When I first told people Amplitude was doing a direct listing, many were skeptical. I kept getting hit with comments like, “Don’t you need to be a big consumer brand like Spotify or Slack to pull that off? Does the difference in dilution really matter? Is it really worth the risk to do something new?”
Those people had good intentions. But to be blunt, they were wrong. Traditional IPOs are one of the worst ways to take a company public. I heard one public company CFO call them one of the “biggest arbitrage opportunities in all of finance.” There is no way I could let Amplitude be at the wrong end of that arbitrage.
For too long the initial public offering (IPO) has gone unchallenged as the “normal” or “right” way to go public, but recently there’s been significant innovation in the listing process and there’s now a much better way to do it.
Having just taken Amplitude public via direct listing, I feel a responsibility to share a few lessons we learned from our listing process that will help other companies prepare.
IPOs systematically undervalue companies
CEOs are fiduciaries to their business, so getting their shareholders a bad deal is unacceptable. Yet, every week, companies choose to debut on the public market and give away their shares at a discount. Over the last 40 years, companies going through IPOs underpriced their stock by an average of 20%. In 2020, that figure jumped to almost 50%. While that might result in headlines about a company’s stock soaring, its leaders end up selling a dollar for 50 cents—in breach of their fiduciary duty.
Why is this happening? Investment banks, which lead companies through the listing process, are looking out for their own interests. A company going through an IPO is a one-time customer for them. But banks work with the big funds over and over again. The incentives are off: The bank is motivated to get its institutional investors a good deal, so it encourages companies to underprice. An IPO is the only financial market transaction where the same investment bankers are supposed to represent both sides of the transaction.
Market-based pricing is the best way to price your stock
A significant advantage of a direct listing is that supply and demand determine your company’s stock price, not a room full of bankers and execs. Before you go public, Nasdaq or NYSE consults with your financial adviser to choose a reference price. This isn’t binding. It just gives investors a starting point.
On the day trading begins, there’s an auction process to determine the opening stock price, which is based on how much new investors and existing shareholders are willing to buy and sell for. Then your stock will begin trading at its true market value. For example, Amplitude’s reference price was $35 a share but we started trading at $50 a share. If we would’ve done a traditional IPO, we would have sold for far less than what we’re actually worth. It’s the free market at its finest.
Another big benefit of a direct listing is that everyday investors are also allowed to participate in trading on day one. This democratizes access to the financial opportunities of a public market debut and closes the gap between institutional and retail investors. It also benefits your employees. Compare this to an IPO, in which there is a mandatory lockup period that prevents existing shareholders from selling their shares for a certain amount of time.
Raising capital is still an option
To date, direct listings haven’t been the massive fundraising moments that traditional IPOs are known for, mainly because the company doesn’t issue any new shares. We did a crossover round earlier this summer, so we were in good shape in terms of capital and didn’t need to raise funds during the direct listing.
That will change. Companies can do a primary raise with a direct listing—it just hasn’t been done before. That path was my first choice, but it would have taken an extra year of working through the process with the Securities and Exchange Commission (SEC) since it’s new territory.
If a single company makes that first leap, the regulatory process will be clear for everyone else. I’m eager to see which company makes history by being the first.
Brand size doesn’t matter, but your business model does
The number one misconception about direct listings is that only big consumer brands can pull them off. I’m here to tell you that’s not true. Amplitude is proof! The one caveat is that direct listings are riskier if investors don’t understand your business or if you’re operating in a newer, unfamiliar market like cryptocurrency or self-driving cars. This risk should decrease over time as it becomes much easier for investors to access company information than when IPOs first were designed more than 50 years ago.
For now, if investors understand your business model, you will be in good shape for a direct listing. This is especially the case for tried-and-true models like SaaS. We’re a SaaS company, and many other SaaS companies have gone public before us, so the investment community understood our sales process and revenue model. This, combined with the hard work we put in on the investor education front, gave them the confidence they needed to invest.
Put the right team in place
With an IPO, your investment bank will leverage its network to set up your investor road show, which is basically a week full of meetings between investment funds and a company’s executive team. You do the exact same thing during a direct listing.
Since you’re setting up your own meetings, it’s essential to have the right team in place to take on the extra work of networking with investors and handling all the logistics that come with scheduling. You’ll also need people who are comfortable navigating unknowns. Direct listings are still new, so there just aren’t that many people who have done it before and can guide you through the regulatory process.
We’re witnessing a watershed moment for direct listings. You’ll still find naysayers, but without a doubt, it’s the best path to go public for any high-quality company. There will be ample opportunity to see this play out as many other companies with a similar size, growth trajectory, and brand recognition as Amplitude go public. My hope is that in a few years, direct listings will be the norm.
Spenser Skates is the CEO and cofounder of Amplitude.
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