Last year was rough for many new stocks.
Sure, Beyond Meat soared. But Uber and fellow ridesharing unicorn Lyft both flopped in their Wall Street debuts. WeWork struggled due to significant concerns about its business model and corporate governance.
You’d think companies would want to avoid Wall Street in 2020. Not so fast.
As Spotify and Slack have proved, this is an efficient way for companies to go public without needing to raise money.
Both companies recently sold shares on the NYSE through a direct listing, which allowed them to bypass expensive underwriting fees for bankers and splashy road shows to target potential investors. Radio and billboard company iHeartMedia also went public via a direct listing on the Nasdaq in 2019.
Now, Airbnb is widely expected to do a direct listing later this year. The CEO of open source software company GitLab, which is currently worth about $2.8 billion according to research firm CB Insights, has also said in numerous interviews that a direct listing for the company is possible some time in 2020.
More SPACs and fewer IPOs?
This isn’t a realistic route for most companies. This is primarily a strategy reserved for large private companies that don’t need new funding.
Take Richard Branson’s Virgin Galactic, which went public recently through what’s known as a SPAC — a special purpose acquisition corporation. Virgin merged with an already existing public company named Social Capital Hedosophia that had no assets.
SPACs are often referred to as “blank check” companies and are typically set up by VCs or private equity firms. They’re often derided by investors as a last resort for sketchy companies to go public.
But Virgin shares are up more than 45% already this year, validating the SPAC process and proving that investors are hungry for some new companies — no matter how they go public.
“There is a lot of energy in the new listing market. Everyone is asking about options. Do a direct listing? An IPO? Go public through a SPAC?” said Jackie Kelley, the America’s IPO leader for EY. “SPACs are definitely a more viable option today.”
Virgin is not the only well-known SPAC.
Atkins Nutritionals, which sells low-carb foods tied to the popular Atkins diet, merged with a SPAC in 2017 to create The Simply Good Foods Company. Simply Good’s stock has more than doubled since the merger and the company has grown even bigger thanks its $1 billion purchase of protein snack maker Quest Nutrition last November.
More blank check companies are coming soon, too.
Fantasy sports company DraftKings plans to go public by merging with sports betting tech firm SBTech and a SPAC named Diamond Eagle Acquisition Corp. The combined company will be called DraftKings Inc. and it will get a new ticker symbol.
During a conference call with analysts about the Diamond Eagle deal last month, DraftKings CEO Jason Robbins said that having a publicly traded stock will make it easier for the company to access capital for future growth opportunities.
The number of SPACs as a percentage of new offerings has soared from 4% in 2013 to 30% last year, according to a recent report from consulting firm PwC.
“Looking forward, the surge in SPACs will likely translate into greater activity in deal markets as they fulfill their acquisition strategies” the PwC analysts added in the report.
Direct listings only make sense for a handful of unicorns
There should be plenty of new companies this year for investors to choose from for their long-term portfolios.
Food delivery services Postmates and DoorDash, trading app Robinhood, big data firm Palantir, digital payments processing firm Stripe and Chinese ridesharing leader Didi are at the top of many 2020 IPO lists. It’s unclear which listing route they will take.
Still, many risks remain, both for companies looking to go public and investors considering whether an IPO, direct listing or SPAC makes sense for their portfolios.
Analysts at CB Insights said in a report that the noise associated with the 2020 presidential election as well as heightened attention on corporate governance in the wake the WeWork fiasco could scare off some startups from going public.
“Some are just reaching the scale necessary to even consider going public, while others continue to tap into the abundant sources of growth capital in the private markets,” the CB Insights analysts said.
The memory of IPOs gone wrong like Uber are fresh in the minds of average investors.
“Investors have a chastened perspective about IPOs,” said Ric Edelman, co-founder of asset management firm Edelman Financial Engines. “IPOs are not necessarily the easy road to riches that they were once perceived to be.”