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The Future of the IPO: Term Sheet

October 16, 2019, 2:13 PM UTC

Direct listings had a spiritual predecessor in the form of the Dutch Auction—a method that failed to take off even though a hot company at the time, Google, tried to pave the way in 2004.

Venture capitalists and those involved then point their fingers at the investment banks for not getting on board. By those accounts, investment banks were unhappy participants in the company’s Dutch Auction—a twist on the traditional IPO that allowed for open bidding akin to eBay’s model, opening the doors to non-institutional investors. In turn, it took away much of the bank’s ability to determine pricing, for better or for worse. 

“Investment banks really didn’t like the process because they had lost control and they weren’t as charitable,” said Lise Buyer, who worked on the Dutch Auction as Google’s Director of Business Optimization at the time. Buyer now helps advise companies on the IPO process as founder and principal at the Class V Group. 

Early Google investor Michael Moritz of Sequoia Capital echoed the view in a recent op-ed for the Financial Times, saying “no other company followed suit [on the Dutch Auction], largely because the banks closed ranks and succeeded, in a disinformation campaign worthy of the NRA gun lobby in the U.S., in portraying the IPO as a flop.”

Granted, Google did not exactly come off squeaky clean at the time, Buyer acknowledges: Google co-founders Sergey Brin and Larry Page participated in a Playboy article that raised questions about securities law violations. It also later emerged that some pre-IPO investors were able to pare back on the number of shares they sold when the IPO priced lower than initially reported. 

But now, conversation around direct listings—or at least modifying the IPO—appears to be gaining traction even in the investment banking community.

Goldman Sachs held a panel featuring Spotify CFO Barry McCarthy, Latham & Watkins Partner Greg Rodgers, and William Connolly, head of technology equity capital markets at Goldman. Morgan Stanley too has set up its own direct listing conference on Oct. 21, sources confirm.

Indeed there is no great break up between Silicon Valley and the traditional Wall Street firms, at least not yet. Even in direct listings, the usual suspects in the tech banking space—Morgan Stanley, Allen and Co., and Goldman Sachs—are still emerging as the go-to lead advisors. The trio worked as financial advisors in both the Slack and Spotify listings.

And even as Silicon Valley paints Wall Street broadly as having fought against the Dutch Auction, banks are, perhaps thanks to the growing levels of capital and power in private markets, warming to the concept of a changing IPO process.

“We did see a shift in investor participation,” Connolly said at the conference, as recorded and released via the bank’s podcast. “Investors who talked to us after Spotify’s direct listing said ‘that was a difficult process, we don’t know how to get our arms around it, we didn’t feel comfortable participating.’ Some of those investors were some of the most active participants in Slack’s direct listings. That shows the markets are learning.”

“There should be more flexibility for more companies—like raising capital,” said Connolly. “Market should also get better at trading direct listings.” 

Venture capitalist Bill Gurley meanwhile hosted a conference on direct listings earlier this month that also featured a panel with Citigroup banker Doug Baird and William Blair’s Carl Chiou—banks that also participated on Slack’s listing as associate financial advisors. 

While early on, it seemed as if only a handful of companies that didn’t need to raise cash and had a well-known brand could take on the direct listing, the swath of companies interested is widening. To list directly, a company doesn’t need to be a well-known consumer brand, but should have the right institutional investors in the conversation in order to drum up “robust demand,” says Citadel Securities Head of Execution Joe Mecane.

 “The conference was to say ‘if you aren’t considering a direct listing, you aren’t doing your fiduciary duty’,” Manny Medina, CEO of sales platform Outreach, said of Gurley’s conference. Outreach is a B2B company that recently reached unicorn status. “It was a rallying cry that anyone can do it.”

Echoing Mecane, Medina noted that many startups seeking to go public now already have investors that straddle the public market—lessening, at least in theory, the need for banks to make those introductions. Mutual funds have indeed increasingly sought pre-IPO investments.

Of course, with only two direct listings in place (Slack and Spotify), and both being decacorns, we’ll have to wait to see if all this talk becomes a trend. But the intention certainly seems to be there.

“I am convinced we will either see the IPO process evolve fairly dramatically, or the direct listing process grow in popularity,” wrote Quora CFO Kelly Battles, who was also at the conference, in a recent post.

