What happens when unpredictable demand meets equally unpredictable supply?
That roughly summed up the state of affairs as enterprise chat app Slack approached its stock market listing on Thursday.
Going public is normally a carefully choreographed affair, stage-managed by investment banks who are paid big underwriting fees to make sure things go smoothly — although the soaring premiums on some recent tech initial public offerings show how imprecise a science this is.
By contrast, Slack has become only the second big company, after Spotify, to invite a free-for-all in its shares on Wall Street.
Rather than an IPO, it chose a direct listing, releasing its stock to trade freely without attempting to set a price and stating just a "reference" figure of US$26 a share.
Depending on how things play out in the coming weeks, it could open the door for others to disrupt one of Wall Street's most profitable businesses — or it could kill the idea off once and for all.
On the demand side of the equation, interest in newly listed tech companies has been rising steadily. Last week, Chewy, an online pet supplies company, priced shares in its IPO at 22 per cent above the midpoint of the range it had first indicated. The stock still traded up 60 per cent on its first day.
Most analysts were kind enough not to dredge up memories of Pets.com, one of the defining names of the dotcom bubble, which went public in early 2000 after little more than a year in business — before going bankrupt nine months later.
With the notable exception of the cash-burning ride-hailing apps Uber and Lyft, Wall Street has welcomed tech companies with open arms this year. Much of that enthusiasm has been for software companies with stable subscription businesses — much like Slack.
Slack has less need than most to work out how potential investors feel: it is not raising any money, so there are no new shares to price or market.
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But any investor contemplating buying the stock has little idea of how many of Slack's early investors are waiting behind the curtain, ready to sell.
Most newly listed companies sell 10-15 per cent of their shares in an IPO and bar early investors or insiders from selling more for six months, limiting supply. Slack's direct listing has no such restrictions.
This kind of free-for-all can make for a bumpy ride. Spotify's shares bounced around before settling in a range, starting 21 per cent above the price they had last changed hands for in the private market, before falling back 13 per cent a couple of days later. They are still roughly at that level now.
To some extent, Slack can afford to sit back and leave the dynamics of supply and demand to do their work without worrying too much about the result.
Newly public companies always face churn, as early investors cash in and a new public shareholder base takes shape. Whether it is better to let the market find its own equilibrium immediately or allow a six-month lock up period feels like a matter of taste.
There are also some obvious benefits to letting the market find its own level. Recent big IPO premiums make it look like some companies have left a lot of money on the table from selling shares to the public. Zoom Communications, the video conferencing app, raised US$450 million in an IPO in April: the shares it sold then are now worth US$1.25 billion.
Jumps like this might to some extent reflect the artificial constraint on supply while lock-up agreements are in place. But that can still have real consequences: even new public investors with an eye on the long term will be tempted to sell if they can pocket much of their expected gain up front, hoping to get back into the stock later at a lower price.
That said, how many boards of directors are really prepared to take a leap into the unknown? The potential costs if things go wrong could be high. That is likely to be a strong inducement to stick with well-proven methods at one of the most important moments in a young company's life.
After Spotify's direct listing there was flurry of interest among other companies in Silicon Valley. The chatter has died down and most companies plotting a route to Wall Street have gone back to the tried and tested, said Lise Buyer, a Silicon Valley IPO adviser.
It will take something special from Slack's stock market debut to really break the investment banks' grip on the listing process.
Written by: Richard Waters
© Financial Times