Warby Parker Direct Listing: A Unicorn IPO Success

The Rise of Direct Listings as an Alternative to Traditional IPOs

The practice of companies going public via direct listing is experiencing a surge in popularity. Venture-backed organizations are increasingly opting for this route as a means to access public markets.

This trend is largely driven by a desire to avoid the pricing challenges that have impacted several high-profile initial public offerings (IPOs) recently.

Warby Parker's Successful Direct Listing

Warby Parker, a well-funded direct-to-consumer (DTC) company specializing in eyewear, recently completed a direct listing. The company has consistently maintained a robust online presence.

Alongside its e-commerce operations, Warby Parker has been strategically expanding its physical retail locations to complement its digital sales channels.

The direct listing proved to be a positive outcome for Warby Parker. Shares began trading above the company’s final private valuation.

Furthermore, the stock price saw significant gains throughout its initial day of trading. This outcome offers a degree of reassurance to the DTC market.

It helps to mitigate the negative perception created by the unsuccessful 2020 IPO of Casper, which cast a shadow over the startup business model.

Key Observations from the Warby Parker Listing

Before concluding our review of direct listing activity this week, several noteworthy aspects of the Warby Parker listing deserve attention.

The debut demonstrated several positive indicators, alongside one element that warrants slight consideration.

Let's delve into these observations to gain a deeper understanding of the implications for future direct listings.

Positive Developments for Direct-to-Consumer Startups

Following the underwhelming initial public offering and subsequent decline of Casper, direct-to-consumer (DTC) startups faced some criticism. Increasing costs associated with advertising channels, coupled with rising software revenue multiples fueled by the pandemic and a faster shift to digital platforms, led some to question the viability of a business model centered around manufacturing and directly selling physical products.

The question arose: why pursue lower-margin, one-time revenue streams when startups in other sectors were achieving higher margins and recurring revenue? However, the direct listing of Warby Parker provides compelling evidence that investing in DTC companies can still yield substantial returns, without requiring the high valuations often seen with early-stage SaaS businesses.

Specifically, Warby Parker generated $270.53 million in revenue during the first six months of 2021. This represented a 53% increase compared to the $176.80 million earned in the first half of 2020. It’s important to note that the company’s revenue growth in the first half of 2020 was negatively affected by the COVID-19 pandemic, which slightly moderates the apparent year-over-year growth rate.

Based on its first-half 2021 revenue, Warby Parker is currently operating at an annual revenue run rate of $541.06 million. What revenue multiple does this translate to? As of this writing, the company, which initially set a reference price of $40 per share, is trading at $53.95 per share, and has reported “111.5 million shares of Common Stock outstanding” in its direct listing documentation.

Consequently, Warby Parker’s valuation stands at $6.02 billion, which equates to a multiple of just over 11.1x its current run rate. This is particularly noteworthy for a DTC company. The multiple is comparable to those seen with lower-performing public SaaS companies, a very favorable outcome. Therefore, DTC startups seeking greater investor confidence can highlight these Warby Parker figures; there is demonstrable market demand for DTC companies with double-digit revenue multiples.

Positive Implications for the Unicorn Landscape

The successful initial public offering (IPO) of Warby Parker is a favorable sign for the broader group of unicorn companies. It’s important to recognize that not all unicorns experience the extremely high growth rates – such as 100% annually – coupled with substantial gross margins and high net-dollar retention figures.

Many operate as more conventional businesses, like Warby Parker, which focuses on the retail sale of eyewear.

Despite this, the company significantly exceeded its valuation from mid-to-late 2020, achieving roughly a doubling in value. This represents substantial value creation for a company that doesn't fit the typical "unicorn" mold.

Specifically, Warby Parker deals in tangible products rather than solely digital services. If a strong debut is achievable for Warby Parker, then unicorns demonstrating comparable growth and operating in sectors favored by Wall Street are also likely to succeed.

For those anticipating further unicorn IPOs, this offering should be viewed as an encouraging signal, akin to the starting gun in a race.

A Catalyst for Future Unicorn IPOs

The Warby Parker IPO demonstrates that a path to public markets exists even for unicorns with more moderate growth profiles. Growth isn’t the sole determinant of investor interest.

This success could encourage other privately held companies valued at over $1 billion to consider going public. It challenges the notion that only rapidly expanding tech firms are viable candidates for IPOs.

Here’s a breakdown of key takeaways:

• Valuation Multiples: Warby Parker’s performance indicates that reasonable valuation multiples are still available in the public market.
• Physical Goods: Companies dealing in physical products can successfully navigate the IPO process.
• Investor Appetite: There is continued investor appetite for well-managed, profitable businesses, even if they aren’t experiencing hypergrowth.

The Warby Parker IPO serves as a positive precedent, potentially unlocking a wave of similar offerings from other unicorn companies.

Positive Signals for Direct Listings

Recent direct listings of Warby and Amplitude have demonstrated considerable success. Strong investor demand propelled the value of their shares above the initial reference prices.

This outcome provides further evidence for unicorns hesitant about traditional IPOs that viable alternative paths to public markets exist.

Anticipating Increased Activity

Our current assessment suggests a forthcoming surge in activity. Many unicorns are likely to pursue exits while the opportunity remains favorable.

We anticipate a considerable number of these companies will explore direct listings as a means of going public.

Understanding the Trend

• Direct listings offer an alternative to the traditional IPO process.
• They allow existing shareholders to sell shares directly to the public.
• Recent successes have validated this approach for high-growth companies.

The positive results achieved by Warby and Amplitude are expected to encourage more companies to consider this route.

This increased activity could reshape the landscape of initial public offerings in the near future.

Challenges Remain in Establishing Accurate Pricing

Further discussion regarding the complexities of pricing is necessary, as the issue hasn't been resolved through direct listings. Amplitude’s initial public offering price significantly exceeded its previously established reference price, as well as the valuation assigned during its prior private funding round.

This indicates that investors in the private market may have misjudged the company’s worth to a greater extent than is typically observed in traditional IPOs. This outcome is, unfortunately, a notable observation.

Warby Parker presents a comparable, though less dramatic, scenario. The company secured $120 million in private funding in August 2020, resulting in a post-money valuation of approximately $3 billion.

Within a little over a year, this valuation has effectively doubled. It's worth noting that Warby Parker’s funding round occurred following a temporary revenue decline in Q2 2020, attributable to the impact of COVID-19.

However, private market investors frequently emphasize long-term value and a sustained investment horizon. Therefore, the apparent undervaluation during the funding round led by D1 Capital Partners should not be easily dismissed.

While utilizing both private funding and direct listings can potentially transfer value from public market participants to those involved in private equity, the market still requires refinement in accurately aligning primary funding rounds with subsequent public debut valuations.

The Disconnect Between Private and Public Markets

The discrepancies observed highlight a continuing challenge in bridging the gap between private and public market valuations. Accurately determining a company’s worth remains a complex undertaking.

Investors in private rounds may operate with different assumptions and timelines than those in the public markets, leading to these valuation differences. This necessitates ongoing evaluation of pricing mechanisms.

• Amplitude’s IPO exceeded both reference price and prior private valuation.
• Warby Parker’s valuation doubled within a short timeframe.
• Private market investors may have underestimated company value.

Ultimately, achieving more consistent and accurate pricing requires further market maturation and a more nuanced understanding of the factors influencing valuation in both private and public spheres.