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The IPO reckoning

Bill Gurley

Hello and happy new year! Today: why 2021 might be a year of reckoning for IPO critics, a bunch more SPACs, and the NYSE won't stop flip-flopping.

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Overheard

  • "Son has successfully shed the WeWork stigma and no one talks about that anymore." —United First Partners' Justin Tang said the SoftBank narrative is all about the company's six upcoming IPOs.
  • "[SoftBank] has provided no information to Moody's since we withdrew our request for a rating from the company on March 25, 2020, hence their opinion is based on their subjective assumptions and hypotheses with no reasonable basis for support." —SoftBank continued to feud with Moody's after the ratings agency gave a negative outlook for the company ahead of a planned bond sale.
  • "If U.S. IPO markets continue to jerk Chinese companies around, it will send a really unwelcome signal to these high-growth Chinese companies that maybe they should consider listing in Hong Kong and Shanghai instead." — Race Capital's Edith Yeung told Protocol that the NYSE flip-flops on Chinese stock delistings could have lasting consequences.

The Big Story

A year of reckoning for IPO doomsayers

The "are IPOs good" debate has raged on for years. Investors, founders, academics and bankers have argued about it endlessly: IPOs are a cash handout to banks, some argue; picking your investors is useful, others say. But this year, push comes to shove: We'll finally see if anyone actually wants IPOs, or if there really is a better way.

Say hello to direct listings with capital raises, known as Primary Direct Floor Listings, which will be put to the test this year after the SEC approved the NYSE's proposal for them just before Christmas. In doing so, the SEC removed the one big problem with direct listings: the fact that they didn't work for companies in need of cash.

  • Now, a company can go public via a direct listing and raise cash at the same time. In other words, direct listings are now a much more attractive route to the public markets.
  • It's worth noting that some people didn't want this to happen. Back in September, I spoke to the Council of Institutional Investors' Jeff Mahoney, who petitioned against the rules. He said that the lack of a lockup period in a direct listing could create traceability problems for investors looking to sue for securities fraud — something that the law firm that worked on Spotify and Slack's direct listing cited as an advantage of the process for companies. The SEC dismissed Mahoney's concerns.

For a taste of what's to come, look at Roblox. On Wednesday, it said it had privately raised $520 million ahead of a direct listing. That's not quite a Primary Direct Floor Listing — the regulation is so new that no company has done one yet — but Roblox shows why they might prove to be attractive.

  • Roblox previously planned to IPO, but changed plans after DoorDash and Airbnb posted massive first-day pops. It was reportedly concerned that such pops would lead its employees to feel shortchanged.
  • As CEO David Baszucki reportedly told employees this week, the lack of lockup is another benefit. "We have concluded that a direct listing is the best path for Roblox as we believe it will create a more market-based relationship for all our stakeholders," he reportedly wrote.

What the Roblox example misses, though, is that Roblox got to pick its investors and the price at which it raised. While that sets a guide for the direct listing, there's no guarantee that it'll go public at that price.

  • In other words, it might still list at a valuation significantly above the $29.5 billion it raised at this week. As was the case with Airbnb and DoorDash, retail investors may be willing to pay a ton more for the stock than institutions.
  • That's in contrast to a Primary Direct Floor Listing, where the company raises money at the same time — and at the same price — it goes public at, avoiding the pop altogether.

So the bigger question is this: If companies can go public through the new and seemingly superior Primary Direct Floor Listing, why would they ever choose to IPO?

  • According to notable IPO-hater Bill Gurley, they won't. IPOs are "unquestionably" going away, he said. He even went a step further, saying, "I think people are going to come after boards for fiduciary duty violations for knowingly entering into a process where you're selling a corporate asset at a massive discount."
  • But as Frank Slootman pointed out when Snowflake popped, the "pop" was driven by a small number of investors, and it's highly unlikely that the company could have raised billions at its first-day trading price.
  • And, of course, companies like choosing their investors: Roblox, in its decision to do a separate capital raise rather than a Primary Direct Floor Listing, is testament to that. (Not that that's the future, either: There were no regulations stopping other companies from doing what Roblox is doing before, but most have avoided that path nonetheless.)

