Slack's $17 billion direct listing could be the IPO game-changer Silicon Valley has been waiting for. But others say it's an irrational techie dream.

• Slack is set to go public this week using via a direct listing rather than a traditional initial public offering.
• In a direct listing, insiders and early shareholders list and sell their shares directly to everyday investors via the public markets, rather than having investment bankers market them to institutional investors.
• Some venture capitalists would like to see more direct listings, because they save companies the time and expense of the IPO process.
• But some analysts and investors say they are unlikely to catch on widely for a variety of reasons, including that many companies simply can't afford to forgo raising cash in a traditional IPO.
• Visit Business Insider's homepage for more stories.

Slack, the popular workplace chat app, will make its debut on the public markets this week by doing something very unusual. 

Instead of following the standard path to an IPO - with investor roadshows, underwriter bake-offs and pre-trading price setting - Slack is doing what's called a direct listing. 

The direct listing is suddenly in vogue among some of Silicon Valley's techies and venture capitalists who hope that Slack (and Spotify before it) will show a generation of startups that there's an easier way to get a stock ticker than submitting to the Wall Street-controlled IPO machine.

"The IPO process is definitely - from a company's perspective - expensive and inefficient," said Pete Flint, a managing partner at San Francisco venture capital firm NFX. "I am excited for this increasing trend for direct listings," he continued.

Flint echoed the comments of Bill Gurley, who recently took to Twitter last week to decry the traditional IPO process and to promote alternatives. Companies can be shortchanged hundreds of millions of dollars in the standard method for going public, said Gurley, a general partner with Benchmark Capital, in a series of tweets.

Pointing to Slack's impending direct listing, which could value the company at as much as $17 billion, Gurley said on Twitter that he was "excited to witness another successful direct listing in the coming weeks." Noting that the bond markets show that there are alternate ways of pricing assets, he added, "This is how 100% of IPOs should be done. And hopefully will one day."

But for all Gurley's enthusiasm, there are as many drawbacks to direct listings as there are benefits. And while experts that Business Insider spoke to believe direct listings will play a bigger role in the future, few think the IPO is in any danger of being replaced. 

A direct listing is cheaper than an IPO - but it means the company won't raise any cash

People like Gurley and Flint like direct listings, because they can reduce the cost and waste involved in going public. Since VCs often cash out some of their investment in an IPO, less waste and a higher stock price means a better return on investment.

For years, Gurley has complained that companies are staying private too long; if direct listings were to catch on, the process could encourage companies to go out earlier, because they are a less onerous process than a traditional IPO. That would allow VCs like Gurley to see returns on their investments sooner than they've been seeing them lately.

In a traditional initial public offering, companies sell their shares to big institutional investors, which then turn around and offer a portion of those shares to the public at large on the companies' first day of trading. The startups typically pay high fees to investment bankers to help them market, price, and sell their shares to investors. The bankers also usually underprice companies' shares in the offering so they will jump - or pop - when they start trading.

With a direct listing, companies - or, rather, their early investors and employees - skip the middlemen. In that process, the existing stakeholders basically sell their shares directly to new investors once the company is listed.

In a direct listing, the company itself doesn't raise any cash, at least not initially. But unlike in a traditional IPO, selling shareholders don't have to worry about being shortchanged by a pop. The process also generally involves much lower fees and doesn't require company executives to go on a so-called roadshow to market their companies' stock to investors.

And once its shares are publicly traded, a company can then start offering its stock from its own treasury directly to investors, again without worrying about underpricing its shares or paying steep banking fees. 

Although companies have used direct listings to go public numerous times in overseas markets, most notably in London, the process was basically unknown and unused in the US before Spotify went public in a direct listing last year, said Jay Ritter, a finance professor at the University of Florida who keeps close tabs on the IPO market. Slack is the first company in the US to follow in Spotify's footsteps.

"Those are the only prominent direct listings in the United States," Ritter said.

Flint thinks more direct listings could be in store after Slack

Flint is hopeful that there will be more soon. Many companies have been been able to postpone going to the public markets thanks to infusions of cash from SoftBank and other venture funds that specialize in investing in more mature startups, he noted. Assuming they can retain their cash, many of those startups could be well positioned to go public via direct listing, he said.

