a16z Podcast - Direct Listings, Myths and Facts

Episode Date: December 11, 2019

We’ve covered a lot of the strategic financing milestones for startups seeking to build a sustainable and enduring business -- from mindsets for startup fundraising to when and how to build a finance functionwith a CFO to what it takes to do an initial public offering (IPO) and stories from the inside out. There’s also a lot that goes on behind the scenes en route to IPO, including how they’re priced and what the "pop" means.Yet another route to the public markets is the direct listing, recently reinvented for tech companies (with Spotify and Slack so far). We explained the process and tradeoffs in this early primer by Jamie McGurk, so this episode of the a16z Podcast brings together two experts from the frontlines: the architect of the direct listings in their current form, Barry McCarthy, current CFO of Spotify (and former CFO of Netflix); and Stacey Cunningham, president of the NYSE where they were listed -- in conversation with Sonal Chokshi to share more about the what, the how, and the why from an insider perspective.What's the bigger picture here, including secular shifts in the public and private markets? Zooming in closer, what are all the details and nuances involved in true pricing, investor days, forward guidance, and other market mechanisms for "radical transparency"? What did it take behind the scenes to make this all happen, and what's still happening? And finally, what are some of the common myths and misconceptions around direct listings (and IPOs) as methods for going public? Turns out, there's a lot that goes into making markets... and market making.---The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation.This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets) is available at https://a16z.com/investments/.Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.

The content here is for informational purposes only, should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. Hi everyone. Welcome to the A6 and Z podcast. I'm Zonal. We've covered a lot of company building advice, including strategic financial milestones for startups from the case study of the open table IPO on the show a couple of years ago and a list of 16 things CEOs should do before the IPO and shared a detailed IPO readiness checklist to also recently sharing the behind the scenes process of the roadshow and pricing, all of which you can find at A6.Z.com slash IPOs. You can also find out that link our explainer about another route to the public markets, the emerging trend of direct listings, which is the topic of this episode. There, Jamie McGurk explained the process and tradeoffs

of the methods in detail for those who are interested. But in this episode, we bring together two experts from their front lines, the architect of the direct listings and their current form, Barry McCarthy, CFO of Spotify, and former CFO of Netflix, along with Stacey Cunningham, the president of the exchange where they were listed, the New York Stock Exchange, to share Share more about the what, the how, and the why from an insider perspective. We also touch on the big picture and secular shifts in the public and private markets, go into the nuances of all the different pricings and market mechanisms involved, share some behind the scenes details on the process,

and throughout we demystify some common myths around both methods for going public. But first, we begin with the differences between direct listings and IPOs. Let's break down what a direct listing is, how it works, some common myths and misconceptions The reality is that both are valid paths. People will take whatever pets they need to go public. And, you know, there's some people may go to the IPO route. And then there's those I may want to go to direct listings route. The number one question I want to start with is the main differences between a direct

listening and IPO. Because one of the things that Jamie and I talked about a lot is that the actual activities are very similar. You still have to engage with investors. You still have to provide information. But there's key differences. And one is that there is no O or offering. The filing process is the same.

you're still filing submitting an F1 or S1, so that's the same. Your obligations as a public company are the same. The differences come down to, one, it's equal access for everyone, all institutions and retail, and there are no lockup periods. And can we quickly answer the question of why, what is the point of doing this? There are a number of reasons why companies would choose to access the public markets. One is access to capital. Two is liquidity for early investors or for their employees, as many,

of them getting RSUs or options for many years and want to have access to liquidity there. Three is the currency so they can engage in M&A. And four is just the visibility of being a public company so they can go out and attract new customers by saying they're already a publicly traded company, gives them a certain credibility. So, I mean, those are kind of the four drivers. And traditionally raising capital or access to capital was the primary driver for companies to go public. Which these days you need less because there's more and more capital available in the

early-stage markets as well. And even late-stage investors have come into the early-stage markets, as we all know, there's a lot of secular shifts that are also driving a lot of this. And importantly, you can either raise it before in the private markets or raise it later in the public markets. If you choose a direct listing, it doesn't mean you don't have access to capital. You're just decoupling the raising of capital from the moment in time that you're listing. You just don't need it right now. So it's all about timing. Yeah, I would say if you need liquidity and you want efficiency, then pretty tough to beat the public market where price is the ultimate clearing mechanism for supply and demand.

And you only have to look to we work to convince yourself that the private market sometimes not very efficient in terms of setting price. Bad habits grow quickly with big companies. You start to see that if there isn't a discipline in governance and they're much larger. It's much more impactful with a large company. You don't have the same kind of valuation that you get from the public markets because there's less liquidity, the less buyers and sellers. it's a smaller subset of the market determining the price.

