The IPO market is on fire. In 2021, more companies have gone public since the internet bubble in 2000, and there’s no sign of it slowing down. Even with this influx of new public companies, only a select few have chosen the direct listing route. And if you ask me, the rest made a mistake.
Traditional IPOs are one of the worst ways a company can go public, so when my team decided to take Amplitude public earlier this year, the decision to do a direct listing seemed obvious. Here’s why other CEOs should consider doing the same.
You won’t sell your stock at a discount
Big IPO pops might generate a wave of media coverage, but at the end of the day, these companies left a lot of money on the table. Over the last 40 years, companies going through IPOs underpriced their stock by an average of 20%. That number jumped to almost 50% in 2020.
As a fiduciary to my shareholders, I couldn’t stomach the idea of selling Amplitude shares for half-off. A market-based share price seemed like a much better option, and that’s one of the biggest benefits of a direct listing.
Instead of investment bankers and executives controlling the opening share price, like they do in a traditional IPO, there’s an auction process to determine how much existing shareholders and new investors are willing to buy and sell for. For Amplitude, this meant that we opened at $50/share instead of the $35/share reference price that bankers assigned us.
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You’ll attract long-term investors
One of the big reasons companies under price their stock is to attract as many investors as possible to buy. But if the only reason an investor is interested in your stock is because of the low price, they’re not going to stick around for long. They want a quick return and then they’re onto the next.
Not only does this result in a lot of volatility, but it requires company leaders to constantly start fresh with investor education. A direct listing helps eliminate this problem because it attracts investors who are in it for the long-term. If someone is willing to pay the fair market-price for your company’s shares on day one, it is because they believe in where the business is going and will stand by it through market ups and downs.
You’ll empower retail investors to reap the benefits
In a traditional IPO, institutional investors are often the biggest winners. They’re the only ones allowed to buy and sell stock on the day of a company’s public market debut. This is something that’s always bothered me — why should the big funds get exclusive, early access to IPOs? They already have enough money!
A direct listing offers a much more inclusive experience. Starting on day one, retail investors are allowed to participate in trading. This includes your employees, who would otherwise have to wait around for the mandatory lockup period to end before they can cash in. With economic inequality increasing all over the world, a direct listing is one small way CEOs can create wealth-building opportunities for everyone.
Direct listings are still very uncommon — Britain just saw its first one earlier this summer — but I hope more companies around the world start to realise the benefits. Traditional IPOs may feel like the safer path, but once companies take the time to understand the short- and long-term financial benefits, the right choice becomes clear.
Written by Spenser Skates, CEO and co-founder of Amplitude