Initial Public Offers, or IPOs, have been the traditional way for companies to offer shares to public investors. But in recent years we have seen several marquee deals doing this through a Direct Listing, bypassing a number of the IPO processes. Will this trend continue? We sat down with Dakin Campbell, author of “Going Public” and Chief Finance Correspondent, Insider, to discuss his book chronicling a number of notable offerings in the last few years and what the future might hold.
💡 Name: Dakin Campbell
💡 What he does: He’s the author of “Going Public” and the chief finance correspondent at Insider.
💡 Company: Insider
💡 Noteworthy: “Going Public” is based on over 150 interviews with bankers, executives, and other direct participants in the marquee deals of the 2010s.
⚡ An IPO is an initial public offering. What exactly is an IPO? Dakin explains, “IPO is the first time that a company sells shares to public market investors. These would be mutual funds or other retail investors like you and me. Companies obviously raise money privately from venture capitalists and others, but those are institutions or very wealthy individuals. And so, the IPO is the first time that companies can sell shares to everyday investors.”
⚡ What’s the difference between an IPO and a direct listing? Some companies decide to do an IPO, while others choose the direct listing method. Dakin explains the differences, “In an IPO, the company sells new shares — just to be clear. In a direct listing, the company takes shares that it’s issued already and lists them directly onto the exchange, so the price is set by the market, and the allocation is set by the market. So it really cuts out this meeting that takes place between investment bankers and institutional investors the night before, which a lot of people during the history of the IPO market, and certainly in the last few years, have raised questions [about] — and whether it’s an insider’s game or not. I don’t know if you want to go there, but a direct listing basically cuts that out and prices the shares with the help of the market.”
⚡ Direct listing leaves the pricing up to the market. Unlike an IPO, a direct listing hands over the pricing process to the market. Dakin explains, “The argument in favor of a direct listing over the IPO is that it really takes the pricing process for how shares are priced and hands that over to the market — to the deepest and most liquid in the US collection of buyers and sellers in the world. And so a lot of people like direct listing because it leaves the pricing not up to investment bankers and investors but to the market.”
Spotify set the stage to change the traditional IPO
“I think that’s really illustrative and instructive for understanding what Spotify was able to accomplish when they did the first direct listing in 2018. And so, with Google’s struggles as context, I tell the story of Spotify and the conversations with the SEC and how they were able to get their bankers on board and their management team and their board aligned with doing something different. And for various reasons, Spotify was successful, where Google was not — in really setting the stage to change the traditional IPO.”
Talk to the right people: the key to understanding the offerings
“The job of a journalist is to figure out what the important meetings are when it comes to deals or transactions or company stories and to figure out who is in the room and to reach out to all of those people or as many of those people as you can, and find out what happened in that room that you weren’t in. So, you might be impressed by the number of interviews I got, but you should see my spreadsheets — that I’ve got of thousands of people’s names that I reached out to by email or text or phone, and I was able to get 150; my success rate was not super high, but you just have to be persistent. And once you can find somebody who’s in the room, then you begin to understand what happened, and you use that to triangulate with others.”
Is innovation in public offerings a bull market phenomenon?
“When you have a winter like we’ve had, I think there’s a real question about how much of the innovation that we saw in the last cycle — and that I wrote about in the book — will persist. And so I think we don’t know the answer. When I was reporting on the book, when I talked to people about it, the skeptics said this is really a bull market phenomenon. Once we get into a bear market, risk will be off. People will be much more fearful, and you’ll see startup executives reverting to the traditional IPO and getting rid of the innovations that some of their brethren came out with.”
[06:33] “I think we have to acknowledge that IPOs have been done for hundreds of years and that the way that IPOs are currently done is a model that’s been done for 40 years. So really, the existing IPO process was established in the mid-1980s by Goldman Sachs and a banker there. And so, it’s time-tested, and it’s been proven over the years — in good markets and in bad markets.”
[08:19] “The traditional IPO is still the king if you need to raise money, if you’re a company that needs to raise. And so the hope among some people I talked to for the book is that eventually, you’ll be able to raise money through a direct listing, and that eventually replaces the IPO and that all of these new shares are priced by the market, not by investment bankers.”
[21:16] “I will say this year we’ve seen a direct listing. It was from a small cannabis company, but to the extent that that’s a moment in time, that tells us that even in a bear market, the direct listing mechanism works. I’m hopeful that when the IPO market does open, we will continue to see some of these innovations.”
