- Palantir announced Monday it has confidentially filed to go public.
- The data analysis company is reportedly considering using a direct listing process instead of a traditional initial public offering.
- Direct listings are more streamlined and less expensive that normal IPOs, but only two notable companies have used them in the US — Spotify and Slack.
- Palantir could be an ideal candidate for a direct listing, venture investors told Business Insider, because it likely doesn’t need to raise money when it goes public and the company is well-known among institutional investors.
- Visit Business Insider’s homepage for more stories.
Palantir may soon enter some select company.
The controversial data analysis firm announced Monday that it has confidentially filed the paperwork necessary to go public. The company is reportedly considering doing so via an unusual process — a so-called direct listing.
A direct listing is a more streamlined and less costly way of going public than a traditional initial public offering. Despite that — and despite the fact that the process has some high-profile advocates in Silicon Valley and elsewhere — only two notable companies have done a direct listing in the US — Spotify in 2018 and Slack last year.
But Palantir, which has drawn criticism for working with law enforcement agencies and the Immigration and Customs Enforcement agency, looks like it was ready-made to use the process and, in doing so, to potentially make the option more palatable for other companies that are planning to go public, venture investors told Business Insider.
“If they can pull it off, then they should do it,” said Jai Das, president and managing director of Sapphire Ventures.
Here’s a look at what a direct listing is, why Palantir might want to use the process to go public, and why it might be in a good position to do so.
Coronavirus stock What is a direct listing?
In a direct listing, a company’s private owners sell shares directly to institutional and everyday investors through a public stock exchange. Just as in an IPO, a company going through a direct listing hires investment banks to help manage the process. But the banks don’t typically line up investors to buy the stock or set a price for the offering; instead both are basically left up to the market.
Coronavirus stock How is that different from an IPO?
In a traditional IPO, a company hires investment banks to help find a market for its shares. The banks help line up institutional investors to buy the shares and help determine the price they will pay. The process usually involves the companies’ management teams going on a “road show” to meet with potential investors to try to convince them to buy the stock.
After those investors buy the shares in the IPO, they typically turn around and sell a portion of them on the open market, usually the next day.
Coronavirus stock What are the advantages of direct listings?
Direct listings are typically less expensive for companies than traditional IPOs, in terms of the fees they pay the investment banks. But direct listings can also eliminate another, potentially much bigger cost.
Many IPOs are followed by a so-called pop, which is when a company’s stock rockets upward on its first day of trading, well beyond its IPO price. Such an event happened just last week when online insurance company Lemonade went public: its stock rose as much as 132% in its first day of trading.
While such pops draw publicity and excitement, they also represent lost money for the company. When a stock pops on its first day of trading, the beneficiaries of that rise are the institutional investors who bought shares in the IPO — not the company that sold them the shares.
“If [the stock] pops, as these companies have been popping, you leave a lot of money on the table,” Das said.
Coronavirus stock What are the drawbacks?
The biggest drawback of direct listings compared with typical IPOs is that the current securities regulations don’t allow companies themselves to raise money through them. The only shares that can be sold in a direct listing are those held by existing shareholders; companies aren’t permitted to use them to raise money by selling stock from their treasury. That means that if a company intends to use a public offering to build its cash stockpile — raising what is known as primary capital — it likely needs to go out via an IPO.
“The mechanism to raise primary capital through a direct listing still doesn’t exist,” Das said.
Coronavirus stock Why haven’t more companies gone public via a direct listing?
Many companies need to use an IPO to raise capital, and a direct listing doesn’t help with that.
Additionally, because so few companies have done a direct listing, there’s still some uncertainty about the process and which companies will be able to use it. The conventional wisdom to date has been that only companies that are already well-known by investors — and therefore already have a potential shareholder base for their stocks — can go public via a direct listing. Other companies, it’s been thought, need a road show to raise their profile with investors and could use the help of investment banks in building demand for their stock.
But that conventional wisdom may be changing. The coronavirus crisis has basically eliminated in-person road shows and replaced them with remote ones. That’s not all that different than how Spotify and Slack marketed their offerings; they did so via online presentations rather than in-person meetings.
And everyday investors have shown that they’re more than willing to buy tech stocks, no matter how obscure the companies may be, Das said.
“We’re in a new world,” said Duncan Davidson, a general partner with Bullpen Capital. “Some of these things about direct listings are just old. They don’t apply any more.”
Coronavirus stock Why would Palantir be a good candidate for a direct listing?
Even if the market hasn’t changed all that much, Palantir is still likely a good prospect for a direct listing, the venture investors said.
Earlier this month, the company raised $550 million selling shares to private investors and said it planned to sell another $411 million worth of shares to such investors imminently. So, the company is likely flush with cash, meaning that it doesn’t necessarily need to raise more in an IPO.
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While Palantir isn’t exactly a household name, it and its founder, Peter Thiel, who previously cofounded PayPal, are well-known among institutional investors. So, it likely doesn’t need a road show or an investment bank to help it drum up demand for its stock, the venture investors said.
What’s more, there’s been an active secondary market in Palantir shares for years. As a result, investors already have a decent sense of what the company and its shares are worth. So there’s no real need for an investment bank to try figure out a price.
“In some ways, Palantir is a very different beast” from the typical company that’s going public, Das said.
Coronavirus stock Why is Palantir trying to go public now?
The company has been around for 16 years and has lots of private shareholders. Although there’s been an active private secondary market for its shares, investors and employees typically still have to jump through hoops to sell stock in such transactions, Das said. Going public would allow those shareholders to sell their stock more easily.
Being a public company also confers a level of stability or solidity that startups often lack, he said. That could be key for Palantir as it tries to win over new enterprise customers or win bigger business from its existing corporate clients, he said.
Having a publicly traded stock also helps when making acquisitions. It’s much easier to use shares to purchase other companies when they have a publicly determined value.
But the biggest reason Palantir may well be trying to go public now is simply opportunism. The markets have bounced back to new highs after their coronavirus-related sell-off this spring. And investors have shown, through the Lemonade offering and other recent IPOs, they are desperate for tech offerings.
“The market seems to be hot,” Davidson said. “This seems to be a perfect time,” he continued, “to try a direct listing.”
Got a tip about the tech industry or tech investing? Contact Troy Wolverton via email at email@example.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.
- Read more about Palantir:
- Secretive data company Palantir is going public. Here’s how the firm’s name was inspired by the indestructible seeing stones in ‘Lord of the Rings.’
- Palantir, a secretive tech company started by members of the ‘PayPal mafia’ with close ties to the Trump administration, could be one of the biggest tech IPOs ever. Take a closer look at how it makes money
- Palantir has confidentially filed for a public listing
- Palantir has raised more than $500 million in fresh funding as the secretive and controversial startup works toward a possible IPO
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