Commentary: Why is so much energy being spent examining alternative ways to become a public company? There’s a pretty good model already: the boringly conventional — but battle-tested — IPO.
I confess I went through a teenage “alternative” phase. I wore a lot of black clothing and listened intently to Pink Floyd records. Some young tech companies are going through their own spell of nonconformity.
Music-streaming company Spotify is considering listing its shares directly on a stock exchange. Uber CEO Travis Kalanick and a close lieutenant batted around the idea of buying a nonoperational public company to take its spot on a stock exchange, Adam Lashinky writes in a new book. “Lean Startup” guru Eric Ries and other prominent tech types have been talking about alternative IPO paths, too.
This is different from what’s happening with startups such as Palantir and Kickstarter that are staying private as long as they possibly can — perhaps forever. Spotify, Uber Technologies and others exploring not-IPOs expect their companies to go public at least eventually. But they are enamored with unconventional routes to do so.
What’s not clear is why there is so much energy being spent on these untested notions. There is a pretty good — although not perfect — model for becoming a public company. It’s called an IPO. It’s boringly conventional, but it has the advantage of being more battle-tested than anything else.
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There are good reasons for today’s breed of young tech companies to try to disrupt this process. Uber, Spotify and others may not need the cash from selling a new batch of shares in an IPO. No one relishes giving a pile of money and control to investment bankers to pitch potential public stock buyers on why the company is a good investment.
But there are a lot of unknowns with non-IPO approaches to taking a relatively large company public. How volatile, for example, would Spotify shares be if the company one day declares a couple of billion dollars’ worth of its equity for sale to the stock-buying masses? It’s hard to say, because few companies of Spotify’s size have tried it.
Going public by buying a shell company — as Uber’s executives mused about and as Etsy considered before its traditional IPO in 2015 — is a tactic more commonly used by small or somewhat suspect companies.
By contrast, IPOs are a well-understood, relatively transparent way to coordinate and match supply of a company stock and investor demand. Here’s what my Bloomberg View colleague Matt Levine wrote about Spotify’s potential decision to declare its stock available for open trading without going through the traditional motions:
“Most stocks don’t trade (much) between 4 p.m. and 9:30 a.m., and so exchanges run auctions every morning to effect the transition from “not trading for the night” to “trading for the day.” The transition from “not trading ever” to “trading from now on” seems like a bigger shift, and one that would require a bigger coordination process. That’s why IPOs happen the way they do: to coordinate that sharp transition in an organized way.”
Spotify is essentially making itself a guinea pig for a method it believes has the advantages of an IPO — disclosure of financial information, open discussion with potential stock buyers and a route to cash out existing investors and employees — without a public offering’s disadvantages. Those handcuffs include legal limits on when stockholders can sell or what the company can discuss publicly about its business.
If some young companies take a flier on not-IPOs and they work, I’m all for disruption of financial markets. But sometimes convention has become conventional for a good reason. Save the nonconformity for Burning Man.