But in a worst case scenario, you actually have misvaluations that are intentional, right? So there's a lack of transparency in the private markets that can lead to misvaluations and that can impact your employees when they're part of that transaction. The private market doesn't enable the flow of information nearly as well as the public market does because filing requirements. And so oftentimes we would find that. that the employees were being taken advantage of by large investors who were willing to provide liquidity, but at less than, let's say, the full conviction price. And ironically, they had more

information about the performance of the business than the employees did. We had no ability to restrict the sale of shares in the secondary market, none. And for an assortment of tax reasons unique to Sweden, we had relatively short life to options. So the company had been around for 10 years. Many employees had options that were expiring. They needed to sell them. In total, before we won public, there were $3 billion that had traded hands in the secondary market in the year before we went public in 2017, a billion two changed hands, which would have made it, would have made it one of the largest tech IPOs that year, I think. Right. And it's, by the way, just a quick note on this. One of the things that Jamie wrote about in the direct listings post that we wrote is that if you think about the difference, because I ask, why wouldn't you just do all this in a secondary market versus in like the public markets is that a secondary market is not a true marketplace because you're matching an N of one buyer with an N of one seller, whereas a true marketplace of the public markets allows the true market price to be set because you have more volume, more people, more buyers and sellers to actually reach that sort of equilibrium of that pricing.

A traditional IPO is just a financing event. And it comes with lots of public disclosure, scrutiny, rigor. But at the end of the day, narrowly from a CFO perspective, it's about raising money. So the question is, can you do it cost effectively there? Or are there other opportunities that you can exploit to your advantage in a relatively low-cost way because of inefficiencies in the capital markets to raise money? Like today, you'd be hard-pressed to argue that there isn't a very inexpensive capital to be had in abundance. You want to think about the difference between raising capital and access to

capital. That's a really important nuance. We've been at this for 227 years. Companies were not IPOing back then. They were direct listing. They were becoming public companies and being traded on an exchange. And then they had access to capital through that mechanism. It's only been since the 70s that there is now a offering that is part of that where raising capital is the only way to come to the public markets. And that's just not true. And so Barry challenged that perception. that you have to raise capital to become a public company. I love this anecdote. I read it first time in an article authored by Alan Patrickoff.

NASTAC has founded in 71 later that year that what we now understand to be tech IPOs happens for the first time. Intel comes public, 64 underwriters, they raise $8 million. And it's roughly the same process today as it was then. That's insane, given how much things have changed. Can you guys answer the question then about the relationship with investors? Because if there is one advantage, supposedly, of the road show process, is that you have, first of all, the criticism is that it's handcrafted, it's hand-allocated, it's not pure mathematical. But the advantage of that hand-crafting is you're essentially selecting in the investors, the big institutional investors you want to hold your stock.

And there's a lot of conventional wisdom here, which I think is ill-considered. Go ahead. So what then is the advantage of having those institutional investors hold your stock? Oh, actually, that's my question for you. Yeah, I don't think there is one. I used to think price stability. But then I came down, as I watched the average number of shares traded in Netflix over the years decreased significantly as the dollar value of daily trade skyrocketed. I realized that the price isn't set by the long-term shareholds.

They don't participate at all, right? their shares are on the shelf. It's the high frequency traders and the hedge funds who are setting the price. It's artificially constrained in an IPO. Even the long-only institutions that might hold a stock for a long period of time aren't getting the allocation that they might want at the time of the IPO. So then they're left coming into the market later. So it takes a company more than six months to get to where they finally can have all investors with access. Right. They have to build up their position over time because of the such limited volume that's given up at the actual listing. Yes. It's it's artificially constrained because they might not get the allocation that they were requesting.

So the second argument I've heard is that, well, if they can't accumulate a position in the IPO, they won't ever own the stock. And I've seen many examples where that's just not true. So it's conventional wisdom that you're basically saying is just false. People really, these are no longer true or they were true. It may be at one point. Well, I would say it's not without its advantages, but the principal advantages, you get to have conversations with really smart people who make good use of your time because if they do decide to buy, they're buying a lot. And those conversations can still happen in a direct listing. Absolutely.

Absolutely. And did. One of the other differences is because you don't have an underwriter and a bank, you don't have a stabilization agent coming out of a direct listing. But you do have a DMM in both of those cases, and they do commit capital throughout that process. And it might make sense to just take a step back and talk about how we open stocks every day. Yes, please.

