Slack’s dazzling debut: is this the future of tech flotations?

money city

Slack made its public debut this week, bypassing the traditional IPO process in favour of a more unusual direct listing.

The direct listing avenue does not allow companies to raise additional capital in the flotation process. It also opens up the shares to wild swings in price as investors gauge the demand in real time. Nonetheless, Slack’s share price has remained remarkably steady so far.

Slack is the latest in a slew of tech companies to make a high-profile public offering. Some, like Uber and Lyft, have suffered sharp drops in share price in the weeks following their debut.

Slack, however, has cause for cautious celebration. Its share price rose by nearly 60% in the first day of trading, valuing the workforce messaging app at $25bn (£19.7bn). Share prices peaked at $41 per share – up from the New York Stock Exchange’s reference price of $26 per share.

Slack ended its first trading session on $38.62 per share – an increase of just under 49%.

Slack’s multi-billion valuation does raise some questions. For a start, the company is a ‘pre-profit’ – read: currently unprofitable – tech firm.

Other pre-profit firms, including Uber and Lyft, have spooked investors with their potentially unsustainable models, resulting in steep declines in share price following their initial IPOs.

Although Slack’s revenue grew by over 80% last year to reach $400m, it still reported losses of $143.9m. And while the app boasts more than 90 million users worldwide, it only counts around 100,000 paying customers.

The challenge for Slack following its promising listing will be to reassure investors that its business model is sound and that its shares are long-term assets – not merely shrouded in hype.

Peter Cowley, serial entrepreneur, angel investor, and author of The Invested Investor, recently told BLM: “The hype comes in when you get these big numbers – the unicorns valued at over a billion dollars – when the company may still be losing money.”

“There’s no doubt that raising money at a higher valuation is positive for the founder. If the valuation is higher, the founders lose less of the company when selling equity. It’s also beneficial for early shareholders as their shares are effectively worth more money.”

However, the value placed on these companies is completely abstract.

Peter said: “The issue is, what use is that money? What does a high valuation mean? And, it means nothing until an exit of some form. Usually a trade sale, sometimes a floatation, an IPO, or occasionally a private equity house might buy the shares. So higher and higher valuations are positive for all those insider parties, but the negatives come at the exit.”

Time will tell whether Slack will be the latest tech firm to slump post-offering, or whether its confident direct listing is based on a sound business model and a canny leadership team.


Industry comment

Dr Emma Russell, senior lecturer in human resources management at the University of Sussex

Tech start-up Slack made quite a splash with its $20bn debut on the US stock market this month.

The valuation of the messaging app company, which is yet to turn a profit, is based in part on the radical impact it has had on works communications for many workers and businesses since it was launched in 2014 and partly on the huge potential market it could come to dominate.

Slack has been dubbed the email killer in some corners, viewed as a cooler, more user-friendly and more efficient upstart. But while many workers might welcome the arrival of alternative to take away the stress of email, Slack has got its work cut out if it’s to become the kingslayer.

Email is now so embedded in our work culture, 86% of professionals stated it was their preferred mode of work communication in a 2017 survey while The Radicati Group estimated the number of work emails sent per day in 2018 was more than 281 billion and predicted that would grow to more than 333 billion by 2022.

Clearly email will not be easily replaced – no matter how capable an alternative exists.

Slack has had excellent take-up by the creative industries but it hasn’t infiltrated other sectors to the same extent. It is not set to become the default digital communication for all anytime soon.

However, it has the potential to become a very valuable compliment to email for many and the default option for a few – largely in the hi-tech and creative sectors.

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