Tue, 13 April 2021
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
The traditional method of going public with an IPO is being challenged by a new model called Direct Listing.
The IPO is typically run by an investment bank which hypes the new offering to investors to create a market. This oversubscription creates artificial demand for the stock.
After launching the IPO, the issuing company’s stock price often fluctuates which meant the round was mispriced.
This provides significant wealth to the investment banker but does little for the company which issues it.
In a Direct Listing, the issuer lists their proposed price to investors cutting out the middleman investment banker.
This reduces the pump and dump scenario of the IPO and reduces the cost of bringing a new issuer to the market. The issuer uses data analytics to set the price so there’s less chance of mispricing.
Today the private market is much more mature with many more investors who understand the value of startups and want to invest in them.
In the IPO, the investment bank provided research to select clients that guided the investor. In the Direct Listing, the company information is available to everyone.
Direct Listing has no lockup period as the IPO does. The investor can sell whenever they want. Larger institutions can buy as much as they want. The issuance is promoted online giving many more investors access to the offering.
In conclusion, the Direct Listing is another example of the internet disintermediating the middle man.
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