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Surf Air Mobility aircraft await boarding. 
(Publicity photo)
Almost as soon as Surf Air Mobility went public via direct listing in July, the aviation company's stock price started to nosedive. 

The startup's shares had been assigned a reference price, a guidepost for investors estimated from prices per share in recent private trades, of $20 on the NYSE. By the end of the first day, its share price had settled at $3.15. Just over a month later, it's trading at around $1.50 per share.

Surf Air Mobility was the first significant direct listing in nearly two years—and its performance is unlikely to inspire confidence in the process. It's likely to be one of very few in the near term.
   
In a shakier market where late-stage companies don't have the cash runway they used to, founders are more incentivized than ever to secure the capital and big investors that come with the traditional IPO roadshow. Only the most desperate companies seem willing to take the direct listing plunge in this environment.

As recently as last year, Instacart had reportedly been toying with the idea of a direct listing, but on Aug. 25, the grocery delivery business dropped its S-1 listing for an traditional IPO.
  Bold no more The direct listing, a once-buzzy alternative to an IPO, is considered a gutsy move by investors and bankers alike. 

"A direct listing is very, very bold," according to Ihar Mahaniok , a seed-stage investor in Instacart and managing partner at VC firm Geek Ventures. "The IPO is much more proven, and has the benefit of both creating liquidity and raising cash for the company." 

Direct listings have historically been done by either companies which can't raise capital any other way or by very well-capitalized companies with substantial cash reserves. Spotify was the latter, having closed $1 billion in new funding less than two years before filing for an IPO.

"Until Spotify did it back in 2017, it was always kind of the capital markets tool of last resort," said David Golden, managing partner at Revolution Ventures and a former J.P. Morgan investment banker. 

At the time it went public, Spotify's CFO Barry McCarthy declared in an op-ed: "The US initial public offering market is broken." For Spotify, a household name with a robust balance sheet, the speculation at the time was that "they really wanted to poke their finger in the eye of the traditional underwriting community," Golden said.

Slack's direct listing in 2019 was a similar story: it was a large, well-known, well-capitalized company. Palantir and Asana, which pulled off direct listings in late 2020, were remarkable in part because they lacked the name recognition of Spotify and Slack.

To be sure, there are advantages to the process: If Instacart had gone with a direct listing, it would have bypassed the underwriting fees charged by investment banks, the lockup period for investors' and early employees' stock, and the traditional roadshow of courting institutional investors.

But the direct listing may revert back to its traditional role in the current IPO window, which is only just starting to open up, as a flotation of last resort. Surf Air Mobility's decision to go public came only after its blank check merger fell through last year.
  Cash is king In this cycle, fewer VC-backed companies are in a position to consider a direct listing, which doesn't typically raise a large amount of capital.

"It would be really audacious to raise primary capital as part of a direct listing," according to Jeremy Abelson, a portfolio manager at Irving Investors, a crossover fund.

On top of the capital raise, the investor roadshow before an IPO is typically highly valuable for a company. The process, in which an investment bank pitches a company to potential institutional investors, sets the share price and also "helps to get your story out," Golden added.

A recent Supreme Court decision made direct listings potentially more attractive in the eyes of founders, as the ruling meant that founders have less liability in direct listings. In June, the court sided with Slack against a class action brought by a shareholder, requiring that a plaintiff had to prove they had purchased registered shares to sue over information in a registration statement. This isn't possible for most shareholders in a direct listing. 

But the direct listing route comes with sacrifices. By putting the company's name out there in the roadshow, underwriters can help companies to avoid the kind of disastrous market opening that can happen when investors don't know about a listing. 

"It was a buzzy thing to do in the bull market, but I don't think it worked out well for the majority of companies," Abelson said.
 

This article originally appeared on PitchBook News