtrics International Inc., a software company.
“You can do a direct listing on an ATS and follow it with a direct listing or IPO on a national exchange,” he said. “It provides a path to multiple liquidity structures over a span of a couple of years.”
For Hendricks, the biggest surprise from the results is how few board members and founders understood that direct listings were available to them. The results show very low awareness, but also very high favorability, particularly among firms with market caps between $100 million and $300 million, he said in an interview.
Still, digital payments firm Stripe Inc., last valued at nearly $100 billion, could be the next to try a direct listing.
One Pandemic Later, Direct Listings See Some Blue Sky
The support for direct listings among venture capitalists contrasts with criticism from other parts of the investing community. Among the gripes are weaker lockup agreements and the missed benefits of an IPO roadshow. Underperformance in some direct listings, such as Squarespace Inc. and ZipRecruiter Inc., compounded concerns about the potential for higher volatility and a lack of price discovery.
Yet direct listings on both major exchanges and ATS platforms should continue to spread as smaller companies come to see their merits, according to the survey.
“Listings on an ATS can be an end in and of themselves, or they can be a mezzanine between being fully private and fully public,” Hendricks said. “You get time to learn what it’s like to do quarterly disclosures under blue sky laws, you learn about things like price discovery. It’s just another part of the journey of a company getting started and eventually going public.”