Slack Technologies Inc. recently decided to go public. The startup workplace communications messaging company has thrived since it was founded in 2009. With over $400 million in annual revenue, Slack Technologies has done rather well. Thus, banks and investors might be quite excited with the company’s mention of going public. But there’s one major caveat. Slack Technologies has opted not to pursue a traditional IPO route. Instead, their public debut will be based on a Slack direct listing on stock exchanges.
The Slack direct listing is highly unusual, as few companies choose this approach to its public offering. Spotify recently made the decision to pursue a direct listing, but its stock performance has been mediocre at best. Some have suggested that Airbnb may also take this approach in the future given its cash reserves. Understanding all this, one might question whether the Slack direct listing is part of some new trend among unicorn startups. Are direct listings soon to be the norm for tech startups moving forward?
A Look at Slack’s Offerings
Slack Technologies was founded in 2009, and the company is essentially a workplace messaging platform. It provides a collaborative workplace that allows interpersonal chats, file sharing and group conversations in a highly flexible manner. These provisions have made Slack Technologies highly attractive, especially for large companies that have thousands of employees. In fact, while the company has over 95,000 paying customers, 645 account for 40 percent of Slack Technologies’ revenues. Its popularity among these big clients has awarded the company notable financial reserves.
In essence, Slack Technologies generates revenues by charging clients based on user volumes. But at the same time, more than 500,000 users enjoy the services for free. As part of its organic marketing approach, Slack Technologies attracts new clients through word-of-mouth. This strategy appears to have worked well with the company—now valuated above $16 billion. Being in such a stable position, CEO and Co-founder Stewart Butterfield has opted against the traditional IPO filing. Instead, the Slack direct filing will allow existing shareholders to publicly trade their shares without the hassles that IPOs impose.
Why the Slack Direct Listing Makes Sense
As noted, the Slack direct listing provides an opportunity for existing shareholders to trade their stock publicly. But what are the benefits of pursuing such a strategy? After all, if no new stocks are being offered, then the opportunity to generate capital funding doesn’t exist. For companies like Slack Technologies, this case is not as important. In addition to having continued growth at 82 percent over the last year, the company also has declining operating expenses. This fact, in addition to adequate cash reserves, means the need for additional funding is not crucial.
Several other advantages exist with the Slack direct listing decision. For one, the existing shares will not be diluted with the additional shares normally created during a traditional IPO. The Slack direct listing also avoids expensive underwriting fees by banks that are used to allowing initial share prices to start lower than actual values. And direct listings do not have required lockup restrictions typical of IPOs. Given these additional benefits, it is understandable why the decision for the Slack direct listing took place.
What’s the Potential Downside for the Slack Direct Listing?
Obviously, the choice involving the Slack direct listing eliminates the opportunity to generate new cash for the company. Still, beyond this concern, some additional downsides may also exist. One potential negative outcome can be stock volatility. The lack of investor education that usually occurs with an IPO offering is not as extensive. This situation can result in varying opinions regarding share values resulting in ups and downs after the company goes public. Such is a concern for Slack Technologies also because of its large “free” customer base and potential competitors.
Other possible downsides of the Slack direct listing involve the volume of shares being sold. If existing shareholders sell an excessive amount of stock, then the company’s share value—and valuation—can tumble. Likewise, if too few shares are sold, ongoing valuations can be challenging, thus creating delays in accurate assessments. Due to many employees’ shares attaining fully vested status at the time of public offerings, the latter is not expected. And Slack Technologies hopes the former does not occur simply due to its prior valuations.
An Aberrancy or a New Trend Among Startup Unicorns?
Without a hefty underwriting fee, banks may be the ones that lose the most through the Slack direct listing. Yet at the same time, Slack Technologies is taking some risks as well. Ultimately, the choice between an IPO versus a direct listing involves several factors. These include tolerance of share dilution, a need for capital, and the strength of the existing shares that already exist.
Markedly, for companies like Slack Technologies, it is understandable why a direct listing might be considered. And if they do well, it may certainly provide a roadmap for other startups in similar positions in the future.
