Can direct listings really fix the IPO Pricing Problem?

Welcome to a week with two public offerings. According to publicly available IPO calendars, Amplitude, a software firm based in the United States, is slated to issue a direct-listing reference price this evening and begin trading the next morning.

Even if you’re sick of IPOs, these two are worth looking into. Amplitude’s initial public offering is remarkable for being a direct listing following a big private-market funding. The company is pursuing a liquidity strategy that takes advantage of substantial private funding while avoiding the pricing difficulties that have irritated many in Silicon Valley’s chattering classes.

And the Warby offering will help to set — or alter — market opinion toward D2C companies; in many people’s minds, the unicorn isn’t even a technology company. Regardless, its e-commerce DNA and venture-backed past keep it firmly in TechCrunch’s wheelhouse. In addition, after raising private cash in recent quarters, it is considering a direct listing. The two direct listings will assist us in determining which side of the public-private divide is undervaluing startups the most. Either pesky bankers are draining unfair value from hardworking Silicon Valley types on graduation day, or private-market investors are irritated that anybody else is profiting from businesses.

In recent years, we’ve seen a lot more direct listings. Perhaps the most well-known is Spotify. However, Asana was also distributed through a direct listing. Wise, Squarespace, Coinbase, and Roblox all did as well.

Amplitude will likewise make its public debut without obtaining any basic capital. According to Crunchbase data, it raised $150 million at a valuation of slightly under $4.2 billion earlier this year. The typical IPO, which comprises a primary raise and a public debut, is decoupled by this strategy of raising private funds and then direct listing.

Another variation on the strategy is to direct list the company and then raise primary financing through a follow-on offering once the market has determined a more reasonable price for the company’s shares. There are also plans to allow firms to straight list and raise primary capital, shifting pricing power away from banks and toward public investors. That fourth alternative is still more of a theoretical exercise than a practical one.

As a result, unicorns who don’t want to conduct a typical IPO might raise private capital before or after a direct listing to avoid the astronomical first-day jumps that some companies have experienced in recent quarters.

The raise-then-direct list method is used in Roblox. It filed for an IPO but decided to postpone it after witnessing a few other companies get off to a fast start. In early 2021, the gaming company raised private financing before going public on the stock exchange. Squarespace did something similar in March, raising $300 million at a flat $10.0 billion valuation (post-money) before going public in May.