Corporate Finance Explained | IPOs, Direct Listings, and SPACs: How Companies Go Public

Welcome to the deep dive. Today, we’re really digging into how these huge private companies actually become public. It’s way more than just paperwork, right? It’s a massive strategic decision. Absolutely. One of the biggest financial choices they’ll make. And we’re looking at the three main ways they do it. The classic initial public offering, the IPO. Just standard route for decades. Then there’s the direct listing, which is kind of the disruptive path. Shakes things up a bit. And finally, the one everyone was talking about a couple of years back, the SPAC, the Special Purpose Acquisition Company. Bit of a wild ride, that one. Definitely the most, let’s say, volatile option of the three. We’ve got sources covering the nitty-gritty of underwriters, the math behind why stocks pop on day one, and some pretty spectacular failures, too. Yeah, the risks are real.

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So the big question we’re tackling is, why did companies like, say, Airbnb and Spotify and, well, WeWork all choose such fundamentally different doors to the public markets? And that’s really the mission for you listening today. We want you to walk away understanding the mechanics, the trade-offs. So when you see a company going public, you can quickly figure out why they chose that specific path. Is it about capital, risk, brand? And we’ve got some great examples to unpack. We’ll look at Facebook, Airbnb, definitely Spotify, and Slack. The direct listing pioneers. Snowflake too. I know. And yeah, the WeWork saga, which is quite the story. Plus Virgin Galactic. That’s to cover.

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Okay, let’s start with the traditional IPO. This was the default for so long. The S1 filing, the road show, feels almost like a ritual. It really was the gold standard, mostly because it delivered on two key things. Which are? Control and capital. So the company hires investment banks, the underwriters, they basically run the show. They handle everything. Pretty much. Their main job is called book building. They go out, talk to big institutional investors, gauge interest, figure out a price. And then they sell blocks of shares to these big players before the stock actually starts trading on the exchange. So the purpose is twofold. Exactly. One, raise a ton of fresh cash for the company itself, for growth, operations, whatever. Two, give existing shareholders, founders, employees, early investors, a way to sell their shares. Liquidity. And access to guaranteed money. I mean, that’s huge, especially if you’re scaling up fast. And deniably powerful, yeah.

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But you hear all the time how expensive it is, and kind of inefficient. Why stick with it if the fees are so high? Well, the cost is significant. That’s the main drawback people point to. First, you’ve got the underwriting, spread the fee itself. Usually, like five to seven percent of the money raised. Which, on a billion-dollar deal, is a lot. Tens, even hundreds of millions, yeah. But honestly, the bigger hidden cost is often the underpricing. The so-called IPO discount.

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Explain that. What’s the discount? The banks, to make sure the deal goes smoothly, and let’s be frank, to reward their big clients. They often price the shares a bit lower than they think the market will bear. Ah, okay. So when the stock hits the market and immediately jumps that famous day one pop, maybe 50 percent, 100 percent. Yeah, you see those headlines? That pop means the company sold its shares too cheap. They literally left money on the table. Money that went to the investors who bought in the IPO, not the company itself. Okay, let’s look at Facebook. 2012 IPO. Huge deal, right? $16 billion raised.

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But it was messy. Oh, very messy. Technical glitches on the NASDAQ, big questions about their mobile strategy, and valuation.

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It wasn’t smooth. So why did they go the IPO route with all that cost and drama? Because they needed the cash urgently. They were in a massive transition, needed funds for acquisitions. Like Instagram, which happened right around then and just building out their infrastructure. So the capital need trumped the process risk. Exactly. The IPO delivered that huge chunk of capital they needed for the long game, even if the debut was rocky. Now contrast that with Airbnb in 2020. This is like the textbook example of that underpricing problem, isn’t it? Oh, absolutely textbook. They didn’t seem desperate for cash in the same way Facebook was, but they chose the traditional IPO. And what happened? They priced at $68 a share. Day one, it closes at $144, more than double. Wow. There is $3.5 billion, which sounds great. But I mean, do the math. They could have potentially raised billions more if the pricing had been closer to where the market opened it. So that difference, that’s the money left on the table. Precisely. It’s essentially a transfer of wealth from the company to the initial IPO investors.

