Why would a company do a direct listing?
CXXXVI
Hello and welcome to Oversharing, a newsletter about the proverbial sharing economy. If you're returning from last week, thanks! If you're new, nice to have you! (Over)share the love and tell your friends to sign up here.
A very exciting update: Oversharing now has an anthem thanks to Walt Hickey, who wins for best secret Santa Secret gift ever. Walt writes Numlock News, an excellent numbers-focused morning brief you should all sign up for. The rap is by Mayamiko on Fiverr, who vastly exceeded any expectations I could have had for an Oversharing theme song, had I contemplated the possibility. Check it out on Soundcloud here.
And a programming note: Oversharing will be off for Christmas and New Year’s. Happy holidays, and see you in 2019!
Direct listings.
We talked last week about how Airbnb and Slack may each pursue a direct listing in 2019, the populist cousin of the initial public offering. In an IPO, the company hires underwriters (usually a group of banks) who buy shares at a particular price, which they then sell to clients and investors. The company can sell new stock and spends weeks or months traveling around the country in a “roadshow” to pitch its stock to prospective buyers. Existing shareholders, like employees and pre-IPO investors, are subject to a lockup period that prevents them from selling their shares immediately, typically for 180 days after the market debut.
In a direct offering, the company can’t sell any new stock, so there’s also no lockup period. Existing shareholders can sell their holdings immediately when the company lists on a public exchange. Spotify completed a direct offering in April 2018.
Why would a company go the direct listing route? According to Sam Dibble, a partner at law firm Baker Botts, the top reason is to keep employees happy. If a company has been private for a long time and doesn’t need to raise money, a direct listing is a great way to let employees cash out. It works best when the company is already a household name and can generate investor interest without the fanfare of a roadshow.
Dibble says other reasons to do a direct offering are to gain access to the public markets without having to pay fees to investment banks, which can be substantial, and to get a quicker sense of the true market value of the company. In a traditional IPO, the IPO price is often deliberately set below market to allow for a “pop” on the first day of trading. The stock price can then reset after the initial lockup period expires, freeing up more people to sell. “Anytime you buy a share on the first day of trading you’re kind of taking a big bet on what the real price is,” Dibble says, but with a direct offering you probably have a better gauge of the price after a month or two.
Here is a Harvard case study of Spotify’s listing that basically says that:
Having enjoyed great success in the private capital markets, Spotify had no immediate need for funding. So, with a large and diverse shareholder base, a well-known brand, global scale, a relatively easily understood business model, and a transparent company culture, Spotify felt that reimagining the process of going public through a direct listing was the path that best enabled it to achieve these goals.
Why don’t more companies do it? “It’s pretty hard to pull off a direct offering,” Dibble said. But you can see why it might appeal to Airbnb. The company was profitable in 2017, its employees have been itching to sell for years, and it has a lot of brand recognition from its guests and hosts.
Cleaning house.
Uber is paying off Travis’s—I mean, er, its—legal bill ahead of an expected 2019 public offering. The company paid $148 million in September for covering up a 2016 data breach that compromised the personal data of 57 million Uber accounts, including 600,000 driver’s license numbers, eight times what Target paid to settle its infamous breach in 2013. In November, a court approved a $10 million offer from Uber to settle a class-action lawsuit from two female engineers who alleged the company discriminated on race and gender. Per Bloomberg, Uber last week quietly resolved allegations that it “put thousands of women at risk of sexual assault by their drivers”:
Experts say the more baggage that Uber can put behind it before going public, the better.
“If you are planning an IPO, one of the first things you should do is clean house and that includes cleaning up any lawsuits,” said Alan Seem, a Silicon Valley finance and securities lawyer. “That’s one of the first things I tell them: ‘Lawsuits can distract from the investment story you want to sell investors.’”
Of course Uber has plenty of other things to distract investors with: driverless cars, flying cars, bikes, scooters, food delivery, temporary staff. I am honestly not entirely sure what the Uber story at this point is, but it seems to be something like, sure, we used to drive around like the bad guy in a Bond movie, but let’s not worry about that, we are under New Management now and focused on New Ideas and it is Very Exciting, Please Trust us and Invest. Can we bring you a McChicken?
Elsewhere in cleaning house, Uber tidied its accounting disclosures in the latest quarter. The third-quarter figures Uber shared in November came in a crisp spreadsheet with alternating gray and white rows, a huge upgrade from the pdfs it used to send around, which with their floating dollar signs, slightly uneven spacing, and “CONFIDENTIAL” splashed across the page in gradient gray font looked like they were designed by a middle schooler in Microsoft Word.
