Instacart mulls direct listing in snub to IPOs | Hacker News Reader

Instacart mulls direct listing in snub to IPOs

reuters.com

103 pointsprostoalex62 comments

As a long-time former banker, Instacart is 100% the right candidate for a direct listing and Goldman / Morgan Stanley are likely currently pitching them on it if not beginning anchor investor meetings. It's a win-win from the bankers' and company's perspective.

The company feels good about avoiding the "perceived loss" from a day 1 IPO pop (not really how it works but it makes founders feel better) and pay slightly less on a total fee basis.

The bankers make more on average because they aren't splitting up the fee pie with 10 other banks and they don't need to backstop the IPO in case things go south on day 1 so they avoid major risk. There's a bit of a relationship loss in not handing hedge funds free Day 1 returns, but those relationships will last given how strong the IPO pipeline is and how much free money has been handed to the hedge funds.

Practically speaking, how is "raise money on private market, then quickly go public via Direct Listing" different from a traditional IPO? Presumably the late stage private investors get the company at a steep discount relative to what would be available to retail investors, so it doesn't seem that different from an IPO where the majority of shares go to select institutional investors. If the shares pop 50% after the Direct Listing, then couldn't one argue that the company left money on the table during the pre-Direct Listing private round?

Yes. The only way to avoid the “pop” is to not need new money. (Edit: if you can hold out a year on current cash you can do a secondary offering after the DL.)

Instacart already gave it away to whoever participated in this $265 million private fundraising round.

You've astutely noted the difference between what people think is happening in a direct listing and what actually happens.

People think founders are sticking it to Wall Street. In reality, the exact same mechanics are playing out with an IPO but without any downside protection for the company.

> The NYSE now offers companies the option to raise money in a direct listing after the U.S. Securities and Exchange Commission approved it in December.

Doesn't the new NYSE listing format 'stick it to wall st' or at least institutions that get early access to IPOs?

I think they're saying that the late-stage private investors are the ones who get the early access.

And the committee memo is so much shorter when there’s no equity risk!

> As a long-time former banker, Instacart is 100% the right candidate for a direct listing

Can you say more about why?

1. Strong liquidity position from several recent rounds of fundraising so they do not need the cash

2. Well recognized brand amongst the investor class / product serves the investor class (similar to a Peloton) so the company would not suffer from a lack of recognition that may plague a Snowflake or Databricks. Allows investors to get comfortable with the story more quickly and through an accelerated process rather than your traditional testing the waters period + roadshow

3. Diversified cap table with many well-known long only and mutual fund names invested already involved

> the "perceived loss" from a day 1 IPO pop (not really how it works but it makes founders feel better)...

Can you tell us more about this and why it's not the loss people think?

It's hard to find the correct number.

Price it too high and the news will report "Instagram opens -30% on their first day". Price it too low and you left money on the table.

The best approach would be allowing people to place buy orders on market and then just liquidate as many as you can stock for when market opens but I'm not sure if this is exactly how this will go.

Who cares if "instagram opens -30% on their first day"? As a company, your objective should be raising the capital you need at the least dilution, not burning money for the sake of some articles that everyone will forget in one week.

Who remembers what the pop or not was for <random ticker>? That's right, nobody.

Have you worked at a company that has gone public? It's a huge day for the company. Seeing the stock dip is a major morale killer, attributes to attrition, and can cause issues with hiring strong talent.

This sounds like a communication / internal messaging issue, especially because the financial outcome (end of day share price) is the exact same.

Seriously, how is this still going on when literal billions of $ on the line are being squandered to Wall St. every year in IPO's? Especially from tech co's where generally people should have a bit more critical thinking for the end result.

It's not the same, the company presumably still owns a lot of it's own stock post IPO, so a stronger share price will be way better for M&A for example, which is one of the many reasons a company may want to become publicly traded.

This seems to be assuming the share price ends up at the same place. It's simply a question of whether the IPO should be priced lower or higher.

If you go by the efficient market hypothesis you would say that. I doubt that a universe where you open at $20 and rise by 100% gives you the same end state for all actors + price as a universe that opens at $200 and crashes by 80%. If you believe everything is priced in all the time I guess it makes sense.

