The Slack logo displayed outside the New York Stock Exchange during the company's direct listing on June 20, 2019.BRENDAN MCDERMID/Reuters
Slack shares soared Thursday on its first day of trading on the stock market, in a sign that Wall Street remains tantalized by fast-growing young technology firms even after the recent lacklustre public offerings of larger companies like Uber.
Shares in the company, which makes workplace collaboration software, opened at $38.50 on the New York Stock Exchange, up from a reference price of $26 that was set Wednesday. The stock continued to rise before closing at $38.62. That gave Slack a valuation of $19.5 billion, almost triple its $7.1 billion valuation as a private company.
Slack’s performance underlined a bifurcation that is taking place in tech offerings this year. While many big tech companies like Uber and Lyft were hyped before going public, their stock prices slid once they started trading. Many of these large companies, which operate in untested categories, were deeply unprofitable and faced questions about whether they could make money and maintain their growth.
But smaller tech startups that have gone public – and which often have more room to grow and lose less money – have been warmly embraced by investors. Those include Zoom, a video conferencing company; PagerDuty, a business software provider; Beyond Meat, a meat alternative purveyor; and CrowdStrike, a cybersecurity business. All have seen their values at least triple after they went public in recent months.
Slack also fits into this category. The company, which is based in San Francisco, is small compared with larger rivals like Microsoft. In its offering paperwork, Slack estimated the entire market for workplace collaboration services was $28 billion – less than Microsoft’s revenue in a single quarter.
The performance of recent IPOs shows that investors are hungry for high-growth companies with a “reasonable” and “believable” ability to turn a profit, said Barrett Daniels, a partner at Deloitte who focuses on IPOs. For those companies, “it’s all systems go,” he said. “There’s never been a better time to go public than right now.”
The fervour for such companies pushed Slack’s valuation above that of other recent newly public tech companies, such as Lyft, which has a market capitalization of about $18 billion. Lyft stock is down 13 per cent since it went public in March. Slack is also now more valuable than Pinterest, the digital pinboard company that had been worth more than the messaging company in the private market.
Slack went public in an unusual transaction called a direct listing, where the company does not issue new shares or raise capital – its stock simply begins trading. That method of reaching the stock market was limited to small, lesser-known companies until music streaming service Spotify broke the pattern in 2017 with a direct listing. Slack’s direct listing was led by Goldman Sachs, alongside Morgan Stanley and Allen & Co.
Slack was able to go public through a direct listing partly because it doesn’t need new capital. The company is sitting atop $793 million in cash, according to its offering prospectus. And while it loses money, it is also growing quickly. In its most recent quarter, Slack reported a loss of $32 million and said revenue rose 67 per cent to $135 million. It anticipates as much as $600 million in revenue this year.
Shortly after ringing the opening bell at the New York Stock Exchange, Stewart Butterfield, chief executive and co-founder of Slack, said going public had benefits. It opens the company up to a degree of scrutiny that large customers will find helpful, he said. When Slack was private, some customers asked to see its financials to ensure the company was sustainable, he said.
“Now that doesn’t have to happen. Now there’s a lot more transparency,” he said. “Starting three years ago, we started trying to run Slack as a public company. We have been building toward this for a long time.”
Slack grew out of TinySpeck, a gaming startup co-founded by Butterfield in 2010 that did not catch on. TinySpeck’s internal chat tool, which uses an early internet protocol called Relay Chat to let colleagues exchange messages and collaborate, showed promise. Butterfield reoriented the company around the chat product, publicly releasing Slack in 2014.
The tool quickly spread among tech startups, catching the attention of Silicon Valley investors. Slack became a “unicorn,” a term used to describe startups that are valued at $1 billion or more, in less than a year. At the time, Butterfield said in an interview that the valuation was somewhat arbitrary and not based on the precise methods of valuing a business, given how young Slack was and how quickly it was growing. Over five years, investors poured more than $1 billion into the company.
As it grew, Slack also attracted potential acquirers such as Microsoft, Google and Amazon. But Butterfield rejected any deal, and Slack is now used by more than 600,000 organizations with 95,000 paying customers. Some of the rebuffed tech giants, such as Microsoft, have gone on to challenge Slack with their own workplace collaboration products.
Wayne Kurtzman, a research director at IDC, said Slack was part of a shift in the workplace in which people are moving from static files to collaborative applications. “It’s a battle for the workspace and where work will get done,” he said. Slack’s challenge, he added, is to show customers it is more than just a messaging app.
In its investor materials, Slack differentiated itself from the incumbents by saying it was focused on collaboration and was not distracted by old products or other priorities. The company promoted a directory of 1,500 applications built by partners, designed to let people automate aspects of their jobs, like responding to customer service messages or monitoring social media comments.
Mamoon Hamid, a venture capitalist at Kleiner Perkins and an early investor in Slack, said Slack’s 10 million users are a small fraction of the 600 million people who use e-mail. “There’s a lot of opportunity to get others to adopt this product,” he said.
Slack’s largest investors include venture capital firms Accel and Andreessen Horowitz, as well as SoftBank’s Vision Fund. In a direct listing, its shareholders can immediately sell their shares and are not restricted by a mandatory “lock-up” period.
Butterfield, the chief executive, holds shares that are now worth more than $1.6 billion.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.