Can direct listings really fix the IPO pricing problem?

Welcome to a two public-offering week. U.S software company Amplitude is expected to post a direct-listing reference price this evening and begin trading tomorrow morning, per publicly available IPO calendars. Warby Parker is also set to direct list later this week — more on its numbers here.

Expect a raft of coverage from TechCrunch on both debuts.

Even if you are tired of IPOs, these two warrant your attention. The Amplitude debut is notable for its status as a direct listing that follows a large private-market fundraising. The company is pursuing a liquidity model that both leverages ample private fundraising and dodges pricing issues present in traditional IPOs that have irked many in the Silicon Valley chattering classes.

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And the Warby offering will help set — or correct — market sentiment regarding D2C companies; the unicorn isn’t even a technology company in the eyes of many. However, its DNA in e-commerce and venture-backed history keep it firmly in the TechCrunch wheelhouse, regardless. And it’s also pursuing a direct listing after raising private capital in recent quarters.

The two direct listings will help us figure out which side of the public-private divide is truly undervaluing startups. It’s either pesky bankers extracting unearned value from hardworking Silicon Valley types at graduation day, or it’s private-market investors irked that anyone else accretes upside from startups.

Let’s talk about how we’ll sort the matter.

Raise, then direct list

We’ve seen a number of direct listings in recent years. Spotify is perhaps the best remembered. But Asana also went out via a direct listing. As did Wise, Squarespace, Coinbase and Roblox.

Amplitude will also float without raising primary capital in its public debut. It raised a huge stack of funds earlier this year — $150 million at a valuation of just under $4.2 billion, per Crunchbase data. This method of raising private capital and then direct listing decouples the traditional IPO, which combines a primary raise and a public flotation.

Another variation on the method is to direct list, later raising primary funds through a follow-on offering once the market has set what is perhaps a fairer price for the equity of the company in question. There is also work afoot to allow companies to direct list and raise primary capital, shifting pricing power from banks to public investors more directly. That final option is still more theory than applicable exercise.

So, unicorns that don’t want to pursue a traditional IPO can raise private funds before or after a direct listing in an attempt to get around the exorbitant first-day pops that some firms have recorded in recent quarters.

Roblox is an example of the raise-then-direct list method. It filed to go public but shelved its IPO after seeing a few other companies storm out of the gate. The gaming company went on to raise private funds in early 2021, and then direct list. Squarespace was similar: It raised $300 million at a flat $10.0 billion valuation (post-money) this March before direct listing in May.

This is the model that Amplitude and Warby Parker will test this week. The question it begs is simple: Does raising private capital and then direct listing solve the pricing issue that traditional IPOs engender when bankers and institutional investors price the floating company at a lower value than what retail investors and others will pay for the same stock once it begins to trade?

So far, the results are mixed:

  • Roblox was worth just under $30 billion in January 2021 following its private round. It started its life as a public company in March worth $69.50 per share, up sharply from the $45 per-share price it set during its pre-direct listing private round. In this case, private investors dramatically underpriced the company’s stock to a similar level as many recent traditional IPOs.
  • Squarespace was worth $10 billion in March 2021, when it raised its final private round. The company’s reference price was $50. The company started life worth closer to $43 per share, rose to as much as $64 this summer, before falling to just over $40 this morning. In this case, Squarespace was overpriced while private, ahead of its own flotation.

In the case of Roblox, money was left on the table. In the case of Squarespace, it probably wasn’t.

What to make of the raise-private-and-then-direct-list model? It’s hard to say, which is why Amplitude and Warby Parker’s raise-and-trade offerings matter. They will provide us with more data.

Other direct listings aren’t as much help as you might think. Coinbase didn’t really raise ahead of its debut in a similar manner; it had plenty of cash. As did Asana. And Wise. So other megadirect listings are more pure-plays than the hybrid model that we are discussing today.

So! What to care about looking ahead? We care what direct listing reference prices turn out to be for each company and how they compare to their final private prices. But only a little. A reference price is a bit like an MSRP number on a shirt that was never going to sell at full price; it’s just kinda there.

What we really want to watch are early trading prices set when Amplitude and Warby actually float. That will tell us how close their private-market investors got to the real value of each company, and if the raise-then-float model is actually solving the IPO pricing issue, or merely changing up which set of already-rich investors get an extra bite at an apple that they didn’t grow themselves.

A lot of unicorns are expected to go public in the coming months. They are watching, too.