The efficient market hypothesis doesn’t predict that everything is priced in all the time. It predicts that you can’t consistently beat the efficiency of market pricing over a long term. It doesn’t predict that short term volatility can’t exist.

The end-of-next-day share price may not be exactly the same, though.

Bookmakers run pre-market. There is a period where you can bet much lower than usual stakes. The bookie sees which side the money is piling on and adjusts the odds before opening the main market.

This is the way to pay a premium for price discovery. Maybe something like that could be done with stocks.

Yes. If you're a major national brand when you IPO, you may not need the road show and support from investment banks.

Between SPACs and direct listings, traditional IPOs are for schmucks.

Can someone remind me why, today, any company would ever choose to IPO instead of direct list?

IPO means paying a ton of money to bankers, as well as leaving tons of money on the table if/when the stock "pops".

Especially now that, since December if I understand correctly, companies can now sell additional shares at the moment of the direct listing, which apparently used to not be allowed.

And then the idea that an IPO comes with guaranteed buyers hardly seems necessary in today's high-frequency high-liquidity age of trading. Plus, surely a ton of employees and investors will want to at least partially cash out from the first millisecond if the price is right, so supply will be there.

Am I missing something?

Because nobody knows anything about most companies and when they 'go public' nobody will buy their shares.

The classical IPO process involves a road-show where the banks take the CFO/CEO to institutional buyers they line up ahead of time, they work out a price agree to buy shares ahead of time for a set price.

The process is underwitten by a bank(s) who buy the shares ahead of time for a set price thereby providing certain guarantees.

This notion of 'leaving money on the table when the stock pops' is just frothy hubris: the stock could equally flop, moreover, if somehow every share were sold first thing in the morning - a 'stock pop' would not benefit the company directly anyhow - the stocks will have been sold.

An IPO is a big fat financial service offered by the banks, for most companies that's the path to market. Avoiding it would probably require a big brand name company with a lot of recognition, probably a very big price. Even then it's risky.

TLDR: banks take on some financial risk and offer advisement on price and inside access to capital rich accounts that would buy the shares; potentially less risky than going out on the open market alone where if no one knows who you are or aren't advised by a bank to buy your stock, they simply won't

Banks do take on the risk to buy* the shares if for some reason the public market doesn't like the listing price or the interest isn't there. Sometimes they just put forth "best effort" and their role is to give inside preference/hype up shares to their large institutional customers to buy the IPO shares. They do the "pricing" of the IPO which sets the shares at a level where there is sufficient interest to sell the public offering of shares but also don't want it to pop too much because the company loses out on raising capital.

However, given the inflation in the market and general hype around a lot of these companies with good growth (and some kind of path to profitability) I don't see how the bank really does anything other than what you say...take money away from the company and the whole pay for access to investors thing doesn't matter anymore.

*I don't think this is always the case, but used to be in some IPOs

An IPO is 2 things:

1) Transferring ownership from existing investors to new investors

2) Raising capital.

You can't really do 2 with a direct listing. Companies IPO mostly because they need money not because investors want liquidity

I'm not sure how you cannot do (2) with a direct listing. The company can just issue new shares to sell on the direct listing, no differently than issues new shares in a new fundraising round

Have there been any of these direct listings with share sales yet?

Every public company has the ability to work shares into the market directly once public; this often goes unannounced.

I believe you need to what a year to become a well seasoned issuer, prior to that you’d have to do almost as much paperwork as an ipo.

I'm not entirely sure how that's possible. If you knew stock was being sold in significant quantities (~10-20% of the company) in extremely short periods of time its almost a guarantee the price will drop on listing day. Previous direct listings have all been about transfer of ownership.

Raising capital doesn’t mean it needs to raise 10+% on day one. Even 1% would take a while to spend.

There are usually listing requirements that require that the public owns a large portion of the shares in the case of the NASDAQ it seems to be 10%. If the company hasn't already sold these shares they would have to sell them on day 1.

The company doesn’t need to put those shares up, it can be any mix of the current shareholders and new stock.

If the offering is announced and expected the price impact will be lower than surprise-selling. And companies at-the-market offerings aren't exactly unheard of.

Companies with at market offerings have liquidity beforehand to know what the value of the shares are. There are willing buyers and sellers at that price.

It's needless to say a direct listing has never been done this way.

You could but the company would need to do the sales work that the bankers otherwise would do.

