Skift Take

Airbnb has always put itself out there as not just another startup or your grandmother's online travel agency. Going the direct listing route, as opposed to a far costlier initial public offering, could fit in nicely with that narrative.

An initial public offering? Nah.

Although Airbnb announced last week it intends to go public in 2020, on the heels of generating more than $1 billion in revenue in the second quarter, there is a good chance that the short-term rental — and increasingly boutique hotel — business would avoid readying a road show in preparation for an initial public offering next year.

Airbnb, if it deems market conditions are ripe, will likely go for a direct listing instead. At least one major investor will advocate internally for such an outcome, a source told Skift. In a direct listing, Airbnb would issue no new shares, could avoid massive fees to bank underwriters like Goldman Sachs or Morgan Stanley, and would receive no new funding, but would start trading as a public company nonetheless.

Those fees can be more than 5 percent of the offering’s gross proceeds.

Like Spotify, another unicorn that broke new ground by opting for a direct listing when it went public in April 2018, Airbnb doesn’t seemingly need a funding infusion from offering new shares after having raised some $4.4 billion in funding so far.  So why bother with an IPO?

Spotify’s reference price, set by the New York Stock Exchange a day before it started trading on April 3, 2018, was $132 per share, and it finished its first day 12.8 percent higher at $149.01 per share, according to the Wall Street Journal.

Airbnb’s public market intentions seem heavily motivated by the desire to give its 6,000 employees the option to cash in their shares without diluting them through the new-share issuance that comes with an initial public offering. Airbnb, after all, was founded in 2008; that’s a long time for early and even later employees to wait to cash in their chips.

There are no lockup periods with direct listings so employees would be free to sell their shares much sooner than through a traditional initial public offering.

As would be customary for an executive in this situation, Sam Shank, Airbnb’s head of hotels and the CEO of its HotelTonight unit, wouldn’t address Airbnb’s stock market plans on stage at Skift Global Forum Thursday, but he did offer plenty of thoughts on the company’s hotel strategy.

Initial public offering expert Jay Ritter, Cordell professor of finance at the University of Florida, told Skift it is plausible that Airbnb will do a direct listing to avoid the high cost of an initial public offering. Ritter said he doesn’t have any specific knowledge about Airbnb’s plans.

“This year, the average operating company going public has netted 22 percent less than the market value of the shares at the close on the first day of trading once one takes into account both the gross spread (the fees paid to underwriters) and the underpricing that is common in IPOs,” Ritter said.

Benchmark’s Bill Gurley, who is not an investor in Airbnb, basically has come to think that the initial public offering process is a ripoff to the newly public companies.

“And I apologize to the Silicon Valley community that it took me two decades to figure this out,” Gurley recently told CNBC. “But I think Silicon Valley’s been on the bad end of a joke for about four decades.

[See the video of Gurley advocating for direct listings here.]

Using data from Ritter of the University of Florida, Gurley argues that initial public offerings tend to underprice the value of company stock, and that underwriters have more allegiance to the the buy side than to their seeming clients when they go public.

We at Skift don’t have any inside information about Airbnb’s strategic plans. As is publicly known, Airbnb is busily expanding its hotel, experiences, and tours businesses, and it has talked about entering the flights arena. With a private valuation of around $35 billion, $4.4 billion in funding, and plenty of cash flow, it’s conceivable that the homesharing company doesn’t need the funding infusion that comes with a traditional initial public offering.

That’s not to say the company hasn’t issued new shares from time to time as with the $26 million it sold this year in connection with its acquisition of Urbandoor in August.

What’s clear from its history is that Airbnb executives like to do things their own way. If the company can avoid the well-worn and costly initial public offering route that many of its peers have slogged through, and go for a direct listing instead, then that would be another jab at mainstream practices, make employees happy, and would fit in nicely with the Airbnb startup narrative and culture.

Never say never, and market conditions can always change, but our bet is on a direct listing as of now.

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Tags: airbnb, benchmark, funding, initial public offering, ipo, venture capital

Photo credit: Airbnb co-founder and CEO Brian Chesky speaks during an announcement in San Francisco, April 19, 2016. Airbnb intends to become a pubic company in 2020. 177103 / 177103

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