6 ms·

Instacart mulls direct listing in snub to IPOs

103 points by prostoalex 6y ago

joschmo 6y ago
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.
- carlineng 6y ago
  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?
  - bradleyjg 6y ago
    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.
  - joschmo 6y ago
    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.
    - cracker_jacks 6y ago
      > 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?
      - nitrogen 6y ago
        I think they're saying that the late-stage private investors are the ones who get the early access.
- formercoder 6y ago
  And the committee memo is so much shorter when there’s no equity risk!
- neonate 6y ago
  > As a long-time former banker, Instacart is 100% the right candidate for a direct listing Can you say more about why?
  - joschmo 6y ago
    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
- supernova87a 6y ago
  > 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?
  - WrtCdEvrydy 6y ago
    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.
    - dannyw 6y ago
      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.
      - mkinsella 6y ago
        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.
        dannyw 6y ago
        This sounds like a communication / internal messaging issue, especially because the financial outcome (end of day share price) is the exact same.
        reducesuffering 6y ago
        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.
- Animats 6y ago
  Yes. If you're a major national brand when you IPO, you may not need the road show and support from investment banks.
- JumpCrisscross 6y ago
  Between SPACs and direct listings, traditional IPOs are for schmucks.
crazygringo 6y ago
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?
- jariel 6y ago
  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.
- darkwizard42 6y ago
  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
dmingod666 6y ago
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..
- matthewowen 6y ago
  Presumably because Instacart is planning a direct listing. That's not the same thing as a SPAC.
  - dmingod666 6y ago
    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."
    - lmm 6y ago
      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.
      - dmingod666 6y ago
        Thanks! :)
    - Johnny555 6y ago
      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-for-your-startup/ https://jonathanhung.com/spac-vs-direct-listing-whats-right-...
sjg007 6y ago
Quick poll. How many people here use instacart? I can't because they don't service my area but others?
- easton 6y ago
  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.
  - sjg007 6y ago
    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.
- prostoalex 6y ago
  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.
- mancerayder 6y ago
  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.
baccredited 6y ago
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.
- baccredited 6y ago
  Goldman Banker Nick Giovanni to Join Instacart as CFO Ahead of IPO https://www.bloomberg.com/news/articles/2021-01-07/goldman-banker-giovanni-to-join-instacart-as-cfo-ahead-of-ipo https://www.bloomberg.com/news/articles/2021-01-07/goldman-b...
adventured 6y ago
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).
- yowlingcat 6y ago
  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.

103 points by prostoalex 6y ago

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.

carlineng 6y ago
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?
- bradleyjg 6y ago
  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.
- joschmo 6y ago
  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.
  - cracker_jacks 6y ago
    > 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?
    - nitrogen 6y ago
      I think they're saying that the late-stage private investors are the ones who get the early access.
formercoder 6y ago
And the committee memo is so much shorter when there’s no equity risk!
neonate 6y ago
> As a long-time former banker, Instacart is 100% the right candidate for a direct listing Can you say more about why?
- joschmo 6y ago
  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
supernova87a 6y ago
> 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?
- WrtCdEvrydy 6y ago
  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.
  - dannyw 6y ago
    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.
    - mkinsella 6y ago
      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.
      - dannyw 6y ago
        This sounds like a communication / internal messaging issue, especially because the financial outcome (end of day share price) is the exact same.
        reducesuffering 6y ago
        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.
Animats 6y ago
Yes. If you're a major national brand when you IPO, you may not need the road show and support from investment banks.
JumpCrisscross 6y ago
Between SPACs and direct listings, traditional IPOs are for schmucks.

crazygringo 6y ago

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?

jariel 6y ago
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.
darkwizard42 6y ago
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

dmingod666 6y ago

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..

matthewowen 6y ago
Presumably because Instacart is planning a direct listing. That's not the same thing as a SPAC.
- dmingod666 6y ago
  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."
  - lmm 6y ago
    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.
    - dmingod666 6y ago
      Thanks! :)
  - Johnny555 6y ago
    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-for-your-startup/ https://jonathanhung.com/spac-vs-direct-listing-whats-right-...

sjg007 6y ago

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

easton 6y ago
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.
- sjg007 6y ago
  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.
prostoalex 6y ago
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.
mancerayder 6y ago
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.

baccredited 6y ago

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.

baccredited 6y ago
Goldman Banker Nick Giovanni to Join Instacart as CFO Ahead of IPO https://www.bloomberg.com/news/articles/2021-01-07/goldman-banker-giovanni-to-join-instacart-as-cfo-ahead-of-ipo https://www.bloomberg.com/news/articles/2021-01-07/goldman-b...

adventured 6y ago

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).

yowlingcat 6y ago
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.