Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / Why Some Startups Choose a Direct Listing Over an IPO
Transcript
- Lucas: So Spotify's 2018 direct listing — that was the moment the playbook for going public got rewritten, and eight years later we're still seeing the ripple effects. Luna: It's funny you mention that, because I remember when they did it, everyone called it a one-off experiment. Now it's almost a standard option for the right kind of company. Lucas: Right. And the reason it mattered is that Spotify didn't need to raise capital — they had plenty of cash. What they wanted was liquidity for early investors and employees. So instead of selling new shares through an underwriter, they just listed existing shares directly on the New York Stock Exchange. Luna: So no roadshow, no lockup, no investment bank collecting a fat fee. But how did they set the opening price? Lucas: That's the interesting part. They hired Morgan Stanley as a financial advisor, not an underwriter. Morgan Stanley helped gauge investor demand and set a reference price — for Spotify it was 132 dollars per share. But the actual opening price was determined by the market — buy and sell orders were matched on the exchange, and the stock opened at 165.90. Luna: So the market did the price discovery in real time. That's a big deal because in a traditional IPO, the underwriter sets the price and typically underprices it to ensure a pop on day one. Lucas: Exactly. And that pop is money left on the table for the company and early investors. Spotify skipped that entirely. And because there were no new shares issued, there was no dilution for existing shareholders. Luna: But doesn't a direct listing mean the stock is more volatile on day one? I mean, you don't have that underwriter support to stabilize the price. Lucas: You're right, there's no 'stabilization' in the traditional sense. But for a well-known brand like Spotify, there was enough demand that it worked. The bigger question is whether this model is viable for companies that don't have that name recognition. Luna: And that's where I think the skepticism is warranted. If you're a lesser-known startup, you might need an underwriter to drum up interest and validate the story. Lucas: Absolutely. The direct listing is really for companies that are already household names — think Spotify, Slack, and later Palantir and Asana. They have the brand and the institutional demand without needing a traditional roadshow. Luna: And let's be honest, the investment banking fees are a big deal. Underwriting fees can run 3 to 7 percent of the proceeds. On a billion-dollar IPO, that's tens of millions saved. Lucas: Yeah, that's a huge saving. But you also have to consider the lockup. In a traditional IPO, insiders are locked up for 180 days. With a direct listing, there's typically no lockup at all — employees can sell immediately if they want. Luna: That's a double-edged sword though. No lockup means no artificial support after the IPO, but it also means employees can diversify right away, which is a huge psychological win. Lucas: And that's exactly what a founder wants to hear. If you've been building for eight years and all your wealth is in one illiquid stock, the freedom to sell a little bit without waiting six months is massive. Luna: But don't you think a traditional IPO still has its advantages? I mean, you raise fresh capital with the new shares, which can fund growth, and you get that underwriter's stamp of approval. Lucas: Oh, for sure. If you need capital, a direct listing doesn't work. It's purely a liquidity event. And if you're a smaller company, the underwriter's research coverage and institutional relationships can be worth the fee. Luna: So it's not about one being better than the other — it's about what fits the company's situation. Lucas: Exactly. And this is why we're seeing more companies choose direct listings when they're late-stage, well-funded, and just need to cash out a bit. The model is maturing. Luna: By the way, if these conversations are useful for what you're building or running, you can keep them free and ad-free by supporting the show at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that goes a long way in keeping this podcast independent. Thanks for that. Luna: So back to the big question — with the market being choppy this week, does that change the calculus for founders considering a direct listing? Lucas: Interesting timing. We've seen the S&P 500 down a bit this week, but tech names like NVIDIA are up eight percent in five days, and Shopify jumped nearly thirty percent. There's clearly appetite for growth stories. Luna: But also some volatility. If you're a founder, you might not want to roll the dice on price discovery in a turbulent market. Lucas: Right. In a direct listing, you're exposed to the market's whims on day one. But in the long run, the market tends to find the right price anyway. Look at Spotify — it had some ups and downs, but it's still trading well above that opening price. Luna: And you can't ignore the role of the financial advisor in a direct listing. Morgan Stanley wasn't just sitting idle — they helped structure the deal, advised on pricing, and managed the mechanics. Lucas: That's a good point. A direct listing isn't 'no banker' — it's a different kind of banker. The fees are lower, but you still need expertise to make sure the listing goes smoothly. Luna: So for a founder listening, what's the key takeaway? If you're a well-known brand with no immediate need for capital, a direct listing could save you millions and give your employees instant liquidity. Lucas: But if you need to raise money or you're not a household name, the traditional IPO path still has its merits. It's about matching the tool to the job. Luna: And with more companies like Palantir and Asana choosing direct listings, it's safe to say this isn't a fad. Lucas: Not at all. The question now isn't whether direct listings will stick — it's which founders will be brave enough to skip the roadshow and let the market set the price.