[00:00:00] Dakin Campbell: For various reasons, you know, Spotify was successful, where Google was not in really setting the stage to change the traditional IPO.
[00:00:25] Nick Mazing: Hello and welcome. You’re listening to Signals by AlphaSense. My name is Nick Mazing, and I’m your host. In today’s episode, we’re joined by Dakin Campbell, who is a Senior Finance Correspondent at Insider and also the author of Going Public, which is a very interesting book that looks at the more key deals in the last decade-plus and discusses really the debate between IPOs
[00:00:51] and direct listings. And I want to say something that was going to come across as very strong, but I really think the book has potential to be a classic for people looking to go on Wall Street, especially in Capital Markets, similar to Liar’s Poker because, you may read the prospect. This is on the SEC website, but the way the deals really come together and all the detail and everything that goes into that is very well chronicled in the book.
[00:01:17] So, we’ll start with two questions. Can you tell us a little bit more about yourself, and can you tell us why you wrote the book?
[00:01:24] Dakin Campbell: Yeah. Thank you for that kind introduction, Nick. It’s not every day you’re compared to, your book is compared to Liar’s Poker, so that’s a real career highlight. So like you said, I’m the Chief Finance Correspondent at Insider. I’ve been here for about four and a half years. I spent 10 years at Bloomberg News before then, and most of my career has been thinking and talking about the financial markets and really
[00:01:47] coming to understand the nuances and the in intricacies and the jargon of the financial markets. So when my editors at Business Insider came to me in the summer of 2019 and asked me to start covering WeWork as that real estate company started heading towards its IPO, I was happy to do that.
[00:02:06] Dakin Campbell: And a story that I wrote in late September of that year was maybe the first time or one of the first stories that put all of the WeWork news together. Your listeners will, will know that WeWorkwent for an IPO, and it all sort of came famously crashing down, and there’d been a lot of coverage about news stories, basically about the covering WeWork and, and its various things in, its in its prospectus, but nobody had really put that together into a narrative.
[00:02:35] So I wrote that for Business Insider, and that was, a lot of people read it, and it got a lot of attention. And, and an agent reached out to me and said, “Would you like to write a book about WeWork? That was a, a well-written article. I think you could expand it into a, into a book.” And my answer to him was, “I don’t really wanna write a book about WeWork that,” I wasn’t super curious about that company for a lot of reasons.
[00:02:59] But, I am and was, or I was and am very curious about the IPO market, about these parts, these corners of the financial markets that are incredibly important, but maybe not completely understood by general interest readers. And so I told him that I wanted to write a book about IPOs, not WeWork.
[00:03:19] And, and together with my agent, we developed a proposal and sold the book and, and wrote the book that we have here.
[00:03:27] Nick Mazing: Interesting. Just based on level of detail, I was, I was like,” He must have worked at like Capital Markets somewhere. It’s, it’s just, it’s just fascinating.” But before we get into the book, can you tell our listeners in case, you know, they’re new to finance, since we’ll be touching on that, what is the difference between an IPO or initial public offering versus direct listing?
[00:03:48] Dakin Campbell: Sure. So an IPO is the first time that a company sells shares to public market investors. These would be mutual funds or other retail investors like you and me. Companies obviously raise money privately from venture capitalists and others, but those are institutions or very wealthy individuals. And so, the IPO is the first time that companies can sell shares to everyday investors.
[00:04:17] What it means in practice is that companies work with investment banks and price and allocate the shares that they’ve issued in a meeting the night before the shares start trading on an exchange. And that meeting is very important because it determines the price of the shares and how much the company raises.
[00:04:38] But it’s also, doesn’t include the full market, I’ll say. A direct listing is a company take shares that it’s issued already. So in IPO, you sell, the company sells new shares, just to be clear. A direct listing the company takes shares that it’s issued already and direct and list them directly onto the exchange.
[00:05:03] Dakin Campbell: And so, the price is set by the market, and the allocation is set by the market. And so it really cuts out this meeting that takes place between investment bankers and institutional investors the night before, which a lot of people, during the, during the history of the IPO market, and certainly in the last few years have raised questions about
[00:05:25] that meeting and whether it’s an Insider’s game or not. And so I don’t know if you wanna go there, but a direct listing basically cuts that out and prices the shares with the help of the market.
