Marc Andreessen, software industry veteran and founder of the venture capital (VC) firm Andreessen Horowitz (also known as "a16z"), wrote a now-famous article in 2011 titled, Why Software Is Eating the World. The article laid out the argument that software would disrupt many industries in the years to come, due to the rise of mobile technology, reduced costs of computing, and the ever-increasing bandwidth of internet connections. Andreessen's team stuck to this theory as they went on to profit from numerous early-stage software start-ups, including Slack Technologies (NYSE:WORK).
The creator of team-collaboration software debuted on the public markets earlier this year but not in the typical way. We'll dive into the details of how shares became available, discuss the winners from that event, and finish up with how early public investors are doing.
Why Slack didn't IPO
One of the primary reasons a company has an initial public offering (IPO) is to raise cash, but Slack didn't need to do so. Prior to going public, it reported a healthy $831 million of cash and marketable securities on its balance sheet. Instead, it chose a direct public offering (DPO), which has the benefit of avoiding the process and cost of underwriting. The company still filed paperwork with the Securities and Exchange Commission, but on DPO day, no new shares were released. On June 20, existing shareholders (insiders, venture capital funds, and employees) were free to sell their stock at prices buyers were willing to pay.
The first day of trading saw share prices range from $38.25 to $42.00, eventually closing at $38.62. When the stock entered the public domain that day in June, it created some big winners.
The winners of the DPO
CEO and co-founder Stewart Butterfield became a billionaire when shares went public. A number of venture capital firms' positions (including a16z's) were also worth billions of dollars. The VC firms that bought into in Slack while it was a private company turned their initial investments into multibaggers, but that's the math of venture capital: Many bets go to zero, but some hit it big, like Slack.
A few senior management and board members became multimillionaires through stock option grants. But there were even some rank-and-file employees who'd been awarded stock as part of their pay packages. Employee stock options at the time of the DPO averaged $6.22 per share. Based on this average figure, an employee's stock award of $10,000 would have included 1,607 shares. With Slack trading at $22.00 per share as of this writing, that would be worth $35,354. Slack insiders who were lucky enough to have stock options would certainly be happy.
Unfortunately, individual investors had to buy shares on the open market -- and they have not fared nearly as well.
Early public investors are far from positive returns
The stock is down 43% from its first day closing level. So an eager investor who invested $10,000 to buy 258 shares on opening day would only have $5,676 as of this writing. This is far from a winning result, but new issues do trade below their IPO prices. Even Facebook saw shares dip below its IPO price for extended periods, though the company has gone on to be a market-beating stock. It's not certain whether Slack will follow in those footsteps, but it's still early for this innovative software-as-a-service company.
With impressive growth rates and a product that customers love, Slack is on track to be much larger five years from now. But many investors think this is too speculative a bet with competition from deep-pocketed Microsoft, no profits expected in the near term, and a valuation ringing in at a lofty 21 times sales.
If this story is to have a happy ending for investors, it will be because of Slack's leadership. It turns out that the quality of the team that Butterfield built is the reason why Andreessen's firm stuck with them, even after they failed at creating a profitable online gaming company. This endorsement should give shareholders some comfort that Slack's future is in good hands.