Beyond the aesthetic upgrade, Uber also stopped breaking out line items that disclosed how much it spent on promotions, driver earnings, driver incentives, and refunds. This “contra revenue” section of Uber’s semi-public quarterly reports gave the best glimpse at how much the company was paying to drivers every quarter, and what impact that expense was having on Uber’s bottom line. You could see, for example, that while Uber has spent more on driver pay in raw dollars over the last two years, it has reduced that expense as a share of gross bookings.
Here’s that blue line up close:
From a corporate perspective, lowering driver costs as a share of bookings is good, because it probably means the company is improving its margins on rides and deliveries. But it also adds merit to complaints from drivers who say they now get a smaller cut of what riders pay. This sort of color will now be absent from Uber’s quarterly filings, if the company has its way, simplifying the narrative for Uber a bit, and helping to make sure investors aren’t distracted by the wrong story.
Electrifying.
My coworker Akshat Rathi has broken through the Tesla bubble and written a fantastic series on the future of electric cars being in China. It sits behind a paywall as part of Quartz’s new subscription offering, but you can sign up here for a free trial, subscribe and enjoy a 45% holiday discount. Here is Akshat:
China’s had so much success using its carrot-and-stick approach to developing its auto market, that it’s ratcheting up the pressure. Starting in 2019, all Chinese carmakers that manufacture 30,000 or more cars per year will have to meet an NEV [new-energy vehicles] quota, that will rise in 2020.
China is expected to overtake the rest of the world combined in sales of electric vehicles by 2020.
Also in the series:
A crazy fact from the piece on China’s electric bikes: “Today, electric two-wheelers are so common in China that they account for 80% of all the greenhouse-gas emissions avoided by the use of electric vehicles—in the entire world.”
Comeback kid.
He’s baaaaaaack:
Anthony Levandowski, the controversial engineer at the heart of a lawsuit between Uber and Waymo, claims to have built an automated car that drove from San Francisco to New York without any human intervention.
The 3,099-mile journey started on 26 October on the Golden Gate Bridge, and finished nearly four days later on the George Washington Bridge in Manhattan.
The car, a modified Toyota Prius, used only video cameras, computers and basic digital maps to make the cross-country trip.
Levandowski was a rising star at Waymo and Uber before he was accused by Waymo of stealing trade secrets and taking them to Uber, in a case that proceeded all the way to trial in San Francisco before the two companies agreed to settle the dispute earlier this year. Levandowski repeatedly took the fifth during that saga and briefly slunk out of the spotlight, but now he is back with Pronto.AI. The startup will sell an advanced driver assistance system called Copilot, which offers lane keeping, cruise control and collision avoidance for commercial semi-trucks. Levandowski even found a guy at Stanford to work with him!
“I don’t really dwell on the past,” Levandowski told the Guardian during a ride in the Prius along highways near Pronto’s San Francisco offices last week. “At the end of the day, what matters is facts and reality. I’m very proud that we were able to achieve, in my mind, a pretty monumental self-driving milestone.”
Ah yes, facts and reality matter most, and particularly the facts and reality of your own mind, if you are Anthony Levandowski.
This time last year.
Hubble sold contacts with fake prescriptions, Target buys Shipt, Airbnb is profitable in 2017
Other stuff.
SoftBank investors balk at massive WeWork investment. Why Southeast Asia’s Biggest Ride-Hailing Company Is on a Mapping Spree. Activist hedge fund attacks Just Eat for “unambitious targets and flawed incentive schemes.” UberEats delivering for Starbucks. Pennsylvania green lights Uber’s return to driverless road testing. Postmates debuts cute delivery robot. Delivery robot spontaneously combusts in California. Congestion pricing could boost ride-hail companies. Aspen renegotiating bikes contract with Lyft after local business backlash. Lyft patents system for driverless cars to communicate with pedestrians. Unions criticize UK plan to preserve the gig economy. Careem launches delivery service. Drivers sue Lyft, alleging inadequate pay. Electric scooters need to toughen up. Bike-share said to reduce smog in China. Mobike to spin off European business. Angry customers demand Ofo refund their deposits. Former Ofo exec launches scooter company Dott. Prime and Punishment. Don’t drink and scoot. Why Do People Still Fall off Cruise Ships?
Thanks again for subscribing to Oversharing! If you, in the spirit of the sharing economy, would like to share this newsletter with a friend, you can forward it or suggest they sign up here.
Send tips, comments, and 2019 hopes and dreams to @alisongriswold on Twitter, or oversharingstuff@gmail.com.