[00:05:36] Nick Mazing: I, I, I absolutely will go there. So, my takeaway from the book, and I, I cannot really vacuum, obviously, I’ve followed the, you know, I’ve, I’ve worked on Capital Markets and follow the news that’s on. There, is there a superior way to go public when you look at IPO versus direct listing? Because my view is that if one of those methods was
[00:06:04] so much dramatically better than the other have taken over and you’re seeing really a mix and deal. So directly things are mostly costly to any technology companies that maybe, you know, try to be more interesting. So, what do you think? Is, is there a superior way to go public?
[00:06:23] Dakin Campbell: So, I think we have to acknowledge that IPOs have been done for hundreds of years, and that the way that IPOs are currently done is a model that’s been done for 40 years. So really, the existing IPO process was established in the mid 1980s by Goldman Sachs and a, and a banker there. And so, It’s time tested and it’s proven over the years in good markets and in bad markets.
[00:06:51] Now, the argument in favor of a direct listing over the IPO is that it really takes the process, the pricing process for how shares are priced and hands that over to the market, to the deepest and most liquid in the US collection of buyers and sellers in the world. And so a lot of people like the direct listing because it’s, it leaves the pricing up to not investment bankers and investors, but to the market. One thing, the another thing we have to mention too is you can’t raise new money in a direct listing yet. So if you are a company and you want to issue new shares to raise new money that you wanna put into R&D or you wanna hire employees or expand your business, you have to do an IPO or, or a SPAC.
[00:07:45] But, but mainly an IPO. Now the SEC has passed rules recently, or at the end of 2020, that would allow companies to raise capital as part of a direct listing process. But no company has done that yet. So the traditional IPO is still the king if it comes to, if you need to raise money if you’re a company that needs to raise money.
[00:08:10] And so the hope among some people I talked to for the book is that eventually, you’ll be able to raise money through a DL, through a direct listing, and that that eventually replaces the IPO and that all of these new shares are priced by the market, not by investment bankers.
[00:08:30] Nick Mazing: Okay. And I think a lot of the controversy in the last few years was the IPO pop. So essentially, what happens is there is a tendency for the banks to underprice the initial public offering. And so it performs well on the first day, and some people, some very vocal venture capitalists on Twitter especially, that have been against that
[00:08:51] IPO public, have been hating on it for years. But there is a why side because there is certain risk involved in that, right? Meaning it’s a new company to the market you don’t know the reception. There is no natural shareholder base, and so on. So, let’s talk about the book now a little bit.
[00:09:05] Now we’ve established kind of the IPO versus direct listings dynamic. You cover a lot of the marquee offerings in the last 10, 15 years, or so. And by marquee, and not only, I, I don’t mean necessarily by size, we’re talking about Uber, Airbnb, Spotify, Unity, going further back, Google, one of the very high profile direct listings, Netscape, and going even further back with British Gas, with Ford, just to kind of explain the history.
[00:09:37] And, and they’re marquee, again, not only because of the market size or because they’re more direct listings, but also when you think about the kind of the technological cycle, it was really the coming of age for a whole generation of, let’s say, cloud computing company. I mean, it’s really historic in the sense that the maturity was there for these companies, were new, let’s say in 2010, and now they’re ready for the public market.
[00:10:00] So how, how of all those deals that you cover, which one was your favorite to research and write about?
[00:10:10] Dakin Campbell: So, I think there were a couple. And you’re right, as, as part of writing this book, I did go back into the history of IPOs and sort of look at how the process developed and, and look at how some of the big marquee companies, how they did it. And one of those companies was Google, right? So Google was, is the big search engine.
[00:10:32] They were a big search engine even back in 2004 when they went public, but they were coming to the market at a really interesting time. It was after the internet crash, and they were private. Nobody really knew how big search was yet, or how big Google was, or how dominant they were gonna become.
[00:10:52] And so they really, they had a chance to sort of determine what kind of offering they did and what their deal looked like. And for various reasons that I get into, Google decided that they wanted to auction their shares. And so ma, many of your listeners has probably, have probably heard about Google’s Dutch auction, and we won’t get into that.
[00:11:12] But an auction is something different than a traditional IPO. And so Google set out to auction its shares, basically giving retail investors, institutional investors an equal shot at buying the shares in, in their IPO. It really didn’t go well. You know, it was, they, I think they submitted nine amendments to their prospectus, and the deal dragged out through the summer of 2004.