Every company that's listed on the New York Stock Exchange has a marketmaker that's assigned to that company. It's an actual person, not a machine. It's an actual person and a firm behind the person, right? And it's known as the designated market maker or DMM. That person has the responsibility to open stocks every single day and close them every single day. And they commit capital when there's a disparity and they can step in and facilitate that process. So every day there's a reference price.

In a stock on a normal day of the week, that reference price is the prior day's closing price. And so the market knows this is where they're. the stock closed yesterday. In the case of an IPO, it's the IPO offering price. Where do those shares trade hands? Which is different than the listing price. Which is different than the listing price. And in all cases, it's different than where it opens, right? So on the case of a direct listing, the SEC was saying, well, there's no price. What's the market going to do? And so we tried to explain that those prices, whether it's the last day of closing sale or the IPO offering price, do not influence where the stock opens the next day.

The stock opens where supply and demand is offset. The true market price. Where there is a market price. That might inform an investor of what the prior participants valued the company, but it doesn't indicate at all where it's going to open the next day. And if you look through history, it's not at all reflective of anything. It's a funny little vestigial artifact, like the tailbone of the IPO process, this idea that you need this reference price in the first place.

It's almost like a psychological crutch in many ways. We had to file rules with the SEC around this. So it's set based on secondary trading. if there is secondary trading, an active secondary market. And if it's not, it's set by the New York Stock Exchange in consultation with the financial advisor. Do you think that at some point in the evolution of the direct listing, we should just drop the reference price altogether and just let the market decide by pure matchmaking and transparency? Barry's nodding.

We do let the market decide. Right. So the reference price is really just a number, just like it is on any other day. It did turn out that it was a useful number to have for many broker-dealer systems who are used to inputting a number. it does create a certain, there's a certain psychology associated with it because it gets used as if it was an offering sometimes in the media. And you'll see, you know, in the case of Slack or Spotify, hey, this was up or down X amount from its reference price. When in fact it's finding true equilibrium, which is actually the better point, right? Yes. And the most relevant number is where is it trading now based on demand and buyers and sellers?

We set the reference price the night before and it goes out to the industry so they can leverage that number. But it's really the morning, the next day, where the price discovery starts. And that's when the DMM is looking at what all the buy interest and sell interest is. They're choosing that price. In the case of an IPO, they're doing that in consultation with the underwriter. In the case of direct listing, they also work with the financial advisor and letting them know what they're seeing and where they're planned to open the stock. What's the point of the stabilization? Can you explain that a little bit?

It's just intended to provide some stability coming out of the offering and so that you would commit capital to maintain that kind of offering price. The recurring thing that I'm hearing is that there's a lot of orchestration to make markets natural. And why not just let markets be natural? And that was one of the organizing theories behind wisdom of crowd trumps expert intervention. If you just eliminate all the friction that's been created over time, you'd get to equilibrium right quick. I do think one of the myths around the direct listing is that there are, that there's no human intervention. And so you still have that market maker at the time of opening who's looking at all the supply and demand and choosing the price and committing capital. It's not just an algorithm because if we're just an

algorithm, you can open right at 930, but they're looking for enough liquidity so they feel like it's really representative of supply and demand and representative of the market. So, you know, it can take a long time. And in direct listing, it takes even longer. I mean, we had a universe of two so far to date. Spotify was 1243. Slack was 12.08. Alibaba was the largest IPO of all time, and it opened at 1153. So we're kind of in a universe where there are a little bit later. But if, you know, when you look at the amount of shares that traded hands, that's where it gets really interesting. Because, you know, Slack, as an example, the more recent one where I think now it was more well known by the market.

There are many retail broker dealers that didn't allow the retail firms to trade in Spotify's listing because they were concerned that it was an untested mechanism and they were trying to protect their clients. This is a classic theme to. We're trying to protect these people when, in fact, they're depriving sometimes some of those opportunities of access. I think there were some concern that if things didn't go well, the retail clients would be the ones to pay for it. Right, which I get. They were being a little bit more conservative. With Slack, that wasn't what we saw. And if you look at the amount of volume that traded hands in that opening trade on Slack, it was almost $1.8 billion on a company whose market cap was $19 billion. That is the third largest opening trade period of all time. And if you look through the three largest, one was Alibaba, it was a $25 billion IPO at Facebook and then Slack.

That's real price discovery. And it was a much smaller company. So to have a trade that size really indicated the overall interest, which means you're getting to a more mature place much more quickly. The Citadel handled both Slack and Spotify and did just a remarkable job. Yeah, they traded over 20% of volume in those securities. you know, and committed a lot of capital through that process. So while there's no stabilization agent, you always have a DMM and they're going to commit capital throughout that process.

