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Comment by joschmo | Hacker News Reader

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.

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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.

> 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.

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

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

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