What We Can All Learn From Slack’s $20B Direct Listing

After 10 years in private ownership, $1.4 billion in funding invested, and saving teams across the world millions of hours with their collaboration tool, Slack has made their much-hyped debut on the New York Stock Exchange at an 11-figure market cap. Now admittedly, at $20+ billion, the figures do look quite impressive, but just how much do we know about the ugly, not-too-Slacky details that make Slack, Slack?

Whether you’re a venture capitalist looking to invest in a future unicorn, or a founder looking to build one, here are some salient takeaways we can all grab from Slack’s listing.

1. If at first, you don’t succeed,…

From remote teams to venture capitalists, everyone touts Slack to be the next best thing after sliced bread, but what many don’t seem to realize is that technically, Slack shouldn’t exist — if everything had gone according to plan, that is.

Now, time for a little story.

2009

Tiny Speck launches, backed by over $1.5 million in angel funding and soon followed by a $5 million Series A from Andreessen Horowitz and Accel Partners. They’re set to build the future of gaming or simply, Glitch, a be-all MMORPG that’s envisioned to beat the best of everything on the market.

2011

Two years after their $1.5 million angel round, Tiny Speck launches Glitch on September 27 but quickly reverts it to beta as they continue working on improving gameplay.

2012

Just over a year after its debut, Tiny Speck announces they’ll be shutting down Glitch for good, noting that the game hasn’t generated enough following to make the project cashflow-positive in the near future.

Now, here’s where it gets interesting: somewhere along the line, the Tiny Speck team had created Linefeed, a project management program that enabled them to collaborate in real-time. Shortly after shutting down Glitch, Stewart Butterfield and his team set to work on morphing Linefeed — which they’d renamed as Slack — into the future of workplace collaboration.

By May 2013 when Slack launched, 15,000 people had requested to Slack’s beta. And for the past 6 years, Slack has been growing at unicorn speed until just a month ago when they blew up Wall Street as the world’s fastest-growing SaaS company.

So here, the message, actually two messages, are clear: if at first you don’t succeed, try again… or you could settle for wearing a really ugly necktie so people have something else to criticize.

Next, it’s entirely possible to make a billion dollars from that ‘lame’ jumble of code you and your colleagues use to get a few things done here and there. You never know…

2. The Long-term Pays Better.

Sometime in Summer 2004, after a brief meeting in Henry Thiel’s office on 555 California Street Building, he agreed to provide $500,000 in seed funding to Mark Zuckerberg, in exchange for a 7% stake and a seat on the Facebook board of directors. By and by, Henry Thiel, with a bunch of venture capitalists would invest over $40 million into Facebook.

Eight years later, in 2012, Facebook IPO’d at a market cap of just over $104 billion and within three months, Henry Thiel (and a bunch of institutional investors) smartly jumped off-boat. At a $104 billion market cap, Thiel dumped over 16 million Facebook shares for $638 million. He wasn’t going to be taking any chances with this dropout’s experiment with social media. It’s easy to imagine a couple of venture fund buddies patting Henry on the back at a venture fund gala, while he tries to throw off a few anecdotes and investing cliches, feeling like he won the lottery. Heck, in just 8 years, he’d multiplied his investment by a factor of over 1,000. You could either call him the smartest or the luckiest man alive. Or both, if you prefer.

Fast forward to 2017–2019, and Thiel’s smartness doesn’t seem that smart any longer. The internet fad that was founded by a Harvard dropout is now valued at over $500 billion — with no sign of slowing down.

Storytime over. Now, imagine Thiel hadn’t dumped his Facebook stock like it was some hot sauce. Imagine he’d seen what Zuckerberg had seen all the while and had retained his stake in Facebook’s future. Heck, even if he’d sold off just a paltry 1% of his stake, he’d have gotten back his initial investment 12X and today, he’d be the second single largest owner of potentially the world’s most powerful company — with a nice dollar value of over $3.2 billion.

So, how does all of this relate to Slack?

Here’s how.

When in 2012 Tiny Speck had churned through a good fraction of the initial funding they’d received and decided they weren’t cut out to build the next War of Warcraft, I imagine them having series of very uncomfortable conversations with their investors. I guess it’d simply been like asking for more money just so you can bury it in the ground.

But somehow, and for some reason, someone (or a bunch of fellas) on that board decided to believe that this time around they could make it and that Slack could be the future of team collaboration that they were touting it to be. The rest, they say, is history.

So, here’s the point:

How much staying power have you got? The best answers only to those who’re ready to give the best they’ve got.