Marijuana is receiving more regulatory acceptance across the U.S., but traditional point-of-sale and software firms are shying away because it’s still a legally dicey industry. That’s given some startups in the space an opportunity to reap some serious green on the funding side. Per my colleague, Jeff John Roberts:

“During the gold rush it’s a good time to be in the pick and shovel business,” Mark Twain reportedly said. That’s certainly true in the modern gold rush that is the cannabis industry, where it’s not just weed sellers seeking a fortune but also the companies that supply them.

Case in point are the firms selling custom software—which is every bit as important to cannabis companies as picks and shovels were to Klondike gold miners. In recent years, investors have been pouring money into these software firms.

The latest example of this is Denver-based Flowhub, which on Tuesday announced it has raised a $23 million Series A funding to expand its sales of compliance and point-of-sale software to marijuana dispensaries nationwide.

Read the full article here.

HOUSEKEEPING: Lucinda here, covering for Polina who returns tomorrow. Please go back to sending deals to!


- Provivi, a Santa Monica-based emerging crop protection company, raised $85 million in Series C financing. Pontifax Global Food and Agriculture Fund led the round.

- Lively Inc., a San Francisco-based provider of Health Savings Account access, raised $27 million in Series B funding. Costanoa Ventures led the round, and was joined by investors including Ally Ventures, Liquid 2 Ventures, PJC, Teamworthy Ventures, Streamlined Ventures, and Y Combinator.

- McMakler, a Berlin-based real estate platform, raised $20 million in funding from Balderton Capital and GR Capital. 

- Lovevery, a Boise, Id.-based maker of educational children’s toys, raised $20 million in Series B funding. Maveron led the round and was joined by investors including GV, Reach Capital, the Chan Zuckerberg Initiative, and Collaborative Fund. 

- Thimble, a New York-based platform offering short-term liability coverage for small businesses and independent workers formerly known as Verifly, raised $22 million in Series A funding. IAC led the round and was joined by investors including Slow Ventures, AXA Venture Partners, and Open Ocean. 

- Building Engines, a Boston-based operations platform for commercial real estate owners, operators and occupants, raised $12.7 million in funding. Wavecrest Growth Partners led the round and was joined by investors including River Cities Capital Funds, MassMutual Ventures and Camber Creek Ventures.

- Cashforce, an Antwerp-based fintech startup forecasting cash and working capital for customers, has raised 5 million euros ($5.5 million) in Series A funding. INKEF Capital and Citi Ventures led the round. 

- Mable, a Boston-based startup mobile and web-based B2B wholesale platform, raised $3.1 million in seed funding. Venrock, Accomplice, and Founder Collective led the round.

- Hummingbird Technologies, a London-based tech platform that evaluates the condition of agricultural fields, raised an undisclosed amount of Series B funding. Investors include BASF Venture Capital, TELUS Ventures, Saudi Agricultural and Livestock Investment Company, and Downing Ventures.

- Fitt, a Pittsburgh-based location-based for healthy living experiences across fitness, food, and events, raised an undisclosed amount. Mountain State Capital led the round and was joined by investors including Riverfront Ventures, MINDBODY, and TNC Ventures.


- Cyteir Therapeutics, a Lexington, Mass.-based developer of synthetic lethal therapies for cancer, raised $40.2 million in Series B funding. Novo Holdings led the round and was joined by investors including Venrock, DROIA Oncology Ventures, Osage University Partners, Lightstone Ventures, and Celgene Corporation.

- Azitra, a Farmington, Conn.-based clinical-stage medical dermatology company addressing skin conditions, raised $14 million in Series A funding. KdT Ventures and Bios Partners led the round and was joined by investors including Connecticut Innovations and Godfrey Capital.


- Rockbridge Growth Equity invested in White Glove, a Birmingham, Mich.-based provider of marketing support for those in the finance, insurance, legal and real estate industries. Financial terms weren't disclosed.

- Canada Pension Plan Investment Board and KKR will acquire a stake in Axel Springer, the German publisher, for at least 500 million euros.

- TMP Worldwide, backed by Gemspring Capital, acquired Carve, a London-based social media strategy firm. Financial terms weren't disclosed.

- HCAP Partners invest in DYPER, a Scottsdale, Ariz.-based bamboo diaper subscription service. Financial terms weren't disclosed.