So 2021 is a make-or-break year, but perhaps more of one for IPO critics than anyone or anything else. According to them, there is no longer any excuse for a company to IPO rather than use a direct listing. I have a feeling they're wrong. By the end of this year, we might know for sure.

A MESSAGE FROM MICRON

Micron

For Raj Hazra, who is senior vice president of corporate strategy and communications at Micron, there has never been a more thrilling time than this golden age of data. In this interview, Hazra describes how "we are now at the doorstep of taking things that we thought were science fiction and making them real, and it's only going to be exponentially faster going forward". Read more from Micron's Raj Hazra.

Up to Speed

  • Monday: Google and Snap were reportedly in talks to invest $200 million in ShareChat at an over $1 billion valuation. Google has previously considered acquiring the company, according to reports. Also Monday: Teledyne bought FLIR for $8 billion; Applied Materials raised its bid for Kokusai; Aeva raised $200 million ahead of its SPAC listing; and Amazon, JPMorgan and Berkshire Hathaway gave up on Haven.
  • Tuesday: Gojek was reported to be in merger talks with Tokopedia, potentially creating an $18 billion giant, after Grab-Gojek merger talks reportedly stalled. Also Tuesday: Chinese regulators reportedly wanted Ant Group to share consumer data with the central bank; Trump banned U.S. transactions with Alipay and other apps; Global Switch was reportedly considering a $11 billion sale; Rivian was reportedly raising at a $25 billion valuation; and Achronix was reported to be considering going public via a SPAC.
  • Wednesday: Alibaba was reported to be raising up to $8 billion in a new share sale. The sale would be a major test of investor confidence in the company, amid a government investigation into the company and Jack Ma's recent absence from the public eye. Also Wednesday: Udaan raised $280 million at a reported $3.1 billion valuation; Kahoot said it would list on the main Norwegian stock market; SalesLoft raised $100 million at a $1.1 billion valuation; Dremio raised $135 million at a $1 billion valuation; LG bought Alphonso; and the U.S. was reported to be considering banning U.S. investors from owning Alibaba and Tencent stock.
  • Thursday: SoFi said it would go public via one of Chamath Palihapitiya's SPACs. The deal values the company at $8.65 billion. It will be the fourth company to go public via one of Palihapitiya's SPACs, following Virgin Galactic, Opendoor and Clover Health. Also Thursday: Simple said it would shut down; Red Hat acquired StackRox; F5 Networks acquired Volterra for $500 million; Quantum Metric raised $200 million at an over $1 billion valuation; and Robinhood was reported to be considering selling shares to its users in its IPO.
  • Today: TSMC's quarterly revenue missed estimates slightly but it set a record regardless, pushing its stock to a record high. Samsung stock also hit a record high, while Micron issued an expectations-beating forecast. Also Friday: Bakkt was reported to be going public via a SPAC; Tuhu was reported to be raising at a $4 billion valuation; Tencent reportedly invested $100 million in Xingsheng Youxuan at a $5 billion valuation; and Tesla overtook Facebook to become America's fifth most valuable company.

Coming Up

  • IPOs are back! Affirm is expected to start trading on Wednesday, having set a price range this week that would see it raise almost $935 million. Poshmark, due to list Thursday, hopes to raise $257 million.

A MESSAGE FROM MICRON

Micron

For Raj Hazra, who is senior vice president of corporate strategy and communications at Micron, there has never been a more thrilling time than this golden age of data. In this interview, Hazra describes how "we are now at the doorstep of taking things that we thought were science fiction and making them real, and it's only going to be exponentially faster going forward". Read more from Micron's Raj Hazra.

Thoughts/feedback/tips? Email me — shakeel@protocol.com — or tips@protocol.com. And subscribe to get Index in your inbox every week. Thanks for reading — have a great weekend, and see you next week.

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