Uber should have done a direct listing

The company could have saved a lot in commissions and also could have avoided the disappointment of trading under the IPO price

Last week I wrote that 2019 was a big year for IPOs. By then Lyft, Pinterest and Zoom, three important unicorns, had already gone public, and we still had Uber and Slack (technically not an IPO, but still) AND WeWork and Airbnb (I apologize for the omissions in the last article) in the pipeline. I also noted that “now a lot will depend on how well these offerings play out” and that “the most important will be Uber’s”.

So Uber went public last Friday, and I would not say it worked out well. We started in October, with bankers telling Uber that they could take it public at a $120 billion valuation, which has steadily faded into an 80-90 billion range just before the IPO. Uber’s book of orders was three times oversubscribed, which might seem a lot, but, considering that Lyft was ten times oversubscribed, it could have been better. Uber finally priced at the low end of the range, fell 8% on its first day and touched a low of 60 billion in valuation, exactly half of what bankers pitched Uber initially.

Why did this highly anticipated IPO go so bad? Matt Levine of Bloomberg has a point. Uber had already sold shares to investors that usually buy on an IPO (mutual funds, hedge funds), unintentionally limiting the number of investors looking to buy on the IPO. There has even been a secondary private market for trading Uber shares before the public offering. I would also add that the risk inherent in the business of Uber were widely known. A myriad articles were circling around how the ride-sharing business may not deliver the high expectations that many had hoped for. This growing scepticism was, in my opinion, another contributor.

So let’s do some black box thinking. How could have Uber averted this bad outcome? Of course, it is easy to be smart ex-post, but nonetheless, by doing a little analysis, we could prepare for similar future problems. In my humble opinion, Uber would have been much better off with a simple direct listing. Last year Spotify did one, which was technically the first, and now Slack is about to do another one. What kind of advantage does a direct listing have over an IPO?

The crucial difference between a direct listing and an IPO is that the latter has an IPO price. You could argue that the difference is that in a direct listing you do not raise capital, but there are IPOs when you simply sell shares without raising any new capital, too. If a company does an IPO, the IPO price will be very important, because that is the price at which you sell shares to investors. In a direct listing, you just become public one day. There is no offering, no IPO price, no determined amount of shares to be sold. The shares that can be traded are the ones earlier investors (VCs, founders, employees) sell, so it is entirely dependent on their willingness to sell.

Uber could have gone public without an IPO, which would have enabled some investors to sell, and also could have avoided this “trading-under-the-IPO-price” misery. Spotify’s direct listing is thought of as a successful one, although the stock mostly traded sideways. This way, Uber could have not raised billions of dollars, but the motivation behind the public offering was not that in the first place. Uber could still raise a lot of money privately. Uber was mainly pushed by investors to finally go public, mainly because some of them wanted to cash out, and everyone was highly anticipating a public Uber. These aims could have been fulfilled with a direct listing as well. Moreover, doing a direct listing Uber could have spared millions of dollars in commissions paid to the underwriters.

Slack does the right thing, just like Spotify. The lesson is not that no company should do an IPO. It is rather that, if you can raise money privately, but want to go public anyway, you could be much better off doing a direct listing. Or maybe just that working out a business model that is viable and profitable on the long term is a necessary premise for a successful IPO.