This made sense in the days before modern telecommunications, when investors may not have otherwise heard of this info. Is there reason to think this dynamic still has value?

The bankers take on the risk of selling the shares. In the traditional IPO process, the company negotiates the share price with institutions (big banks, hedge funds) in advance of the offering date. On the offering date, the company has a guarantee that it will be able to sell all its shares at the agreed upon price, and therefore be guaranteed to raise a specific amount of money. Those institutional investors will flip those shares to the public, hopefully at a price higher than the negotiated price for a profit. The risk is that this profit isn't a guarantee. Just because everyone's heard of your company doesn't mean they also believe in the company as much as the stakeholders do.

With the market being this hot (IMO it's a bubble, but only time will tell), enough public investors are clamoring over IPOs that companies could likely get away with a direct listing like this. Given an extended market downturn though (say, if 2008 happens again), companies will likely find those same public investors to be a lot less eager to snatch up new share offerings.

From my read of FTA, being able to raise money in a direct listing is a new capability:

> A company can also sell its shares in the open market to raise capital following a direct listing without restrictions, typically after it has reported quarterly earnings. Some companies opting for direct listings also choose to raise money before they go public through private fundraising rounds.

(i.e. direct listing was restricted to only shares held by not-the-company)

> The NYSE now offers companies the option to raise money in a direct listing after the U.S. Securities and Exchange Commission approved it in December.

I recall reading about the Microsoft IPO and how they were forced to do it because their employees wanted to be able to sell their stock.

I wonder #2 is more important for some businesses than others ?

It's also possible over the intervening years the norm for startup companies is to be well-capitalized from the get-go and require #2 to keep going.

> Companies IPO mostly because they need money not because investors want liquidity

The amount of money US companies that need money get via initial or secondary public offerings is minuscule compared to other methods companies raise money (credit lines, bonds etc.) It has been that way since at least World War II.

This year Instacart hired Goldman Sachs banker Nick Giovanni to be their CFO. He led multiple companies through a direct listing IPO, all from the banker side.

Interesting, right?

I'm surprised the Reuters article didn't mention this. I guess everyone is busy.

Goldman Banker Nick Giovanni to Join Instacart as CFO Ahead of IPO https://www.bloomberg.com/news/articles/2021-01-07/goldman-b...

Kroger has $130 billion in sales and $3.4 billion in operating income, and Instacart is due to be worth over twice what Kroger is? That's going to end well.

If Instacart had demonstrated extreme margins, such that their business was going to be a long-term high growth, high margin big tech monster, then sure, maybe they'd be worth considering at 1/2 to 1/3 the expected price on the basis of a sweet growth curve over many years.

I'll consider their stock after it implodes down to a more sane valuation, assuming they're not drowning in red ink at that time. The end of the pandemic is going to be brutal on their growth rate as many years of growth were artificially pulled forward in time to the present (and plausibly a lot of growth they're not going to hold on to, the penalty for that will be negative). They'll pay for that with lower growth rates in the coming years, which is exactly what you don't want to see if you're buying them at a $50b market cap.

Oh I know, but we're in the super bubble, low interest rates mean stocks don't go down. Hello Snowflake (44% haircut so far), hello Tesla (30% haircut so far), hello DoorDash (40% haircut so far).

I hear what you're saying with the case for inflated fundamentals, and we are for sure in a super bubble as you said. The examples you note are also pretty good points of data for your case. But think about the other side. If Instacart would've been invented by Kroger (or any other grocery blue chip), why wasn't it?

There's a reason why that's the case, and that is the premium that investors are paying for. An enormous part of the bull case for Instacart, much like other tech companies, is that they are highly leveraged marketing operations which operate on zero marginal cost of distribution. Granted, Instacart is definitely more of on the operational side than pure marketing, but you could say the same thing about Amazon. Amazon's advertising revenue line has experienced breakneck growth over the past few years; from what I hear, the same is occurring with Instacart.

If you put all of that together, it doesn't really make sense to compare Instacart to a blue chip company that operates in its space because they operate completely and allocate capital completely differently. You wouldn't compare Amazon to Sears.

Quick poll. How many people here use instacart? I can't because they don't service my area but others?