So your point is that the myth is that it's purely algorithmic when, in fact, there is going to be a human agent in the middle. Yeah, there's a human being that is overseeing the opening of that stock. The model that we have in place, there's a human being that oversees the opening of stocks all the time. If it's not as complex situation, that can be automated, the more complex the situation is. And so IPOs are typically more complex. in a direct listing, you increase the level of human participation.

I would say the other myth is that direct listings open differently than traditional offerings. Yeah, what we do is we collect the buyers and we collect the sellers and the DMM looks at that book of business and figures out where is their price. Now, they're looking not just for where does supply meet demand, but they'll wait for a time, and this is why it sometimes takes a little bit longer, to see that there's stability above and below, that there's enough interest below the opening price and above the opening price so that when it opens, it isn't very volatile, which is why it takes some time to get to a place where it really feels like it's representative. And what's fascinating is one of the concerns that we had. And there were

a lot of people involved in this process who've been in the markets for a long time that disagreed on this point, that there would be buyers and no sellers. So when Spotify came to market, I mean, I even think it was in your F1, Barry, that there would be more volatility, could be more volatility in the listing. But Spotify actually traded with less volatility than the typical tech IPO. And Slack was, there was so little volatility in the first day of trading Slack. So the way I love about that, though, is this is where there were, of course, plenty of headlines in both cases that, oh my gosh, the next day or it's now going low when in fact doesn't have the pop phenomenon. The performative ticker tape type of thing where everyone is avidly looking at the

opening price and does it pop or not. And that is the thing that people have been so trained that it's actually, they're missing the point that, hey, wait a minute, that pop thing is an actual a distortion when you actually want the true state. Yeah, there is a viewpoint that the bigger the pop, the more successful the IPO. It's actually the opposite of it. Right. And in fact, as we know, as we all know, many IPOs sort of artificially under price in order to orchestrate the sensation of a pop. I don't know if there's a good reason for that. I think it worked in the existing system because you essentially give people the sensation that

they are getting a gain. But what is the point? point of the pop? And can the pop go away altogether with a direct listing? Well, we talked about the fact that companies are coming to market much larger. Historically, when they were much smaller and they were lesser known and there wasn't a lot of public market investment in the private market space, shares were being allocated in the IPO and investors were taking a little bit of risk with a lesser known company and they were taking it with this understanding that they're going to get some benefit on day one. That game has changed. A listing now doesn't have the same risk profile with companies that are well-established large companies to this date. So I think it's

somewhat, you know, the markets have evolved in a way that that first day pop is really changed. I was out here a couple weeks ago at a conference guy named Jay Ritter from Florida, done some research over the last 10 years on the size of the pop. And ironically, the pop was the largest for the two premier investment banks. And I think it peaked down. out at 36, 37%, so everybody talks about the fee being the cost of the transaction, but in our case, we were looking at transactions that had raised more than a billion because the rule of thumb is you would issue, say, 10 to 15% of the outstanding shares. So if we had a 20 billion market cap, we would have done a $2.5 billion listing. And so from 2011, I think there were 11 transactions

that had raised more than a billion. And if they... The objective is 100% turnover in shares issued, which it is in a typical transaction and say 30% appreciation first day. If the bankers and the capital market experts are really expert, you would expect that most of the time they would achieve those two objectives. So one of the 11 transactions, 9% hit the benchmark for first day appreciation, all the other. were over and under, and only two hit the turnover objective. So basically they're all mispriced. They're all mispriced. And money's being left on the table.

And you have to ask yourself, is it happening because they're really not very capable? No, that's clearly not the case. They're the world's leading experts, no question about it. It's because the process is just fundamentally broken, in my view. So actually, Barry, why don't you tell us about this process? Like, what did it take? I mean, honestly, it's nuts that you guys decided, hey, we're. we're going to use this old tool that's been around that actually is used for companies that

are, you know, splitting or trying to come back from bankruptcy or debt. And we're going to now use it to go public. Tell us more about why you did that. We needed to become public. And we had a billion, 700 million of cash on the balance sheet and no debt. If we could find a way to do it without raising capital, which we didn't need and couldn't deploy, we wouldn't be diluting our shareholders, our founders, our employees. It was in our money. It was in our way. our economic self-interest to explore alternatives. And I felt I had my Wizard of Oz moment when I thought about the scale of the business

relative to other public companies that I had known, the lesser CEO wouldn't have had the courage to be different. Being different is part of the ethos of the company. And so I began the conversation with Daniel by saying to him, hey, I have this idea. It's never been done before. And for him, one of his,

primary objectives was equal treatment for employees. Yeah. So the absence of the lockup, the radical transparency, the equal access, the price discovery, well, we never could have done it without the folks at Latham. It's a relatively easy thing to ask the question, how do I do this? Could I do this and explore and tease out all the options? You mean Latham and Wacken's a legal firm? Yeah. Right. It took almost two years of prep work to make it live. I mean, this is hyper-technical stuff. and engage the SEC constructively in a conversation about how to do it. It was in the process of doing that. It was a well-trodden path.

