IPOs, SPACs, and direct listings: Silicon Valley opens the doors to more investors
When the members of Fortune’s annual Investor Roundtable met this month, late-stage tech startups were very much in the public eye. Sky-high valuations in the private market are encouraging more companies like Airbnb and DoorDash to pull the trigger and go public. And other startups are eyeing alternatives to traditional initial public offerings—including direct listings and mergers with special purpose acquisition companies (aka SPACs).
Those alternatives are often good for the founders—but are they good for investors? Our panelists had no shortage of opinions.
Joining us were Savita Subramanian, head of U.S. equity and quantitative strategy and head of global ESG research at Bank of America Merrill Lynch; Josh Brown, CEO of Ritholtz Wealth Management; David Eiswert, head of the top-performing T. Rowe Price Global Stock Fund; Sarah Ketterer, CEO and fundamental portfolio manager of Causeway Capital; and Mallun Yen, cofounder and general partner of early stage venture capital firm Operator Collective. The following is an edited excerpt from our conversation.
Fortune: DoorDash and Airbnb and other later-stage startups are expected to IPO soon. They have so much more momentum now than we would have imagined eight months ago.
Mallun Yen: At the beginning of the pandemic, everyone thought, Oh, gosh, Airbnb was on its way to going public, and then the travel and hospitality industry was seemingly decimated. Silver Lake was quite prescient, stepping in there at a very reasonable valuation. And now Airbnb is booming.
On the private venture capital side, valuations are kind of crazy. So while a lot of companies are in preparation to file, more and more are looking at alternative ways of getting financing. There’s been a lot of discussion about direct listings and SPACs [special purpose acquisition companies, which raise cash to buy privately held startups and take them public]. That’s not the right alternative for every company, but I love the trend of investor democratization. The openness to doing things not just the traditional way, I think, is ultimately going to benefit the broader economy.
Josh Brown: But it’s not always better. Let’s look at direct listing: Slack went public that way. Not great for shareholders who came in in the aftermarket, and not just because the stock hasn’t performed well. There’s no lockup for insiders. Executives are free to sell, and they’re not under any pressure whatsoever to deliver results. Whereas if you come public in the traditional way, the insiders are locked up for six months, nine months.
With SPACs, I get it: The IPO road show is arduous; you can’t do it in COVID times. This is a really efficient way to match an investor with a company. But that’s the thing: It’s one investor, the SPAC, deciding this is the right price for this company. There is no vetting process. And what we’ve seen with Nikola and others, like MultiPlan, is that oftentimes, these companies would have benefited from having more vetting on a traditional road show. They would never have gotten the valuations they got, and people wouldn’t have lost billions of dollars.
David Eiswert: I can’t even keep track of them. We have 150 analysts, and I still don’t even know what’s going on. You can’t do the kind of due diligence that you want to do.
Of SPACs that have taken a company public, are there any that seem like models for doing it right?
Brown: DraftKings looks good. I like everything about the way they did that. And it was early.
Yen: There are very strong companies that could have done this if they wanted to, but they didn’t—Snowflake, for example. As with everything, there’s a 1.0 model, and the ones that aren’t as strong are going to fall by the wayside.
Sarah Ketterer: I’m going to add that the proliferation of SPACs, plus the record level of loss-making IPOs, tell us something, which is, we’re at a very exuberant part of the market cycle. And what happens after that?
More from the Investor Roundtable
A version of this article appears in the December 2020/January 2021 issue of Fortune with the headline “Investor Roundtable: The smart money plots its next move.”