I don't, because the fees are upwards of $10-12 pre-tip around here. I'd rather just drive to the grocery store, it's like a 20 minute round-trip but then at least I know I have the groceries now and not in 2-3 hours.

So it sounds like there’s a demographic component. You don’t but other people do. You are price and time sensitive but others may not be.

In my area it doesn't make much sense as (a) most of the grocery stores are open and are rarely crowded anymore (b) free curbside pickup is offered through the store app.

From the local nextdoor and facebook groups it seems like a solution for busy parents or elderly who would rather not go to a store.

I used them early in the pandemic for months, but switched to Freshdirect since the latter has up to date and accurate online stock. What's in your online cart is what gets delivered. With Instacart, because they deal with a bunch of supermarkets (which you choose from - the competitive advantage) you get a 'shopper.' In my experience the shopper couldn't find 30-50 pct of the items. Non organic tomatoes replace my organic tomatoes. A bunch of items just not found and price refunded. Some obscure Italian olive oil I put in the cart is replaced with a completely other brand and bottle size. All this, and the app sends me notifications asking me to approve the replacement. Ok, but the shopper is shopping for others, too, and so the notifications for me to approve happen every 3, 5, 8, 10 minutes for 45 minutes.

Not sure how it is in other locations, but in mine, the business model of loosey goosey stock quantities doesn't work for me as shopper, and it's probably too complicated for them as a business to keep close tabs on what's available.

When will someone start up a supermarket robotic warehouse? The Amazon of supermarkets.

Most of the stuff in the middle of a supermarket are dried goods, which are easily warehouse-able, given temperature control.

Fresh fruits can be easily packaged, and marked with pick date, and freshness date.

All this can be picked by robots now, and packaged for delivery to your front door.

There is an online-only supermarket called Ocado here in the UK. They do pretty much what you describe.

I do. I don't have a car, and I live in a college town where the nearest decent grocery store is about 3 miles.

I have a decent experience. The biggest con is that you "have" to give 15-20% tips (technically you don't have to but I try to be nice), I use express so afaik the other fee is only about $3. Also, shoppers don't always know where to find obscure items so they just get refunded, even when the item is in stock. But otherwise, shoppers are very nice, 99% of the time they get the correct items and only the replacements I specify. When you check out you specify a 2 hour timeframe where shoppers can deliver, in my experience they usually deliver on the very early side of the timeframe unless you specify "next 2 hours" immediately.

AFAIK, SPACs are considered scammy because when you circumvent the IPO process you also skip any checks that are supposed to take place.

Essentially they take over an already defunct company that is already listed (or it could be the other way round, I think).

No mention of this anywhere in the article..

Presumably because Instacart is planning a direct listing.

That's not the same thing as a SPAC.

What am I missing here:

"IPOs have been on a tear since last summer as markets rallied following the Federal Reserve’s moves to support the U.S. economy during the COVID-19 pandemic. Yet their popularity has been eroding as more companies choose to go public through mergers with special purpose acquisition companies (SPACs) or direct listings."

That sentence is true but it's also kind of akin to "car popularity is declining as more people choose to use bicycles or trains" - bicycles and trains don't actually have much in common, and in many ways cars are more similar to either of them than they are to each other.

Thanks! :)

I think you're missing that SPACs are not the same as direct listings.

That sentence didn't mean "...go public through SPACs, also known as direct listings", but it meant "...go public through either SPACs or direct listings".

More info about SPACs vs direct listings here:

https://jonathanhung.com/spac-vs-direct-listing-whats-right-...

There's a bit of nuance here in that outside IPOs, companies can go public both through either a SPAC or direct listing. However, a SPAC incurs a 20% sponsor fee that the direct listing doesn't, so you imagine that many strong firm would simply balk at the price and opt for the direct listing if they felt bullish enough about their market prospects.

Perhaps it's more reasonable to compare SPACs and traditional IPOs, where there's a middleman taking a cut one way or another. SPACs seem like an inverted IPO to me pioneered in the current rather frothy environment, where there's more capital that wants to go into taking growth tech firms public than there are firms ready to take public, so they pre-allocate the dollar allocation into a blank check firm to streamline the process when a suitable target is found to expedite the process. The advantage here seems to be 1) time preference or 2) ease of taking firms public that otherwise would face challenges in being taken public in more traditional market conditions.

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