Many people had done it. The stocks had performed horribly. And you asked yourself, well, was it the transaction itself? It was inherently flawed or was it the companies that the world didn't care about or was it some combination of both? If you're using a well-trodden path, why do you have to spend time convincing the SEC about it? Well, the backstory here is when we began the process, we thought under, section 12 of the 34 Act that we could become a publicly traded company. And the SEC was

dead set against that. We had a lengthy negotiation about it. At the end, they got what they wanted, which was a 33-act registration, which brings with it strict liability for companies different from a traditional 10b-5 defense. I think the perspective being that even though there weren't shares being sold, it still was an offering to be a public company, was the SEC's view. Yeah. And if you made a material misstatement, you were guilty. You didn't need to prove reliance. You didn't need to prove many of the other nuanced things. You were just toast. That's what they wanted. But what I wanted was radical transparency. I wanted to be able to speak openly to prospective investors as if we were already public. But traditionally in a traditional IPO and a 33 act

filing, there's something called the quiet period that ties your hands. Specifically what I wanted was, in terms of acting like a public company, was to be able to hold an investor day, present in great detail the strategy of the business, and allow investors to see the people who were running the business in order to make an informed decision about whether they wanted to invest behind them and the strategy. And historically, that's not done in IPOs. There's a traditional roadshow process, but it doesn't include that.

And then secondly, I wanted to give guidance like a public company. It was a muscle that we'd been developing over many years before we began the process. And instead of the kabuki dance that happens in a traditional offering, I thought we should tell investors ourselves. Now, after the fact,

I came to understand with Michael Grimes help more recently, just how important the giving guidance is because if the company doesn't do it, nobody else in the investor community is doing it. And if the market has no idea how you're going to perform, they'll guess and their guess won't be truly as accurate as your guess would be. And bad things would happen as a consequence. I think that work that Spotify and Latham and we did also at times was important to establish what the direct listing is today because now it does offer fair access and full transparency, which had they not persevered on that front to be able to have

an investor day and have that broadcast to anyone. So it's not just a roadshow. That goes only to private institutional investors. When the traditional IPO, there are shares being allocated and there's a story being told to a select group of people, not just to anyone. So when Spotify blaze this trail, it was everybody can hear the same information. You just go to the Spotify website. You can watch the investor day. And you get four hours full of, you know, what's their story? what's going on. And anyone can see it. And then when it starts trading, anybody can participate. There were over almost 19,000 people who've streamed that investor day, which would never happen in traditional road shows. Yeah, that's fair access. That is. Very democratizing. My mom and dad

could tune in, as well as like fidelity and all the big investors. Equal access was was a very important objective for us. Two things I will say that don't get quite as much attention but are byproducts of being public companies is it does introduce a lot of discipline in governance when a company is public because there is so much transparency and so many aspects of your business are filed with the SEC. But the other thing that often gets left often talked about is you're then allowing others to share in your success when your public company. I'm glad you bring that up. There is a lack of access for regular retail investors that they don't have access to that capital because of the company staying private longer. I just don't think it's particularly

important. In a traditional IPO, the retail allocation is about 10%. Their growth in the market after their public, right? So if you look at at a Salesforce, Salesforce IPOed in 2004, so 15 years ago, if you had the opportunity, which retail doesn't, to buy into the IPO, that performance is up 5,500 percent since their IPO pricing. But even if you look at the first day of trading when then retail does have access, up 3,300 percent compared to 163 percent in the S&P 500. That's a big difference. Because while I agree with you, Barry, that the retail allocations are so small and already a small float to begin with, the fact is that retail investors are deprived of that. Like there's something very democratizing about going public. You both think a really

good point about the structural change in the evolution of the capital market. So by way of comparison, when we took Netflix public in 2002, there was 600,000 subscribers, were 76 million in revenue. We had, I think, 13 million of cash on the balance sheet. No secondary sales. When I left at the end of 2010, so eight years later as a public company, it was two point. billion of revenue, 20 million subscribers, and 150 of net cash, net of debt on the balance sheet. Okay, so fast forward. Historically, early buyers of the public market have moved downstream into late stage private, right? And the private market is a washing cash, which is enabling companies to stay private longer. Spotify's coming public. It's more than 10 years old. It has

4.4 billion U.S.D. of revenue, 71 million subscribers, a billion two traded in the 12 months prior to coming public in the secondary market, and 1.7 billion of cash. So almost twice the size of Netflix after Netflix was public for eight years. That, you know, never happened before. Yeah. We call it the quasi-IPO, which that this phenomenon, the company stay private longer? Well, and I think you don't get the valuation that you get from the public markets. I mean, the public markets is real price discovery. You have real buyers and sellers coming together.

