Another day, another direct listing. The once-exotic method of going public is increasingly popular with venture-backed companies as they look to list without running headfirst into the IPO pricing issues that have bedeviled a number of high-profile public offerings in the last year.
Precisely who is underpricing whom in those situations is a fun, if slightly academic, question.
Today’s direct listing was Warby Parker, a heavily venture-backed DTC company in the eyewear space. Warby has long had a strong e-commerce component, though it has a growing retail footprint to support its digital sales efforts.
Warby’s direct listing has proved a success. The company not only listed, but did so at a price point that was above its final private-market valuation, and its shares appreciated rapidly during its first day of trading. For the DTC market, the results partially combat the odor that 2020’s ill-fated Casper IPO left lingering around the startup business model category.
Before we close the books on direct-listing week, a few quick thoughts on the Warby listing. I found a few healthy things in the debut, and one that’s ever so slightly less sanative. Let’s have some fun!
Good news for DTC startups
In the wake of Casper’s underpowered and rapidly descending public offering, DTC startups got a bit of a bad rap. Rising channel advertising costs biting more deeply into customer acquisition costs while software revenue multiples scaled to new heights thanks to the pandemic and an accelerating digital transformation made the model of actually making physical goods and selling them to consumers seem a bit old hat.
Why chase lower-margin, non-recurring revenue when there are startups out in the market creating higher-margin, recurring top line? Well, the Warby direct listing makes a solid case that investing in DTC companies may be a way to generate strong returns while not being forced to pay Series F prices for Series A SaaS companies.
To wit, Warby racked up $270.53 million in revenue during the first half of 2021. That was up 53% from its H1 2020 result of $176.80 million. The company’s revenue growth in the first half of 2020 was impacted by COVID, mind, making its year-over-year growth rate a bit less impressive than the raw numbers might cause you to think at first blush.
Regardless, on a $541.06 million annual revenue run rate based on its first-half 2021 revenue results, what is Warby worth in revenue multiple terms? The company, which set a reference price of $40 per share, is worth $53.95 per share as of the time of writing, and told the market that it has “111.5 million shares of Common Stock outstanding” as of its direct listing.
That means that Warby is worth $6.02 billion, or just over 11.1x its current run rate. For a DTC company! That’s a similar multiple to lower-tier public SaaS companies, which is pretty darn good. So, if you are a DTC startup that wants a bit more respect, just shove the Warby numbers under your investors’ doors. There’s market appetite for double-digit-revenue DTC multiples out there.
Good news for unicorns more broadly
That Warby managed a strong public offering is good news for unicorns as a cohort; not all unicorns are growing at 100% per year with strong gross margins and whatever their equivalent of net-dollar retention might be. Some are more pedestrian businesses, like Warby, which sells glasses.
And yet the company just flat-out crushed its middle-late 2020 valuation by a factor of about two. That’s impressive value creation for what we might consider a nontraditional unicorn. By which we mean that it’s not dealing merely in bytes, but in physical goods. And if Warby can debut with healthy numbers, unicorns with similar growth rates and a revenue type that Wall Street has an even warmer perspective on certainly can.
If you have been praying to the pantheon for more unicorn debuts, here’s a public offering that should sound more like a starter pistol than anything else.
Good news for direct listings
Both Warby and Amplitude had strong direct listings, with ample demand for their shares carrying their value over their set reference prices. For unicorns leery about traditional IPOs for whatever reason, here’s even more data that there are other routes to the public markets that are more than open.
From where we sit, that indicates that we should be soon stampeded by myriad unicorns hunting the exits while the doors are still flung wide.
Bad news for solving the pricing mess
Sorry to bang on about this so much today, but the pricing issue has not been solved by direct listings. Amplitude shot far over its reference price — and the value it was awarded in a private round earlier this year. So, private market investors got the company’s value even more wrong than most IPOs manage. Alas.
Warby is a similar, if more modest, case. It last raised private capital in August 2020, when it added $120 million to its coffers at roughly a $3 billion post-money valuation. Just over a year later, that figure is double. Now, you can argue that Warby raised that round after it had just suffered from a COVID-induced revenue dip in Q2 2020.
And fair enough! But private market investors love to talk long-term value and a long-term perspective. So I don’t think that we should simply wave away the fact that the D1 Capital Partners-led round was done at what appears today to be an excessive discount.
Raising private and then direct listing can shift value from public-market investors to those focused on private companies, but in terms of nailing primary raises to post-debut values, the market still has work to do.