SPACs, Everywhere, 2021
Whether Gurley is right remains to be seen.
By November 2021, nearly a dozen direct listings had taken place since Spotify’s transaction, including six in that year alone. Among those was gaming platform Roblox, cryptocurrency exchange Coinbase, and eyeglasses retailer Warby Parker.
Some portion of those set a high-water mark on the first day of trading, only to see the shares decline over the following days. Institutional investors began to wait out the listings in the hopes of getting a better deal. It was a sign the market was beginning to adapt to the new listing approach.
Most companies continued to choose the traditional IPO, in what Goldman Sachs called a “supercycle” for technology listings supported by rising stock markets. More than 120 companies raised $71 billion in proceeds in traditional U.S. IPOs through November 12, 2021, delivering more than $3 billion in fees to Wall Street underwriters. The figures roughly doubled 2020’s count. By November 2021, not one company had publicly announced any intention to figure out how to raise capital alongside a direct listing. While the surging IPO market was credited with giving entrepreneurs the freedom and safety to try new things, it also exerted a countervailing force. Companies felt like they couldn’t wait to go public and hash out the primary direct listing with regulators if it meant missing the IPO window.
Instead, innovation largely took hold within the traditional structure. The Unity–Goldman Sachs order-entry system, which Goldman branded after the fact as the “transparent IPO,” or T-IPO, and Morgan Stanley’s look-alike became standard. Many firms scrapped the traditional 180-day lockup, instead allowing a portion of sales on the first day or releasing insiders once the stock price rose a certain amount. Retail investors became a bigger part of the conversation, spurred by features on Robinhood and other trading apps that gave users a chance to buy into IPOs.
Changes made to the traditional IPO market have spread to other industries. In 2021, the SEC chose to make the testing-the-waters meetings enabled by the JOBS Act available to companies in every industry. In financial markets as well as product markets, technology companies were leading the way.
There was still much to resolve about the mechanics of raising money with a direct listing. The biggest hurdle was finding and adjusting the price range that the SEC required every company to have published on the cover of its registration statement. Unlike an IPO, where the price of the shares is set over days and weeks, the direct listing would price in an auction in the middle of the trading day. Lawyers expected the SEC to require an amended prospectus if the price settled outside of the range. That was a nonstarter—approval for an amended filing typically took a day, which would slow down the process and potentially discourage investors from participating.
Workarounds were proposed, like a standard that would have the SEC review and sign off on an updated range within an hour or two. But not one company took the lead in negotiating a path through the thicket. The talks were likely to take months, all while other companies were getting wealthy by selling into rising markets.
The boom in blank check companies sponsored by the likes of Bill Ackman and Chamath Palihapitiya gave companies yet another option. In 2020, 248 SPACs raised $83 billion, while more than 550 deals raised more than $150 billion in 2021. Whether technology companies would fully embrace the trend by selling to the blank check firms remains to be seen.
Nonetheless, the SEC’s approval just before Christmas 2020 served as a fitting coda to a four-year period of rapid change in how companies exercised their fundamental need to raise capital from public market investors. Markets change and adapt, often slowly and then all at once. What took place in the months leading up to Spotify’s direct listing and in the years after felt like a moment in time that venture capitalists, startup executives, and investment bankers will remember for years. Suddenly someone challenged the status quo, which had felt broken to so many for so long. McCarthy’s simple act of asking questions was a reminder to entrepreneurs that the IPO process was designed for them. And that they should take on the mantle and make it work for them.
In every IPO, company executives try to solve for particular objectives. Many want to raise as much money as possible by selling shares at the highest price, while others are more concerned with allowing insiders an opportunity to sell stock immediately. Some simply want to pay as few fees as possible to their investment banks. Still others may prefer exploring features further down the auction spectrum, by making orders binding or subject to pro rata allocations.
For those who are asking the hard questions about the process, the goal becomes finding the best way to balance the competing forces of supply and demand to arrive at the preferred outcome.
“Three years ago, I don’t think you could even have these discussions with the banks, because there was no choice,” said one executive at a company that successfully questioned the status quo. Now companies had more leverage because they can go public through a direct listing or a blank check company. The investment banks “recognize that the product has to evolve,” the executive said.
By 2021, the group of executives, investors, and bankers who had led the recent wave of innovation began to move on. McCarthy stepped down as Spotify’s CFO in early 2020, handing the reins to Paul Vogel. A year later, McCarthy joined the board of a blank check company launched by former Goldman Sachs banker Gregg Lemkau, who had left during the pandemic for a job running Michael Dell’s investment firm.
Jabal’s time at Unity came to a surprising end. The company announced her departure in March 2021 and gave her a generous separation agreement when she left in May. Unlike her statement in the press release announcing her March 2019 hire, the press release announcing her departure didn’t quote the CFO. It’s unclear what led to her exit. Riccitiello continued on as CEO. Jabal and the company declined to comment.
Gurley stepped back from day-to-day investing at Benchmark, choosing not to invest money from the firm’s tenth venture fund.
Lise Buyer and Carl Chiou continued advising companies looking to go public. In June, they restored the secrecy of the bids in the Unity-designed order-entry system to help Marqeta, a payment processing firm, go public. The stock rose just 13 percent in its first day of trading.
Executives at Airbnb and DoorDash continued to ride the wave of the pandemic economy. In November 2021, Airbnb reported quarterly revenue of $2.5 billion and earnings of $1.22 a share, defying expectations. By the end of October 2021, DoorDash’s stock was hovering close to $200. More important to the company’s management team, nine out of the ten most important shareholders receiving allocations in the IPO held on to the majority of their shares.
Most prognosticators agreed that it would likely take a new personality, an executive or a group of executives with smarts and an independent streak, to continue pushing for change. If the new innovators make more progress, they will have the early disruptors to thank for paving the way.