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And this also brings up another IPO feature, the lockup period. Right, where insiders can’t sell right away. Yeah, typically six months, employees, early investors, they see this huge paper gain, but they can’t touch it. It stabilizes the market, sure, but it delays their liquidity. You can see why people started looking for alternatives. Absolutely. If you’re watching half your potential value go to someone else’s clients, yeah, you’d want another way. Which brings us to the direct listing, the skip-the-middleman approach. Exactly. The direct listing or DL, it fundamentally changes the game. No underwriters setting the price through book building.

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So how does it work, though? The company just lists its existing shares directly on the exchange. Critically, no new shares are created. Meaning no dilution for existing shareholders, but also, and this is the key tradeoff, no new capital raised for the company. It’s purely about liquidity for current shareholders. In the price, how’s that set? By the market itself. It’s basically an option on the exchange floor, or digitally now, of course. Supply meets demand, and boom, you get an opening price. That sounds much cleaner. Cheaper too, I imagine. Way cheaper. You slash those massive five, 7% underwriting fees, that’s a huge saving. Okay, so lower cost. What else? The lockup restrictions are often avoided or much shorter, so employees and early investors can sell sooner. That’s a big plus for morale and retaining talent. Yeah, my bad. And the pricing, arguably, is more transparent. It’s the public market deciding the value from the get-go, not a bank behind closed stores. This discovery is immediate. But the big catch is no near money. So who does this work for? You can’t fund big expansion plans this way. Right. It’s perfect for companies that are already pretty well known, have strong brands, don’t urgently need cash because maybe they’re already profitable or have a healthy balance sheet. Like Spotify. They kind of pioneered this, didn’t they? They did back in 2018 on the NYSE.

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Spotify was a global name. Everyone knew them. They didn’t need a banking rudge show to tell their story. So they saved the fees, got liquidity for insiders. Exactly. It was efficient. Yeah. And the stock opened pretty close to its reference price, suggesting the market mechanism worked well for them. And Slack followed them. Yep. 2019. Same logic. Strong brand recognition. No immediate desperate need for billions in fresh capital. It just made sense for companies like them. They wanted liquidity, not the IPO headache. Okay. The DL sounds really compelling for the right kind of company.

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But then came the SPACs. If the IPO is the old guard and the DL is the efficient alternative, SPACs felt like the Wild West for a bit there. Yeah. Yeah. Wild Child is a good way to put it. The 2020, 2021 boom was something else. So, break down a SPAC for us. What actually is it? Okay. So a SPAC, Special Purpose Acquisition Company, is basically a shell company. It has no actual business operation. A blank check company, right? Exactly. It’s formed by a sponsor, could be a well-known investor, an ex-CEO, someone with connections. They raise money in their own IPO. So the shell company goes public first. Correct. That money just sits in a trust account. And the SPACs only job, its sole purpose is to find a private company to buy, usually within two years. And when it finds one? It merges with that private company. The private company essentially takes over the SPACs stock market listing. Poof, it’s public. That merger process is often called the D-SPAC. Why was this suddenly so popular? What was the appeal for the private companies?

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Speed. Speed was massive. You could potentially go public in just a few months versus the year, year and a half for a traditional IPO. Huge difference. But there must have been more to it. Oh yeah. A big draw was perceived valuation certainty and crucially, the ability to use forward-looking projections. What do you mean? In a regular IPO, the SEC is really strict about making future financial forecasts. You mostly talk about past performance. But in a SPAC merger, it’s structured differently, allowing companies to present these, well, often very optimistic projections about future growth and profits. Which could justify a higher valuation. Often yes. They could sell a grand future vision more easily. That led to what people called founder-friendly terms, meaning higher initial valuations than they might have gotten in an IPO, especially if their current numbers weren’t amazing. But that sounds risky. High valuations based on maybe shaky projections. Extremely risky.

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And that brings us right to WeWork, a perfect, if painful example. Right. They tried the IPO in 2019. It spectacularly blew up. Blew up is putting it mildly. Massive governance issues, questions about the business model, valuations slashed. It was a disaster. So then they eventually went public via a SPAC in 2021. They did. The SPAC structure got them onto the public market, something the IPO couldn’t. But here’s the key lesson. The structure couldn’t fix the substance. Meaning the underlying problems were still there. Exactly. The flawed business model, the governance worries. They didn’t magically disappear. The stock tanked pretty quickly after the D-SPAC. And they ended up in bankruptcy by 2023. Correct.

