Direct Listings vs. IPOs: Fixing the Pricing Problem?

Upcoming Public Offerings: Amplitude and Warby Parker

A significant week for public markets is underway. U.S.-based software firm Amplitude is anticipated to announce its direct listing reference price tonight, with trading scheduled to commence tomorrow morning, according to publicly accessible IPO schedules.

Warby Parker is also preparing for a direct listing later this week; further details regarding its financial performance can be found here.

Extensive coverage of both initial public offerings will be provided by TechCrunch.

Why These Listings Matter

These two companies deserve attention, even for those fatigued by IPO activity. Amplitude’s debut is particularly noteworthy as a direct listing occurring after substantial private funding rounds.

The company is employing a liquidity strategy that capitalizes on significant private investment while circumventing the pricing challenges often encountered in conventional IPOs, which have frustrated many within Silicon Valley’s investment community.

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Furthermore, the Warby Parker offering will serve to establish – or potentially revise – market perception concerning Direct-to-Consumer (D2C) businesses.

Many do not classify the unicorn as a technology company, however, its roots in e-commerce and its history of venture capital backing maintain its relevance within TechCrunch’s scope.

Like Amplitude, Warby Parker is also opting for a direct listing following recent private capital raises.

Public vs. Private Valuation

These two direct listings will provide valuable data to determine which side of the public-private valuation spectrum is more accurately assessing startup worth.

Is it investment banks extracting undue value from Silicon Valley companies at the time of their IPO, or are private market investors displeased with the prospect of others benefiting from startup growth?

Let's examine the process by which we can resolve this question.

Direct Listing Strategies: Raising Capital and Going Public

In recent times, several companies have opted for direct listings rather than traditional Initial Public Offerings (IPOs). Spotify stands out as a prominent example, alongside Asana, Wise, Squarespace, Coinbase, and Roblox.

Amplitude is now preparing to enter the public market through a direct listing without initially raising new capital. Prior to this, the company secured substantial funding – $150 million at a valuation nearing $4.2 billion, according to Crunchbase. This approach separates the conventional IPO process, which typically combines a primary capital raise with the public offering.

A further variation involves direct listing followed by a follow-on offering to raise primary funds once the market establishes a potentially more equitable price for the company’s shares. Currently, there's exploration into enabling companies to simultaneously direct list and raise primary capital, thereby shifting pricing authority from investment banks to public investors. However, this latter option remains largely conceptual at this stage.

Consequently, unicorns seeking to avoid a traditional IPO can secure private funding either before or after a direct listing, aiming to circumvent the substantial first-day price surges observed in some recent IPOs.

Roblox exemplifies the strategy of raising capital before a direct listing. The company initially filed for an IPO but paused the process after observing the successful debuts of other firms. Subsequently, Roblox raised private funds in early 2021 and then proceeded with a direct listing. Squarespace followed a similar path, raising $300 million at a $10.0 billion post-money valuation in March before its direct listing in May.

This model is now being tested by Amplitude and Warby Parker. The central question is whether raising private capital and then direct listing effectively addresses the pricing challenges inherent in traditional IPOs, where bankers and institutional investors often undervalue the company compared to what retail investors are willing to pay.

The results observed thus far have been inconsistent:

• Roblox had a valuation of nearly $30 billion following its private funding round in January 2021. Upon becoming a public company in March, its share price reached $69.50, a significant increase from the $45 per-share price set during the pre-direct listing round. This suggests that private investors significantly undervalued the company’s stock, mirroring the pattern seen in many recent traditional IPOs.
• Squarespace was valued at $10 billion in March 2021 after its final private funding round. The reference price was $50, but the company began trading closer to $43 per share, peaking at $64 before falling to just above $40. In this instance, Squarespace appeared to be overvalued during its private phase, prior to its public debut.

In Roblox’s case, potential value was left unrealized. Conversely, Squarespace may not have been undervalued.

Evaluating the raise-private-and-then-direct-list model is complex, making the offerings from Amplitude and Warby Parker particularly significant. Their outcomes will provide additional data points for analysis.

Other direct listings offer limited comparative insight. Coinbase had ample cash reserves and didn’t raise capital ahead of its debut in the same manner. The same holds true for Asana and Wise. These larger direct listings represent purer forms of the strategy, distinct from the hybrid model under discussion.

Looking forward, the key metric will be the direct listing reference prices for each company and their comparison to the final private prices. However, this comparison is only moderately informative. A reference price is akin to a suggested retail price that is rarely achieved; it serves as a general indicator.

The crucial data will be the initial trading prices established when Amplitude and Warby Parker actually begin trading. This will reveal how accurately private-market investors assessed the true value of each company and whether the raise-then-float model genuinely resolves the IPO pricing issue, or simply alters which group of affluent investors benefits from an additional opportunity to profit from assets they did not cultivate.

Numerous unicorns are anticipated to go public in the coming months, and they are closely observing these developments.