And that's exactly what the direct listing is designed to address. What about on your end when you had to do from the exchange side? I mean, how did you guys have to first of a lot of some of the things that Barry touched on? We had to work with as well because it was part of what our listing standards require. And so we had to adjust some of the rules that we have at the New York Stock Exchange. Not too dramatically because it isn't so unique. But a couple of the things that we had to do was introduce the concept of a financial advisor. You know, the SEC wanted to know that there was a bank or somebody.

The secret about the stabilization efforts, the market makers would tell you, is that the banks today don't really commit capital to stabilize. They don't really underwrite anything anyway. Think of the value exchange. It really happens in a traditional IPO. It's exactly what happens in a direct listing, except the fees paid in a direct listing. bear no relationship to the size of the offering because there's no offering. Right. You're just paying them for their advice and counsel, which is the value they provide in a traditional.

Well, and also the relationship brokering, but that's something that in this case, again, with a structural shift of the markets and the fact that a lot of late stage capital investors are following these companies early on, there's a lot more public information about these companies, what their products are, et cetera. I mean, didn't you guys still do relationship building with some of these institutional investors? That's exactly the point. Most of that is happening regardless and it has been happening for several years. And so by the time you're ready to go public, you have already formed strong relationships with the people who are most likely to buy your offering.

So in a traditional allocation, I think it's 26 to 35 percent of the offering would go to the top 10 investors. And the next 25 to 30 percent would go to the next 20. retail gets 10 and everybody else gets a balance. And it's the same 200 investors every single deal, deal after deal after deal. So you already have relationships with the accounts that matter. The fact that you're doing an investor day doesn't prevent you from going out and talking to investors that you want to target.

Slack did that. They did like a mini road show as well as the investor day. It doesn't prevent you from doing that. It just allows you to share information more broadly. Coming back to the roadshow stuff, we also met with the best. So we were in Boston. You are London, Stockholm. because given the scale of the business,

you just couldn't afford to ignore it. And the day of the investor day, we had 18 research analysts already writing about the story. What do you guys think of this other recurring theme here? That Slack is a company people use Spotify. You guys are like, you know, one of the world's largest streaming music companies

that something people use all the time in their daily lives, that only well-known brands can do a direct listing, that you can't be like a wonky, like, software company that only like certain businesses use, for instance? Like, what would you say to demystify that? myth or respond to those folks? It probably was helpful for the first one, Spotify, to have a well-known brand.

I coming out of the Spotify listing thought, oh, you need to have a well-known brand, and you need to have a distributed shareholder base and lots of holders so that there will be liquidity. I've evolved that thinking after Slack, and it's less, while Slack is a very well-known brand in the tech community, it's not a household name to many people. And they didn't have a broad distributed shareholder base, but you need to have sell You need to have some liquidity. So that's really, I think, a myth that you need to have a household name.

Yeah. And I would also point out that this is where tech has a real inflection point because, you know, many, many years ago, my mom would never have said, I'm investing in Twitter. She doesn't even know what Twitter is, but they watch TV. Tech has permeated our lives in a very different way. So I think we just have to acknowledge another huge secular shift, which I think is another underlying reason why now is the time. I think the reason there is more conversation about direct listing now is because of Slack. Right. After Spotify went, it was kind of a yawn. The view was, yeah, they're different. They're Swedish. It's, you know, big scale. It's like not everybody can do that. It took a long time to bring this thing to life. Barry first came to the New York Stock Exchange in 2016. And when I first had a conversation with Barry about this idea he had, I was certainly, you know, I was not so concerned about Spotify and how it would go then. I was more concerned about the second one. Because not everyone has Barry,

McCarthy kind of at the controls, thinking about how this is going to go, thinking about all the things might miss something. And Slack, I think that really told the market, this is a tool people can use. And it's not just a one-time success story. What about the forward-looking guidance? So you mentioned that was really important to you to do that. And the difference between a direct listing and IPO is in the case of an IPO, the filing does not become effective to like the night of, whereas in the case of a direct listing, it can be rendered effective like 10 days in advance or a certain period. So what was the point of the forward-looking guidance? Because I'm kind of hearing mixed messages on one hand where, yes, you guys want the market to decide based on the true

transparency of the information. But on the other hand, we want to give guidance. I don't quite understand that nuances of that. Yeah. Well, let's just acknowledge that there's a school of thought that argues against the wisdom of giving guidance. And I just think it's foolish. Guidance is definitely a hotly debated topic. So the analogy I'd like to use is if you're in a relationship and it's date night, something comes up at the end of the day, you're supposed to meet at 7, you don't show up till 10. If you haven't called, your night's not ending well.

