Slack Technologies (WORK) hit the public markets today by way of a direct listing instead of a traditional IPO. The wildly popular enterprise chat platform is the second company in recent memory to use that relatively rare method of going public after Spotify (SPOT 0.93%) did likewise early last year. Direct listings aren't for every company. Most use IPOs to raise capital, so a direct listing is a viable option for companies that aren't looking to raise capital.
"It's not for everybody, and it's not going to displace the current IPO. But it's for companies that fit a specific profile, meaning they don't need to necessarily raise capital but they want the other benefits of being a publicly traded company," NYSE COO John Tuttle told Yahoo! Finance regarding Slack's debut today. "So, this is a new option for them."
So what is the exact reason why Slack isn't doing a regular IPO?
Slack didn't want to raise capital
In an interview with CNBC this morning, co-founder and CEO Stewart Butterfield said the primary reason why Slack was eschewing the standard IPO process was that it simply does not need to raise capital at this time, which would dilute existing shareholders. Butterfield said:
The big thing for us was -- in a traditional IPO it's the company that's offering shares. You might raise, you know, a billion dollars or something like that. When you raise a billion dollars, you dilute existing shareholders by issuing new shares. So we're not doing that. We are just opening it up for trading.
Butterfield notes that Slack has nearly $800 million ($792.7 million) in cash on the balance sheet already and doesn't need any more. Slack does lose money and burn cash, but not at astronomical rates, and that existing cash position already offers a cushion. Net loss last fiscal year was $138.9 million and free cash flow was negative $97.2 million.
That being said, going public does give Slack greater access to capital markets if it decides to raise capital in the future. Butterfield acknowledged that Slack could do a secondary offering at some point later. "One of the things about being public is it opens up capital markets generally," Butterfield told the outlet. "So not just equity, but debt, converts, all kinds of stuff."
Additionally, Slack shares won't be bound by any lock-up agreements, and distribution is somewhat more equitable in a direct listing compared to an IPO. In the traditional IPO process, underwriters allocate shares based on investor demand. Inevitably, institutional investors (that often have other business with investment banks) get priority while retail investors may not get all of the shares they want -- institutional investors typically get 90% of allocations on average, according to Fidelity. In a direct listing, institutional investors and retail investors have the same access to the open market with no allocation process.
In contrast, Spotify had a less publicized reason for pursuing a direct listing: finagling its way out of a terrible convertible debt deal with private investors. That situation was unique to Spotify and does not apply to Slack, but both companies now enjoy the benefits of being public.