• Triton

2019 Tech IPO Winners and Losers – Part Three

Slack was the biggest loser of them all

If issuers win by raising the most capital at the best price, and investors win by buying stocks that go up (and stay up) the most, then no tech company’s public-market debut fared worse in 2019 than Slack’s.

First the capital: Slack raised zero dollars in proceeds. As the table below shows, tech IPO proceeds in aggregate ($20.8 billion) were a little more than 10% of aggregate market cap ($189.9 billion, ex Slack), meaning Slack could have raised about $1.4 billion and been the third largest tech IPO of the year after Uber and Lyft – bigger than Peloton or Chewy, and roughly the size of Pinterest. 2019 Tech IPOs – Underwriting Discounts

Making matters worse, Slack paid $22 million in advisory fees, so net proceeds were actually negative. And as a percentage of market cap, the table above shows, Slack’s fees were low but not the lowest of the group – Uber and Futu paid less than Slack did.

As for investor returns: we can see below that Slack finished the year 14% below its “reference price” and in the bottom third of tech IPOs overall on a percentage basis, having fallen by almost half from its high. Tech IPOs – By Percentage Change in Stock Price IPO to 12/31/2019

We can also see that Slack’s SaaS comps conducting their IPOs in the customary way, including a big institutional roadshow to market shares to new public-market buyers, were generally up, and up big, representing the top seven – and eight of the top ten – names above.

So who benefits from a situation like this?

Not the new public-market buyers of Slack stock, and not the Slack employees who are sticking around for the long haul watching the shares fall.

The beneficiaries in this case are the same crew clamoring for direct listings generally: venture capitalists who don’t like lock-ups because they want to be able to dump as much of their stock as possible as soon as it’s listed – and at the highest price.

Slack spent $22 million on advisory fees to forego $1.4 billion in proceeds and an institutional roadshow to introduce itself to new public-market buyers, and allowed all of its early investors to flood the market at will pushing the stock underwater after a very respectable initial gain.

Does this make any sense at all beyond the narrow self interest of venture capitalists?

VCs seem to be saying that if there is going to be an opening “pop” – 48% in the case of Slack – they want to be able to sell into it and move on, regardless of the consequences longer-term.

If the problem is lock-ups then issuers would be better off doing normal IPOs without lock-ups and taking the resulting haircut on pricing. Had Slack done this, even if the un-locked stock pushed the share price down to current levels, at least the company would have an additional billion-plus dollars in the bank.

However, it’s hard to believe an institutional roadshow wouldn’t have made Slack a more popular idea among the buyers who pushed the other SaaS names to double-digit gains, and counteracted some of the selling pressure that made Slack the loser of the year.

Chewy was a great example of an IPO done regular way that was focused on shareholder liquidity, and successful for all participants who didn’t feel the need to capture every single penny for themselves.

Chewy’s IPO was 88% secondary, so the company got proceeds, selling shareholders got instant liquidity, IPO buyers got a 63% one-day gain, and IPO investors who held (as well as pre-IPO owners who didn’t sell) were up 32% from the IPO price at year end. Only selling shareholders demanding instant liquidity AND the top-tick price could be aggrieved here. It’s not enough for VCs to do well – no one else can do better!

And this is not an isolated case – Zoom’s IPO-of-the-year was 46% secondary.

Nonetheless, despite adverse pros and cons – and positive precedents to the contrary – look for direct listings to be the “bright idea” of 2020. Maybe someone will be kind enough to explain to me why this is good for founders and employees.