Whereas if you text and give an update, okay. Land's much better. Guidance is the equivalent of making the phone call or sending the text. now one perspective on the wisdom of giving guidance as it relates to an IPO previously i mentioned there was this kabuki dance that happened so the company has a forecast they don't want to miss it when they share it with the bankers so they detune it they hand it to the bankers during the IPO process the equity research analyst for your underwriters will come over the chinese wall you'll you'll take them through your forecast teach them the business in preparing their own forecast

They'll take the forecast you gave them, which you detuned before you gave it to them, and they will detune it. And then they will basically teach the street because the SEC won't allow you to talk about future performance. They will speak for you to the street. And then the street will take the forecast they got from the equity research people, which was a dummy down version of the dummy down version you gave them, and they will dummy it down. It's like a game of operator. And so by the time the institution investor gets it, it's a good chance you don't even recognize it anymore. Right. But it's the underwriters, equity research people who are teaching investors what the future performance of the business might be. So you can short-circuit that entire process by just

telling people what it is you're going to do. If you look to the public market for best practice, most companies give guidance. The counter view is that if you're telling, if you're providing quarterly guidance, you're managing your business to the quarterly guidance. Investors are demanding that you hit those numbers and that it creates a short. term view for leaders versus long term. And it's debated. And my view is you're getting held accountable for their expectations, whether you inform them or not. As long as investors get rewarded based on quarterly performance, public companies are going to be under a lot of quarterly performance pressure. That doesn't mean that's how you need to run your company. In fact, if you do become

short-term oriented, eventually the performance of business will fall apart and sell your stock price. Right. So your point is that you're going to be held accountable for the expectations. So you might as well control those expectations. Yeah, so figure out what you need to do over the long run in order to be successful and then break it down on a quarterly basis and tell them what that is. And some tell them they'll like what they're hearing and sometimes they won't. The only way to manage your stock price is to take care of the performance of your business. And if you do that, eventually the stock price takes care of itself. But coming back to the guidance thing, if you're not speaking in a direct listing, nobody is speaking in an informed way about what the expectations are for the business.

now how the street interprets your guidance as something else entirely. So I was a public company's CFO for 35 quarters before Spotify. And for that entire time, we told the street that our guidance was actually what we expected and people came to understand that. And we said we were going to manage ourselves the same way at Spotify. And still, in our first quarter, when we did what we said we were going to do. The stock traded down because people had learned to expect outperformance in that first public quarter and it didn't matter that we told them that we were going to be different. They just didn't hear it. So there's some put some calls, but I think the wiser course is to try to lean in and manage people's expectations. Recognizing in a direct listing,

there's this vacuum and it's different than a traditional offering where the equity research of your underwriters plays an important role in informing investor expectations. What would you say to the myth that public investors don't like direct listings? During our roadshow, we spoke to a number of large investors, and the biggest surprise for me was their enthusiasm. Why? Because if you run a large portfolio, by the time you receive your allocation, it's so infinitesimally small as a percent of the assets you run, it's completely immaterial to you. Oh, totally. The asset center management for most of these funds, I mean, how big a rural IPO and these stocks play. It's tiny. That big first-day pop is meaningless for them. Yes.

And they get cut back in the allocation. So yes, because of the limited volume. So what's different about the direct listing is if they have full conviction, they can back a truck up and buy the whole thing. And they love that. Which then gets advertised. I mean, part of why the process takes longer in the morning is we're sending out an indication of price range that's much wider than you would in normal IPO because this is the price discovery process happening unlike the allocation the night before. And so institutional investors can see that and determine where they want to put their interest into the market. And over time, it narrows down to a place and they can actually attract more sellers by indicating their overall interest. This is great because I think a common

misconception that I've heard from a lot of the lay commenters, which is not always fun to read Twitter, but a lot of people complain about the fact that direct listings are self-serving for early stage investors because they don't have to worry about a lockup period. But it does make a difference in the market side because of the availability of the volume of that stock. Lockups make a difference in how people trade and look at the stock for a period of time, just knowing that there's going to be shares that can come to market. Right. It's an artificial constraint. Yeah, it's another artificial constraint. Oh, and the hedge fund guys short the heck out of the lockup expiration. There's all kinds of market manipulation. You're removing a lot of that trading that might occur around lockups. Right. That's, in fact,

