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What a ‘Direct Listing’ Is, and Why Banks Are Nervous

The Slack Technologies app

The Slack Technologies app

Photographer: Andrew Harrer/Bloomberg
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Hot technology startups have traditionally raised the cash they needed to break into the big time through initial public offerings. IPOs became synonymous with instant wealth for company founders and those lucky enough to buy those shiny new shares. But for some of the new generation of tech firms going public, one thing is very different: they don’t need the money. Music-streaming service Spotify Technology SA went a different route last year, going public through a method called direct listing and workplace messaging platform Slack Technologies Inc. followed suit. Airbnb Inc. has considered a direct listing as it weighs its options for going public.

Before an IPO, companies looking to raise funds in public markets hire investment bankers to stage a “roadshow”: the bankers make presentations in different cities to get investors excited about buying the new stock, and then underwrite the share sales. Banks often price the IPO at a discount below the expected trading range, which can create a “pop” in the first day of public trading as new investors start to buy shares. In a direct listing, no new money is being raised and no new shares are sold. Instead, private investors or employees who hold shares can just start selling them on the public exchange.