- Clarion Capital Partners invested in Harris & Harris, a Chicago-based provider of accounts receivable management. Financial terms weren't disclosed.

- The Carlyle Group closed its investment in HireVue, a Salt Lake City-based provider of AI-driven talent assessment solutions. TCV, Granite Ventures, and Sequoia remain minority investors. Financial terms weren't disclosed.

- Blackstone plans to make a tender offer for Unizo Holdings, a Japanese hotel chain, Reuters reports. Unizo previously rejected an offer from the firm.

- Blue Wolf Capital Partner acquired Kirlin Design Build, a Maryland-based  engineering and construction company. Financial terms weren't disclosed.

- SFW Capital Partners agreed to sell DaySmart Software, an Ann Arbor, Mich.-based provider of business management software in the salon, pet, spa, and tattoo verticals, to LLR Partners and Parthenon Capital.


- Phathom Pharmaceuticals, an Emeryville, Calif.-based firm focused on gastrointestinal diseases, says it plans to raise about $150 million in an IPO of 7.9 million shares priced between $18 to $20. It posted a loss of $1.3 million in 2018. Frazier Life Sciences (41.1%) and Takeda Pharmaceutical Company (9.1%) back the firm. It plans to list on the Nasdaq as “PHAT.” Read more.

- OneWater Marine, a Buford, Ga.-based recreational boat retailer, now plans to raise $60 million in an IPO of 3.2 million shares priced between $18 to $20. The firm posted revenue of $603 million in the year ending Sept. 2018 and income of $1.1 million. One Water Ventures, LMI Holdings, and Goldman Sachs back the firm. It plans to list on the Nasdaq under an undisclosed symbol. Read more.

- Youdao, a Hangzhou, China-based maker of learning products and services, now plans to raise $92 million in an IPO of 5.6 million ADSs priced between $15 to $18. It posted revenue of $142.6 million and a loss of $84.8 million in 2018. NetEase backs the firm. It plans to list on the NYSE as “DAO.” Read more.

- Tela Bio, a Malvern, Penn.-based firm focused on soft tissue reconstruction, filed for a $69 million IPO. The firm posted revenue of $8.3 million in 2018 and loss of $29.9 million. OrbiMed (34.6% pre-offering), Quaker BioVentures (21.2%), and Pacira Pharmaceuticals (13.6%) back the firm. It plans to list on the Nasdaq as “TELA.” Read more.


- Fortress Investment Group sold CoreVest American Finance Lender, the Irvine, Calif.-based real estate lender and several of its affiliates to Redwood Trust. Financial terms weren't disclosed.

- Carlyle Group plans to sell Addison Lee, a taxi service, by early next year, the Financial Times reports. Carlyle acquired the firm in 2013 for 300 million pounds.

- FFL Partners agreed to sell Crisis Prevention Institute, a Milwaukee, Wis.-based, provider of crisis prevention and intervention training programs to help professionals respond to anxious, hostile and violent behaviors, to Wendel for an enterprise value of $910 million. 

- Castle Harlan spun out Colyar Technology Solutions, a Phoenix-based provider of software for the U.S. Department of Agriculture, from portfolio company Gold Star Foods. Financial terms weren't disclosed.

- ArchiMed sold Primo Group, an Italian chain of dental clinics, to Aksia. Financial terms weren't disclosed.


- Clean Energy Ventures closed its $110 million debut fund.

- Veritas Capital closed Veritas Capital Fund VII with $6.5 billion.


- Houlihan Lokey named Jerome Brown as managing director and Austin Smith as vice president. Brown and Smith previously worked at JMP Securities. 


- TV Time agreed to acquire Mediamorph, a New York-based firm focused on content management for the entertainment industry. Financial terms weren't disclosed.

- Cognizant (Nasdaq: CTSH) agreed to acquire Contino, a London-based technology consulting firm. Financial terms weren't disclosed.

- KIND Healthy Snacks acquired Creative Snacks, a North Carolina-based maker of cluster-style snacks and trail mixes. Financial terms weren't disclosed.

- Broadridge Financial Solutions acquired Appatura, a Ridgefield Park, N.J.-based firm for regulatory and marketing content management. Financial terms weren't disclosed.