Will IPOs go Slack?

Slack, the trendy platform threatening incumbent corporate email and collaboration tools, is going public. But not the conventional way. It could raise just under $20bn through a Direct Public Offering, saving the hundreds of millions that it could spend with an investment bank through a more traditional Initial Public Offering.

They’re not the first. Indeed, DPO’s are relatively commonplace for smaller firms and those with a strong and loyal client base. But it was Spotify that was the first digital giant of this era to take this route last April. It was generally considered a successful float with no big price fallout. But Spotify has a great global consumer brand, and arguably there was a small risk in not employing an IB to pre-sell stock and run the roadshow.

Does Slack carry the same caché? After all, it’s still a niche corporate software platform that has a fraction of the market share of Microsoft. And while it’s growing fast, it is still barely known outside of Silicon Valley, or the SV replica start-up communities around the world. So is this one just for the “Tech-Bro’s”, or can we expect an army of Grannies to start investing their pensions?

Its underlying numbers are pretty solid as digital start-ups go. There are 10 million daily active users, and revenue quadrupled to $400m over the past two years. Unsurprisingly, time to profitability is uncertain, with operating losses floating around the $145m to $155m level since 2017.

For business model nerds, an interesting element is of its recent SEC filing is evidence of its “Freemium” pricing model at work. Of the more than 600,000 businesses that use Slack, only 88,000 pay for it. In any traditional business this would represent a crippling cost of sale, but with a digital native like Slack, the cost of adding free users to the platform is insignificant….if the paying users really buy in all the way.

And there’s good reason to believe that they will, in time. While at heart a fairly simple tool, Slack benefits from a community of 500,000 developers that have churned out 450,000 plugins and integrations. In essence, users can pretty much make Slack do whatever they need, using an app-store mechanism to add on new functionality.

This is the sort of platform business model that incumbent corporate software leaders such as SAP, Oracle, and Microsoft dream of achieving so elegantly – but will take a while to transition their significant user bases towards.

In fact, it's Slack’s platform positioning that raises another big question about the DPO. Will it ever go ahead? There are some who suggest their filing may be a play to raise the stakes for a potential buyer to swoop in. And there are several who have much to gain by accessing this market (Facebook, Google, Apple), or conversely much to defend (Microsoft). It wouldn’t be cheap, but likely would not surpass Facebook’s $20bn+ Whatsapp acquisition. Indeed, Slack could well be enterprise software’s Whatsapp moment.

But perhaps the biggest impact of Slack’s DPO could be on the investment banking industry. IPO’s are one of the most lucrative parts of their business, and if Slack proves that you don’t need as big a brand as Spotify’s to make it work, then more Silicon Valley unicorns could follow. After all, with the sector awash with private VC and PE money, many of these upstarts do not need to raise cash from an IPO, they just need liquidity.

If Slack succeeds, then investment banks need to rethink their value proposition if it seems the trend will catch on. They can’t afford erosion in this market just as IPO volumes are starting to return to growth. If it’s a flop however, the DPO threat will likely be put to bed for a few years to come, to be seen as a quirky strategy, only for the brave or the brash.