UPDATED 22:06 EDT / JUNE 19 2019

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Slack to go public Thursday via a direct listing. Here’s what you need to know

Slack Technologies Inc. is set to list on the New York Stock Exchange Thursday, but in a twist to a traditional initial public offering, it’s going with a direct listing.

The company has set its price at $26 per share, giving it a valuation of $15.7 billion, up 118 percent from the company’s last funding round in August 2018.

The tech unicorn heads into the listing with $400.6 million in revenues through the 12 months ended Jan. 31, up 81% from the year before. Losses for the fiscal year came in at $138.9 million, a slight improvement from a loss of $140.1 million the previous fiscal year.

In an update May 13, Slack said revenue for the fiscal first quarter ending April 30 will be between $133.8 million and $134.8 million, up from a figure of $80.9 million in the same quarter of 2018. For the same period, Slack said its loss would be between $38.4 million and $39.4 million, an increase thanks to product investments and spending to support growth from $26.3 million a year ago.

Direct listings are rare but not unheard of. Spotify AB was the last major tech company to take the route, in April 2018.

Ahead of Slack’s debut, here’s what you need to know:

Direct listing

A direct listing is a way for companies to become publicly traded without going through a traditional bank-backed IPO. In a traditional IPO, shares are offered to investors prior to the company floating and new money is raised, whereas a direct listing sees a company simply list existing shares for sale on an exchange.

The direct listing process is cheaper because underwriting is not required to undertake the process, potentially saving a large firm tens of millions of dollars in fees. As PricewaterhouseCoopers notes, underwriters have typically charged fees of “4-7% of gross proceeds, plus an additional $4.2 million of offering costs directly attributable to the IPO.”

The benefit of a traditional IPO is that the underwriters sell stock to their clients, increasing demand, whereas in a direct listing, the company itself sells the stock.

The underwriting model is under fire after the drops of both Uber Technologies Inc. and Lyft Inc. post-IPO, however. “Despite having the cream of the crop in the likes of Morgan Stanley, Goldman Sachs, JPMorgan and Credit Suisse, among many others on their underwriting teams, both companies’ stocks have flamed out and late-stage investors are now underwater,” Axios wrote Monday.

Sales pitch

Any company, whether through a direct listing or traditional IPO, pitches promises of future wealth through growth and profit, and Slack in this regard is no different.

Despite losing money, Slack stands on solid ground. As of January, the company said it had surpassed 10 million daily users, with paid users jumping to 85,000, up 50 percent over the last year.

Co-founder and Chief Executive Officer Stewart Butterfield told investors during the company’s roadshow that companies are shifting from email to team messaging services such as that provided by Slack.

“This shift is inevitable… we believe every organization will switch to Slack or something like it,” Butterfield explained. He also claimed that Slack would eventually become a utility similar to the internet or electricity.

“The world is going to continue to use more and more software and we deliberately try to put ourselves in a position where Slack the company gets more valuable as the world uses more software because Slack the product becomes more valuable for our customers as that customer uses more software,” Butterfield added.

Market

The company is clearly growing and sees itself as part of revolution, a $28 billion total addressable market by 2022.

“Compared to Salesforce’s $120 billion total addressable market or Zoom’s anticipated $43.1 billion TAM by 2022, Slack’s TAM is small,” Andrew Kirchner, co-founder of Slack App startup Hooky, told SiliconANGLE.  “But if Slack can move beyond the communications software market and truly become a the control layer for a myriad of enterprise software and the aggregator of all workflows, that could be huge.”

Arguably having created the modern incarnation of enterprise and team messaging, Slack faces stiff competition from Microsoft Teams, which surpassed it in by number of users in December.

“Slack has some real challenges ahead of it, namely, Microsoft, Google and profitability,” said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy. “Unicorns do best when they have a 5-10X advantage on the entrenched players. Both Microsoft, with Teams, and Google, with Hangouts, are entrenched players and Slack has no discernable advantages over the two giants. This, plus the fact that Slack charges only a small percentage of its users, should give investors pause.”

Potential

Slack’s direct listing is being closely watched as a measure of market appetite for software-as-a-service companies.

“Slack’s success will be determined in the short-term based on the answer to one question: Can it prove to the enterprise buyer that it is more than a chat app, more than a collaboration tool, but instead an enterprise collaboration platform?” Michael Facemire, vice president and principal analyst at Forrester Research Inc., told SiliconANGLE. “If Slack can do this, expanding out of a tech-savvy user base and into all parts of the business become much easier, as it starts to do work for everyone.”

The appeal, he added, is that “instead of trying to remember URLs, user IDs and passwords to legacy systems with an outdated user experience, employees can now open a channel in their Slack app and use natural language to execute the same transaction. Simple machine-to-machine automations can be constructed within a team, and then virally roll out to the larger organization as adoption grows.”

Per Roman, co-founder and managing partner of investment firm GP Bullhound, is bullish on the offering, saying that “Slack has the potential to become one of the most significant enterprise software companies globally.”

“With more than 10 million active users across 600 thousand organizations the platform is redefining collaboration across multiple industries and applications,” Roman said. “We see Zoom as the closest comparable and are thrilled to see how the two companies are partnering in a number of areas. Microsoft continues to make advances with their Teams solution and it will be interesting to see how the market continues to evolve.”

Photo: Scott Schiller/Flickr

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