the other secular shift we haven't talked about is the reality of HFTs, like high frequently trading, hedge funds, et cetera, all these things that have also changed the way markets transact around public. We have to wrap up. Do you have any advice for how people should think about pricing their IPO? Because in the traditional IPO, you have the legacy of, you know, the sort of fake price that's set, and then you have this and dance with the road show. You're not pricing your IPO. You're telling your story about running your business and the market is pricing your listing. That's actually the best advice ever. But it's true. I mean, you're running a business. You're talking about what you have planned for the business in the future and you share metrics and numbers

and the market tells you what they think your company's worth. Barry, and you were forced to do the reference price. Like, would you like to get rid of it altogether? I think it was just completely irrelevant to the process. It doesn't matter whether it exists or not. Honestly, nobody pays attention to it. I do think, I think, you know, it's been a helpful, from a mechanical perspective, it's been helpful.

You know, we worked with the SEC. It was important to them that there be some reference out there in the market. We introduced the concept of a financial advisor that would work with the DMM as needed. We had to introduce a new way to meet our listing standards, and we used a market cap test because companies typically do that through the IPO. So we had to introduce that piece of it. And then, you know, the other things that the SEC wanted were the transparency and the filing, the investor day. We should give the SEC credit, especially director of Corp Finn, Bill Hinman, was really constructive in trying to find a way to provide new tools in the market.

And we've had many conversations with them about what's worked so far, what have we learned, and what can we do in the future? You know, could you introduce primary raising using the same mechanism if you wanted to kind of recouple the raising capital? Yeah, I would like to second that. He led every meeting. They were difficult discussions. They went a long way to accommodate some of our disclosure requests in the context of the 33 filing. And I think the public interest was well served as a consequence. I mean, their job is to protect and ensure that they're healthy markets and protect investors.

did you get critiqued a lot on the street or by your peers for this? Like after the opening itself, how did you feel? Caught a little bit of the dead cat bounce when people first began to hear about what we were doing and no one knew how to understand it, interpreted. And so we spent time on background with members of the financial press and the media helping them understand just what it was. And then we stepped back and they performed a very valuable role, which is they debated endlessly the pros and the concept.

of it. And after that, I just went back to work. Exhausted. I think to date, and it's only been universities too, it's much more work for the company to go the direct listing route than a more traditional IPO where you sign up, show up, and get shepherded through the process. I would say if you're going to do an investor day, it's considerably more work. But aside from that, it's pretty much the same. And my team did it themselves with the lawyers for the most part, with on the back end important input from the banks, all three of them. I was going to say, though, for an investor day, just to be clear, that's a single day, while it may take a ton of work to plan, prepare, share that story.

That's all practice for your future earnings calls and everything else you're going to be doing and thinking anyway. One more mechanical detail. Why the ringing of the bell? Because theoretically, you didn't have to ring the bell anymore. And I think it's great because Stewart asked his mom to ring the bell for Slack. Yeah. So there are two different bells that you're talking about.

One is the bell that starts trading each day. So at 9.30, and that bell rings for 10 seconds. It actually tells the traders on the floor that they have 10 seconds to get their orders in before the market is open. They're not looking at the clock. And so the bell, they actually are very particular about the bell ringing for the right amount of time. Yeah. And then it's a ceremonial first trade bell that rings when the stock opens for the first time as a public company. And we give the opportunity for a CEO or whoever they might want to delegate that responsibility to.

I have a question for Barry, though, if we have one more minute. please. Do you have the flags displayed anywhere? What are the flags? We do. We have them in one of our large conference rooms. So we, you know, we were concerned that with this new way of coming to markets, things could go wrong. And there were lots of things that run through your head. At the time, I was chief operating officer. And so you worry about all the things that could happen. What we didn't account for was that we would hang the wrong flag outside. In honor of Spotify's listing day and an attempt to, you know, to hang the Swedish flag outside. Oh, no. Somebody grabbed the Switzerland flag, which hung outside the exchange for about seven minutes before it was realized that the wrong country's flag was put up. On listing day, my wife had sent me a picture from the exchange, which I forwarded to Tom Farley.

And he wrote, he thought I was pulling his leg. That was a joke. Yeah. Yeah. So Tom was pretty upset about that. And I said to him, Tom, this is the only thing that goes wrong today. it's a win. So we leaned into it a little bit and sent Barry and Daniel the flags, the all three flags that hung outside. The Swiss one included. The Swiss one, the Swedish flag,

and the U.S. flag to hang outside. Thank you for joining the A6 and Z podcast. Thank you. Thank you so much.