Index Ventures' Sarah Cannon explains why more startups should consider direct listings when going public

  • Direct listings can be more startup-friendly than IPOs, Index Ventures’ Sarah Cannon told Insider.
  • Index Ventures invested in Slack and Squarespace, which went public via direct listings.
  • Cannon said Slack gained confidence in using a direct listing after seeing Spotify’s performance.
  • See more stories on Insider’s business page.

The past few years have shown that the traditional IPO is no longer the only game in town for startups seeking to go public. According to Sarah Cannon, a partner at Index Ventures, even more of them should be looking at one alternative in particular: direct listings.

Several notable startups, including Asana and Palantir, have chosen to make their market debuts via direct listings rather than traditional IPOs. In direct listings, companies typically do not sell new shares, but sell existing ones to the public.

Cannon has plenty of experience with the alternative pathway to going public. Her firm is an investor in Squarespace, which made its public market debut on Wednesday via a direct listing. Roblox, another Index Ventures portfolio company, opted for the route earlier this year. And Cannon was a board observer at Slack, which went public in 2019 through a direct listing. 

Index has encouraged several of its portfolio companies to take a closer look at direct listings because of their benefits for both founders and employees, Cannon told Insider.

In Cannon’s view, direct listings hold a couple of key advantages. Because existing shareholders can sell their shares on the first day of public trading with a direct listing, as opposed to the typical six-month lockup period for an IPO, direct listings are the friendlier option for employees seeking a quicker payoff from the equity they have built up, she said.

Plus, Cannon added, direct listings are often less time-consuming for founders, because they typically involve only a single presentation to investors. By contrast, with an IPO, founders typically have to give several “roadshow” presentations to potential investors as the underwriters shop around their company’s shares.

“It takes management away from their day job,” she said.

Squarespace shares got off to an inauspicious start on Wednesday, closing below their reference and opening prices, but were trading higher on Thursday.

Overall, Cannon said, direct listings have held up in performance over the course of the first few months of trading. Cannon and Index declined to comment on Squarespace specifically.

In the past, direct listings were considered riskier than IPOs because they lacked the backing of a big bank. Some founders fretted that their startup’s shares would be more volatile if they chose that option, Cannon said.

But since Spotify kicked off the direct listing trend in 2018, more and more companies have opted for it. This year alone has seen Roblox and Coinbase make their market debuts via direct listing. ZipRecruiter is preparing to take the same route later this month. And Instacart is also considering the IPO alternative, Reuters reported. 

Cannon told Insider she and Slack’s team studied Spotify’s market debut and its first few months of trading very closely to see if a similar approach would be viable for them.

“The takeaway was that it wasn’t more volatile than the comparable tech stocks,” she said.

In December, the Securities and Exchange Commission allowed companies to sell new shares in a direct listing, which enables them to raise money as they go public, just like in an IPO. Several markets experts have suggested that the new rule could make direct listings even more popular.

Cannon agrees. “There hasn’t been a shortage of demand in any of these listings,” she said. “I really hope a lot more companies do it.”

A picture of a switch and lightbulb
Source: Read Full Article