Can Silicon Valley Cut Wall Street out of IPOs?

In a direct listing, a company places its stock on a public exchange without raising any money or using underwriters. The company doesn’t choose the price or who gets to buy in the night before trading begins—as is the case in a traditional IPO. Direct listings are rare, as companies typically seek to raise money when they go public. But now that two major issuers have opted for them, more cash-rich Silicon Valley startups are likely to at least consider following suit.

Airbnb Inc., for example, is weighing a direct listing for its offering, which is expected to take place in 2020, according to people familiar with the home-sharing company’s plans.

Slack operates an app used for group communication and, as of earlier this year, had more than 10 million daily active users and 85,000 paid customers. The company has raised more than $1 billion since it launched in 2013 at increasingly higher valuations and still has ample cash on its balance sheet, according to people familiar with the company. In August, Slack raised $427 million in a funding round led by Dragoneer Investment Group and General Atlantic, valuing the company at $7.1 billion. That came after it raised money fromSoftBank Group in 2017.

Spotify’s market value now stands at about $25 billion.

Slack’s choice is a coup for the NYSE, which battles Nasdaq for the biggest stock listings in the U.S. While Nasdaq won the listing of Lyft Inc., whose highly anticipated shares made their debut Friday, NYSE has secured Uber Technologies Inc., Pinterest Inc. and now Slack.

The competition is particularly frenzied this year, as it is expected to be one of the busiest since the tech boom for IPOs. Stocks have been trading near record highs and volatility has been near record lows this year—ideal conditions for new issues.

Still, a 12% drop in Lyft’s shares Monday, their second day of trading, could limit investor enthusiasm for the other technology companies that have raised vast sums privately at high valuations.

In their pitch for Slack’s business, NYSE executives emphasized how designated market makers, or DMMs, are present on the floor of the exchange to help combat volatility on the first day of trading, according to a person familiar with the matter. DMMs are the human beings on the floor of the exchange who oversee trading in specific securities. That could be especially crucial here because in a direct listing, there is no Wall Street bank to act as a stabilizing agent supporting a stock if it swings dramatically in early trading.

The Slack listing is less of a win for Wall Street firms generally, which rake in tidy sums every year in underwriting fees. Still, they’re likely to have a banner year in 2019 as a flood of tech companies are planning to go public using the traditional IPO route.

Slack is working with Goldman Sachs Group Inc., Morgan Stanley and Allen & Co. as advisers, not underwriters. The trio played the same roles on Spotify’s direct listing and were paid about $36 million in total for their work.

A typical IPO can have more than a dozen underwriters who in some cases earn a lot more.