September 30, 2019 BARRON’S 11
upmorethan500%—themarkethasfallenin
lovewithfakemeat.Ritternotesthatforthe
sixthstraightyear,about40%ofalldealvol-
ume consists of biotech companies, which
createalmostnobuzzamongnon-Ph.D.biol-
ogists, but are promising nonetheless (See
this week’s biotech roundtable, starting on
page 16.)
Pinterest (PINS), a social media busi-
ness that is often overshadowed by Face-
bookandTwitter,isup44%sinceitsApril
IPO.
Given recent events ,itwouldbeeasyto
declaretheIPOwindowtemporarilyclosed,
and a pause seems likely. There aren’t any
unicorns—privatecompanieswith$1billion-
plusvaluations—withpublicIPOfilings.The
consensus is that the supply of IPO-ready
enterprisesoftwarehasdwindled.Expecta
light listing calendar in the fourth quarter.
The IPO everyone awaits is Airbnb, but
that won’t be until next year.
Theotherbrewingstoryistheemergence
ofdirectlistings,whichenablecompaniesto
gopublicwithoutraisingnewfunds.Essen-
tially, companies give the public access to
theirexistingstock.Therearethreerecent
examples: Spotify Technology (SPOT) in
April 2018, iHeartMedia (IHRT) in July
2019, and one that may shake up the IPO
market, SlackTechnologies (WORK),which
drew outsize attention when it direct listed
on the New York Stock Exchange in June.
Slackshareshavefallen40%fromtheirfirst
trade. (See Tech Trader on page 25).
That won’t mean the end to direct list-
ings. Buyer, who plays an early advisory
roleascompaniesbegintheirIPOplanning,
sees direct listings as a clear option for
manyofherclients,withbenefitsacrossthe
board. For issuers, there is no stock dilu-
tion. For venture investors, there is no
lockup period. For bankers, there is less
work—and smaller underwriting groups
withwhichtosplitfees.“EverycompanyI
talktoistalkingaboutdirectlisting,”Buyer
says.
Thisweek,agroupofmorethan20ven-
ture-capitalfirmswillmeetinSanFrancisco
withatleast150pre-IPOcompaniestodis-
cussdirectlistings.MorganStanleyishold-
ing a similar event a few weeks later.
Among the most vocal champions of di-
rect listings is Bill Gurley, the longtime
partneratventurefirmBenchmarkCapital.
Hesaysdirectlistingsprovideabetterap-
proachtoshareallocation,openingthepro-
cesstoeveryinvestor.“NooneonE*Trade
bought any CrowdStrike shares,” he says.
“No one trading on Robinhood got Zoom
shares. That’s the core issue for me.” He
saysthecurrentIPOprocessleadstolarge
banks shifting dollars to their favorite cli-
ents in the form of IPO allocations.
There is clear data to show that IPOs
aren’talwaysefficientmechanismsforprice
discovery. From 1980 to 2018, the average
first-day return after an IPO was 18%, ac-
cording to Ritter. That underpricing
amountedto$165billioninproceedslefton
the table, Ritter calculates. Theoretically
thosefundscouldhavegonetocompanycof-
fers if bankers had more accurately pre-
dicted value before pricing stocks.
Sowho willuse directlistings? “Found-
ersthatareparticularlyquick-minded,intel-
ligent,anddon’tlikethingsthatdon’tmake
sense,” Gurley says.
Gurley sees a tale of two markets from
here. It remains a “glorious day in the en-
terprise,” he says, as the shift to the cloud
continues. But there could be continued
troubleforconsumerbusinesses.Investors
have decided they want companies with
“positive unit economics,” Gurley says,
where adding a customer produces a posi-
tive return. “Lots of unicorns now have to
dealwiththerealitythatWallStreetdoesn’t
want growth at all costs.”
Data as of 9/26 *Reference Price Source: Bloomberg
ATaleofTwoIPOMarkets
Among 114 U.S. IPOs in 2019, 63 have positive returns. Here are some highlights.
Company / Ticker IPO Price Recent Price % Chg Market Val (bil)
BeyondMeat / BYND $25 $154.34 517.4% $9.
ZoomVideoCommunications / ZM 36 79.75 121.5 21.
CrowdStrikeHoldings / CRWD 34 58.3 71.4 13.
GroceryOutletHolding / GO 22 35.71 62.3 3.
Pinterest / PINS 19 27.38 44.1 14.
PelotonInteractive / PTON 29 25.76 -11.2 7.
SlackTechnologies / WORK 26* 22.63 -13.0 12.
UberTechnologies / UBER 45 31.57 -29.8 53.
Lyft / LYFT 72 41.90 -41.8 12.
SmileDirectClub / SDC 23 12.94 -43.7 5.
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