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It’s a stark reminder that the way you go public can’t save a fundamentally weak company. Structure doesn’t fix broken fundamentals. And there are other risks with SPACs too, right? Delusion. Huge risk. SPACs sponsor typically gets something called the sponsor promote, often 20% of the SPACs equity for relatively little investment. That’s massive delusion right off the bat for everyone else. So, public investors are already starting behind. Pretty much. It makes it much harder for the stock to perform well long-term. And then there’s redemption risk. Redemption. When the SPAC announces the company it wants to merge with, the initial SPAC investors get a choice. If they don’t like the deal, they can redeem their shares and get their original investment back plus interest from the trust. So the money raised might just disappear. A chunk of it can, yeah. It creates huge uncertainty about how much actual cash the merged company will end up with makes financial planning a nightmare. So, while we saw some names like DraftKings or Virgin Galactic use SPACs early on. Yeah, some high-profile ones, often with very high valuations. The overall model seems to have some serious flaws, especially when markets cool off. Absolutely. Speed is great, but not if it means skipping proper due diligence. That rarely ends well. Okay, let’s bring it all together for the listener.

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IPO, direct listing, SPAC. When a company’s leadership is sitting down trying to decide which door to walk through, what are the absolute key factors driving that choice? It really boils down to three core strategic questions finance teams need to grapple with. First, and maybe most importantly, capital needs. How much money do they actually need to raise? Exactly. Is this about funding future growth or just getting liquidity? If you’re like Snowflake needing billions to build out massive data infrastructure, you need the IPO. You pretty much have to go the IPO route even with the fees and the underpricing risk. You need that primary capital injection. A DL won’t cut it.

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Okay, number one is capital, which is two. Second is brand strength and investor understanding. How well known is the company? Does the market already get what they do? Like Spotify again. Right. If you’re a household name like Spotify, you probably don’t need the bank’s road show to explain your business. A direct listing is viable. But if your business is complex, maybe B2B or needs that stamp of approval from Wall Street. Then, the IPO process with the banks validating it becomes more important. Correct. It helps build that initial investor confidence and understanding. Makes sense. And the third factor, you hinted at this with SPACs. Timing and market conditions. This is critical. The viability of these paths, especially SPACs, is hugely dependent on the broader economic climate. How so?

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When markets are hot, lots of liquidity, high risk appetite, cheap capital. When interest rates go up or investors get nervous, that SPAC window slams shut. Deals fall apart, funding disappears. So the choice isn’t just internal strategy, it’s reading the market environment. Absolutely. An IPO might be feasible in most markets, though pricing will vary. A DL relies on market confidence in the specific company. A SPAC relies on overall market frothiness. They’re very sensitive to conditions. It’s also a huge cultural change for the company, isn’t it? Going from private to public.

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Oh, massive. You shift from maybe a handful of patient, long-term private investors to thousands of public shareholders, analysts, and media scrutinizing your every move, every quarter. The 90-day shot clock. Exactly. The pressure for predictable quarterly results is intense. It changes everything, how you forecast, how you communicate, even internal priorities. And the finance team is suddenly center stage. Front and center. Investors closing the books anymore. They’re modeling dilution, forecasting JAP earnings, managing investor relations, guiding Wall Street expectations. It’s a huge step up in responsibility and visibility. So the structure they choose, IPO, DL, SPACO, has to actually support that new public company reality. It has to. If you pick a SPAC just because it’s fast, but your internal finance controls and reporting aren’t ready for prime time, that structure won’t save you. It might even accelerate failure.

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OK, so let’s wrap this deep dive with a quick final summary of the core tradeoffs. Sounds good. The IPO gets you the capital you need, but it’s expensive, potentially leaves money on the table through underpricing, and involves lockups. Right. The workhorse, but costly. The direct listing. Much cheaper, more transparent pricing, quicker liquidity for insiders, but raises zero new capital for the company. Efficient liquidity, but no growth funding. And the SPAC. Yeah. Potentially high initial valuation using projections, but carries significant risks around dilution, redemptions, and long-term performance, especially in cooler markets. Speed and flexibility, but high risk and very market-dependent.

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So the big takeaway here is that going public isn’t just a transaction. It’s the start of a whole new chapter, a cultural shift. And the path you choose that initial door has to align with your company’s real needs, its readiness, and its long-term strategy. Its teams are absolutely crucial in getting that alignment right. Okay. And as we close, here’s a final thought for you to chew on, thinking about future listings. We saw WeWork managed to go public via a SPAC only to collapse later. It really makes you wonder how much can any specific deal structure, whether it’s an IPO, DL or stack, truly cover up fundamental weaknesses in a company’s actual business or its governance. Something to consider.