Fortune: The Future of the IPO: Term Sheet

Direct listings had a spiritual predecessor in the form of the Dutch Auction—a method that failed to take off even though a hot company at the time, Google, tried to pave the way in 2004.

Venture capitalists and those involved then point their fingers at the investment banks for not getting on board. By those accounts, investment banks were unhappy participants in the company’s Dutch Auction—a twist on the traditional IPO that allowed for open bidding akin to eBay’s model, opening the doors to non-institutional investors. In turn, it took away much of the bank’s ability to determine pricing, for better or for worse.

“Investment banks really didn’t like the process because they had lost control and they weren’t as charitable,” said Lise Buyer, who worked on the Dutch Auction as Google’s Director of Business Optimization at the time. Buyer now helps advise companies on the IPO process as founder and principal at the Class V Group.

Early Google investor Michael Moritz of Sequoia Capital echoed the view in a recent op-ed for the Financial Times, saying “no other company followed suit [on the Dutch Auction], largely because the banks closed ranks and succeeded, in a disinformation campaign worthy of the NRA gun lobby in the U.S., in portraying the IPO as a flop.”

Granted, Google did not exactly come off squeaky clean at the time, Buyer acknowledges: Google co-founders Sergey Brin and Larry Page participated in a Playboy article that raised questions about securities law violations. It also later emerged that some pre-IPO investors were able to pare back on the number of shares they sold when the IPO priced lower than initially reported.

But now, conversation around direct listings—or at least modifying the IPO—appears to be gaining traction even in the investment banking community.

Goldman Sachs held a panel featuring Spotify CFO Barry McCarthy, Latham & Watkins Partner Greg Rodgers, and William Connolly, head of technology equity capital markets at Goldman. Morgan Stanley too has set up its own direct listing conference on Oct. 21, sources confirm.

Indeed there is no great break up between Silicon Valley and the traditional Wall Street firms, at least not yet. Even in direct listings, the usual suspects in the tech banking space—Morgan Stanley, Allen and Co., and Goldman Sachs—are still emerging as the go-to lead advisors. The trio worked as financial advisors in both the Slack and Spotify listings.

And even as Silicon Valley paints Wall Street broadly as having fought against the Dutch Auction, banks are, perhaps thanks to the growing levels of capital and power in private markets, warming to the concept of a changing IPO process.

“We did see a shift in investor participation,” Connolly said at the conference, as recorded and released via the bank’s podcast. “Investors who talked to us after Spotify’s direct listing said ‘that was a difficult process, we don’t know how to get our arms around it, we didn’t feel comfortable participating.’ Some of those investors were some of the most active participants in Slack’s direct listings. That shows the markets are learning.”

“There should be more flexibility for more companies—like raising capital,” said Connolly. “Market should also get better at trading direct listings.”

Venture capitalist Bill Gurley meanwhile hosted a conference on direct listings earlier this month that also featured a panel with Citigroup banker Doug Baird and William Blair’s Carl Chiou—banks that also participated on Slack’s listing as associate financial advisors.

While early on, it seemed as if only a handful of companies that didn’t need to raise cash and had a well-known brand could take on the direct listing, the swath of companies interested is widening. To list directly, a company doesn’t need to be a well-known consumer brand, but should have the right institutional investors in the conversation in order to drum up “robust demand,” says Citadel Securities Head of Execution Joe Mecane.

“The conference was to say ‘if you aren’t considering a direct listing, you aren’t doing your fiduciary duty’,” Manny Medina, CEO of sales platform Outreach, said of Gurley’s conference. Outreach is a B2B company that recently reached unicorn status. “It was a rallying cry that anyone can do it.”

Echoing Mecane, Medina noted that many startups seeking to go public now already have investors that straddle the public market—lessening, at least in theory, the need for banks to make those introductions. Mutual funds have indeed increasingly sought pre-IPO investments.

Of course, with only two direct listings in place (Slack and Spotify), and both being decacorns, we’ll have to wait to see if all this talk becomes a trend. But the intention certainly seems to be there.

“I am convinced we will either see the IPO process evolve fairly dramatically, or the direct listing process grow in popularity,” wrote Quora CFO Kelly Battles, who was also at the conference, in a recent post.

Getting High

Marijuana is receiving more regulatory acceptance across the U.S., but traditional point-of-sale and software firms are shying away because it’s still a legally dicey industry. That’s given some startups in the space an opportunity to reap some serious green on the funding side. Per my colleague, Jeff John Roberts:

“During the gold rush it’s a good time to be in the pick and shovel business,” Mark Twain reportedly said. That’s certainly true in the modern gold rush that is the cannabis industry, where it’s not just weed sellers seeking a fortune but also the companies that supply them.

Case in point are the firms selling custom software—which is every bit as important to cannabis companies as picks and shovels were to Klondike gold miners. In recent years, investors have been pouring money into these software firms.

The latest example of this is Denver-based Flowhub, which on Tuesday announced it has raised a $23 million Series A funding to expand its sales of compliance and point-of-sale software to marijuana dispensaries nationwide.

Original article contributed by: Fortune

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