[00:11:43] And so by the time they were ready to go public, it was in August of 2004. Usually not the time that you wanna be selling new shares. Most investors are on the beach and, and so bankers like to avoid that time. And, and so Google went public, and they tried to get between 108 and $135 a share, and they ended up getting $85 a share.
[00:12:09] Now, it’s worth noting that Google shares never went below $85 after that. It, they, it went up to a hundred on the first day of the offering and, and pretty much kept rising from there. But I like that deal a lot because it shows how Google tried to do something different and really tried to change the market and was unable to. You know, it didn’t, didn’t work out.
[00:12:34] And anybody who was sort of looking at Google as a, as the first of many Dutch auctions, ended up being pretty disappointed. Google didn’t change the, the process and it became a bit of a one-off. There were a couple others after them. But I think that’s really illustrative and instructive for, for understanding spot what Spotify was able to accomplish when they did the first direct listing in 2018.
[00:13:00] And so, with the Google struggles as context, you know, I tell the story of Spotify and the conversations with the SEC and how they were able to get their bankers on board and their management team and their board aligned with doing something different. And for various reasons, you know, Spotify was successful, where Google was not in really setting the stage to change the traditional IPO.
[00:13:30] Nick Mazing: Another question that I had, which was like really burning ’cause I spent weeks working at the Equity Capital Markets desk at Lehman Brothers as a part of my rotation as a banker. And the level of detail that you have for every deal in the book is crazy. In other words, it reads like you were a managing director, either the coverage person or the ECM person
[00:14:03] pitching the deals going back and forth ’cause obviously there is so many cross current, so many events. It’s not just COVID, there’s just so many things that that are happening. Every, every deal is unique. So how were you able to get, I think you said some, I think in the book it said something like 115 interviews with bankers, which is
[00:14:22] absolutely crazy because as a banker you are sworn in secrecy. You never discuss any deals, any clients, any trips, nothing. You just, it’s, it’s just by default, it’s an NPI. And somehow you got people to share with you extreme level of details. What’s, what’s the trick here? What happened?
[00:14:40] Dakin Campbell: So, one bit of correction. I did conduct 150 interviews. They were not all with bankers, so just to make sure, I obscure my sources. But this is the job of a journalist, is to figure out what the important meetings are, when it comes to deals or transactions or, or company stories, and to figure out who is in the room and to reach out to all of those people or as many of those people as you can, and, and find out what happened in that room that, that you weren’t in.
[00:15:13] So, you know, you might be impressed at the number of interviews I got, but you should see my spreadsheets that I’ve got of thousands of people’s names that I reached out to by email or text or phone. And you know, I was able to get 150, but my success rate was, was not super high. But you just have to be persistent and, and,
[00:15:39] you know, once you can find somebody who’s in the room, then, then you start under, begin to understand what happened and, and you use that to sort of triangulate with others.
[00:15:50] Nick Mazing: I, I, I really think that this is what makes the book kind of the, the Liar’s Poker of, of ECM, right? Because the, it, it’s like you were in the room. Just, just so and so from the board that I just called, that wanted this thing, but then this other investor wanted another thing and so on, right? I mean, it is the level of detail, like you said already.
[00:16:09] I’m gonna repeat myself. It’s, it’s just crazy. So, now let’s, let’s look towards the future. So we had, you know, a pretty good boom in IPOs, 2020 second half, 2021. Bumper years. Like you look at, you know, number of deals, you look at dollars raised, or the, I should say, offering volume and, and, and so on.
[00:16:32] A lot of them were SPACs, which didn’t do very well. What are some of the learnings, some of the regulatory changes that you think are coming as a result of that, maybe companies staying longer? What is kind of the ritual for, for that? What is your overall feel since you completed the book
[00:16:48] kind of towards the end of, you know… The, the winter was already starting, I would say in, in 2022. Now we had a pretty deep bear market, not just in stocks, bonds, globally, not a single geography. So what, what do you think will be happening from here, given, given, given the boom?
[00:17:05] Dakin Campbell: So, I think one of the really interesting context or trends that’s taking place in the background is the reduction in the number of publicly listed stocks in the US. And so, I’m a little rusty on the numbers there, in the book, but I think in the late nineties, there were something like 8 or 9,000 publicly listed stocks in the US.
