To IPO Or To Direct List

The recent IPO of Toast and the direct listing of Amplitude raised again the issue of what is the best method to go public under the perspective of the company and of its long-term backers (founders, management team and VC funds).

Toast’s shares popped 56% in its NYSE classical IPO debut on September 22, 2021.

A little pop is considered healthy; however a large pop can be considered an error. Why?

1. A large pop indicates that the debuting company could have raised more money, or the same amount of capital, with less dilution.

2. Naturally, the hard-working log-term backers do not like it when (effort-attached) money is handed out to (effort-detached) new shareholders, as when bankers price an IPO too low while securing fat allocation in the deal for their own customers (for whom the investment banks work?)

Direct listing is a way to avoid the IPO pop.

In an IPO a company raises fresh capital by selling new shares. In a direct listing there is no issuing of new shares and, thus, no new capital flows to the company. The company simply starts to trade at a reference price set by the long-term backers, who can decide whether to sell or not. And since there is no formal price setting, there is no IPO pop.

However, as it happened with Amplitude, companies that opt for direct listing sometimes need cash (in addition, a cash rich company appears more stable), and then they go to a big final VC round just before the direct listing – in the case of Amplitude, it raised a $150M series F round, mainly with Sequoia and Battery Ventures, just 3.5 months before the direct listing (September 28, 2021), at $32 per share.

The direct listing price/share was then referenced at $35, representing a little pop of less than 10%. But surprise… Amplitude closed its first day of trading at $54.80, representing a gain of 71% for the last round VCs

Conclusion

Raising from VC funds and then direct listing does not solve the IPO pop issue.

However, is it better to enrich long-term backers (the VC funds) or the Wall Street investment banking apparatus?

I guess few founders would choose the latter option.