Imagine a situation where Andreessen Horowitz and co. had pulled the plug on Slack before it got off the ground. They’d have missed out on some serious money + contributed to the mental breakdown of thousands of teams who’d have to do all their team collaboration going back-and-forth between tabs and whatnot.

Whether you’re building a startup, investing in one, getting married, or just getting a new iPhone, here are a few tips to help:

• Do your due diligence. Is this worth it? Do I know enough about the risk I’m about to take? Can I handle this? Risk is a prerequisite for profit, but you must know enough about any risk before taking the plunge.
• Can I be in this for the long-term until I get what my sight is trained on? When you’ve got a clear outlook on what the future holds, it pertinent to make sure you’re set to hang on for the long ride
• What’s my exit strategy? As much as we’d all love to, you can’t ride a good wave forever. Know when to measure your wins or losses and suck it up.

Now, before you begin feeling sad for him, here’s what’s good to hear: Henry Thiel’s a billionaire anyway ($2.5 billion) and missing a $2.6 billion upside is definitely a mistake he can afford.

3. First, Break All the Rules

When Microsoft IPO’d in 1986, everyone was all over the Harvard-dropout wunderkind who was going to launch the world into the personal computer age. Just 11 years earlier, Gates had turned his back on Harvard to build his first BASIC — what he and Allen believed to be the future of personal computing.

Everyone one who knew Gates hit him up to let them in on some of the action, and according to “Hard Drive: Bill Gates and the Making of the Microsoft Empire”, even his’ grandmother and housekeeper opted to buy some Microsoft stock before it hit the floor of the NYSE where it was madly anticipated.

What no one knew was that on March 12, 1986, less than 24 hours from the offering slated for March 13, the hard-bargaining, tantrum-throwing Gates had nearly backed out of the deal to have Microsoft’s IPO underwritten by Goldman Sachs.

Goldman Sachs had offered to underwrite Microsoft’s stock offering for a 6.5% stake or a paltry $4 million and Gates just wouldn’t have it. After Sun Microsystems had IPO’d at a market cap of $64 million and remitted only a 6.13% stake to their underwriters, he dropped orders to Frank Gaudette, a Microsoft lieutenant, insisting on a 6.13% underwriting fee before leaving for a vacation.

6.5% may seem like a minute portion but when appraised in the range of billions/at Microsoft’s current $1 trillion market cap, it levels out at a nice $67 billion price tag. Not bad for a few weeks’ job.

In the end, the Microsoft team acquiesced, with Gates hinting to his Microsoft clique that had Goldman Sachs played tough, he’d have backed out of the IPO deal, possibly looking elsewhere or postponing it for later.

Now, fast forward to 2019 and investment banks are still making a killing underwriting stock offerings for promising tech firms. Although firms tend to frown upon IPOs due to the quite significant fee margins (which may require diluting stakeholders) and the lock-up window, within which shares can’t be offloaded, it’s still considered a relatively safe bet. In essence, the underwriter puts its weight behind the offering to ensure it hits targets and that all shares offered are purchased. Plus, should demand exceed the shares available for sale, the underwriters are authorized to do some quick math, effectively diluting the standing shareholders further, and selling as many shares as they can.

Alternatively, companies can list their stock directly, but although it’s been an option for quite a while, most companies tend to favor the added punch a proven underwriter would have on a listing. Slack chose the less-traveled route of listing their stock directly on the New York Stock Exchange.

That said, what do Microsoft’s IPO and Slack’s direct listing have in common?

Well, the willingness to break all conventional rules to get things done your own way.

Just like Bill Gates flat out refused to sign over 6.5% of Microsoft in underwriting fees, Slack’s management no doubt did the math and realized that at a $17 billion valuation (their targeted opening market cap), 2–8% in fees (average fee range for underwriters) would be hanging somewhere between $340 million and $1.36 billion. And you don’t pay anyone a billion dollars to do what you can do yourself — especially given that Slack is tightly owned and the underwriter’s fee would require diluting the existing shareholders.

So, with that excuse (and as many more as we don’t know), Slack opted to list directly and sell their shares to buyers without middlemen. And they crushed it. Despite widespread Wall Street skepticism, on its first day of trading, Slack stock rocketed 48% over the targeted reference price, closing at $38.50 to give Slack a $21 billion valuation on day one.

What’s to be learned here is that while a few dare, fewer still go all the way in; no one gets and stays big by playing by the rules — a rule Slack seems to understand quite well.

With their first big move being to say no right in the faces of the powers that be, it’s left to see what’s to be expected from Slack in the coming days.