[00:17:26] They’re now, I think less than 5,000. And so a lot of people, you know, folks at the SEC, others in government recognize or believe this to be a problem. You know, retail investors count on publicly listed stocks for their retirement. They make investments in those. And so with fewer stocks available for individual investors to buy, that leaves
[00:17:51] less opportunities to make the investment returns that people need to, to make their retirement basically. And it also means that the companies that could be public are in the private markets. And so, a lot of the value that com, that is being created in the US economy is accruing to the investors who can buy these companies and the private markets.
[00:18:12] And so, as we’ve already established, that’s not retail investors. That’s, wealthy individuals, that’s institutions. And so, one reason that the SEC was super excited about the direct listing was because they felt like adding innovation and flexibility into the way that companies can access the public markets would be a good thing and would encourage companies to come into the markets in a way and in a number that they haven’t in the past.
[00:18:41] And so I think there is still a lot of appetite for getting more US publicly listed stocks and for reversing the trend that’s taken place over the last 20 to 25 years. So I think that is the backdrop to, that’s the regulatory and governmental backdrop. There’s a lot of in,you know, interest and appetite into doing whatever they can to encourage more, to make it more flexible for companies
[00:19:10] access the public market. So, but when you have a, a winter, like we’ve had, you know, I think there’s a real question about how much of the innovation, that we saw in the last cycle, and that I wrote about in the book, will persist. And so I think we don’t know that answer. You know, when I was reporting on the book, when I talked to people about it, skeptics, they said, you know, “This is really,
[00:19:37] a bull market phenomenon. You know, once we get into a bear market, risk will be off. People will be much more fearful. And you’ll see startup executives, you know, reverting to the traditional IPO and, and getting rid of the innovations that some of their, their breath came out with.” And so, you know, I will say that this year we’ve seen a direct listing.
[00:20:01] It was from a small cannabis company, but to the extent that that’s a moment in time that tells us that even in a bear market, the direct listing mechanism works. You know, I am hopeful, and I’m showing my bias here. If it wasn’t, you know, apparent already, I’m hopeful that when the IPO market w does open, that we will continue to see some of these innovations.
[00:20:24] You know, one of the big things that changed in the last cycle, which I talk about is the lockup. And so the lockup for years and years was fixed at 180 days. And that’s basically the amount of time that insiders at the company, executives and employees can’t sell their shares. And so, the lockup began to be changed.
[00:20:47] Dakin Campbell: Investment bankers got a lot more flexible on how they structured the lockup. And in some cases, companies allowed employees to cash out early may, on the first day, in, in a few cases. And so the lockup is one place that a lot of the bankers and lawyers and advisors that I talked to for the book are looking to see whether that
[00:21:12] persists in the, in, in this bear market. And if we can continue to see a flexibility in lockup provisions, making it easier for employees, everyday employees who are not super wealthy, but have a lot of their net worth, are tied up in these private startups, if we can see them continuing to be able to cash out, then that will be an innovation that will be,
[00:21:38] that’ll be a good thing. I think a lot of people will agree it’s a good thing if that sticks around. But I will say, as I’ve talked to some people recently, they have told me that the lockup very specifically is one place that is starting to go back to the 180-day fixed provision. And so, I spoke to someone, you know, several weeks ago who’s involved in these types of negotiations for companies that are getting ready to access the public markets in 2023 whenever the, the markets calm down. And this person said that, you know, the bankers are starting to encourage companies to go back to the 180-day lockup. So if that’s the case, and if that’s a sign of things to come, then those skeptics that told me that the innovation was a bull market phenomenon, may actually have been right. I just hope that’s not the case, and I hope startup founders and executives understand that they have a lot of leverage in these deals. And really, these are, these are their transactions and, and, you know, they should be encouraged to get the best outcome as they can.
[00:22:46] Nick Mazing: And, and, and I think, you know, adding to the policy angle of increasing the number of publicly traded companies, adding to that, the SEC, when you look at the jobs act, when you look at reg Reg A IPO, so exactly, that’s this sort of move. So, we were talking with Dakin Campbell, Chief Finance Correspondent at Insider and author of Going Public.
[00:23:08] Thank you for joining us today.
[00:23:10] Dakin Campbell: Thanks a lot, Nick. This was fun.
[00:23:12] Nick Mazing: And the book covers a lot of the marquee offers in in the last few years, with really a unique insider-level perspective. We’re going to have all the relevant links in the show notes in case you’d like to learn more about the book or about Dakin. My name is Nick Mazing. This is Signals by AlphaSense. You can subscribe to us on the major platforms.
[00:23:33] Thank you for listening.