"It's conceivable that more and more companies will go in that direction," Flint said.

Read this: $445 billion flowed into startups in the last five years. Now it's threatening to upend one of Silicon Valley's most celebrated customs

One of the challenges with going public - however it's done - is to establish a price for a company's shares. Many of the more mature startups that remain private have seen the development of so-called secondary markets for their shares. These markets allow insiders such as early investors and employees to sell some of their stakes in private transactions to institutional investors including venture funds and mutual funds.

For those companies, the secondary market has already basically established a price for their shares, which can make doing a direct listing easier, said Flint. There's little guesswork to be done in how their shares will trade once insiders start selling them on the public market.

Slack's shares are currently trading on private markets at prices that value the company at almost $17 billion, according to CNBC. That's about the market cap thatBloomberg said Slack will begin trading on the public markets at after its directly listing, citing people familiar with the matter. 

Another factor that might boost direct listings is all of the press coverage that's been devoted to tech companies in recent years, he said. In the past, an IPO has served in part as a marketing event, introducing a company to investors and the public at large. But the abundance of coverage of startups and tech in general has made that function of IPOs less important, he said.

"There's less pressure to IPO purely from a branding perspective," he said.

Companies are loath to stand out and there's danger in being an "orphan"

But other investors and analysts are skeptical that direct listings will become mainstream anytime soon.

Part of the reason that there have been so few direct listings in the US is that companies are reluctant to do something different from the crowd, said Reena Aggarwal, a finance professor and director of the Center for Financial Markets and Policy at Georgetown University. Generally, corporations only go public once, and directors and executives want the process to go as well as possible. With the traditional IPO, everyone - corporate insiders and prospective investors - is familiar with the process and knows what to expect.

"The [companies] want to be careful," said Aggarwal. "They don't want to be the first few to be trying out something new."

But other factors are also at play in why direct listings haven't caught on more widely, analysts and market experts say.

One big one is that the investment banks like the traditional IPO process, said Ritter. They benefit not only from the big fees they get, but also from the ability to parcel out shares in hot IPOs to preferred hedge fund and mutual fund clients, he said. The banks not only see lower fees in direct listings and other alternatives to traditional IPOs, they stand to lose power and the ability to generate hefty fees from those institutional investors, Ritter said.

To try to dissuade companies from doing anything other than a standard IPO, the banks sometimes threaten that their analysts won't cover the companies after the firms are public, he said. For prominent companies like Spotify or Slack, such threats don't carry much weight - both companies are big enough names that they'll be widely covered by analysts no matter what process they use to go public. 

But not every company enjoys the same name recognition as Spotify or Slack. For lesser known companies which need analyst coverage to help generate interest in their shares, the prospect of being ignored by analysts is a serious consideration, said Ritter. 

For such companies, he said, "there is a danger to being an orphan when it comes to analyst coverage if you haven't played by their rules of the game."

Even Uber couldn't afford to go direct

Another reason for the dearth of direct listings is that most companies going public these days do so, at least in part, to raise more cash, said Jai Das, president and managing director of Sapphire Ventures. Even Uber, the poster child for delayed IPOs, couldn't afford to do a direct listing, Das said. Despite all the cash it raised in the private markets, it couldn't forgo the opportunity to raise more from public investors, he said.

"There are very few Silicon Valley companies that [do] not need an extra infusion of cash," Das said. "I really can't think of a company out there that can go out and do a direct listing because it doesn't have to sell shares to raise ... capital."

Even Flint acknowledges that multiple factors will likely have to come together for a startup to be able to hold a direct listing instead of a standard IPO: The startup must already have a strong brand; investors will need to already be familiar with its business; shares in the startup must already trade in an established secondary market.

Perhaps most importantly for a startup to go direct, he said, "there's not a pressing need to raise cash."

• Read more about Slack's public offering:
• Slack just hinted at how many shares could be for sale in its direct listing next week
• Opinion: This is why Uber's stumble could cause Slack's IPO to falter
• Slack just changed its stock ticker weeks before it's expected to go public. Instead of 'SK' Slack wants to be 'WORK'
• These are the slides about Slack's spending, sales and customer growth that the CFO is betting its IPO on