When a company makes its stock market debut, it’s often referred to as “going public.” A significant milestone, going public has long been associated with the concept of an initial public offering, or IPO. But going public and making an initial public offering aren’t always synonymous. Though IPOs have historically been the most common way of listing publicly, alternatives to IPOs—like direct listing and special-purpose acquisition companies (SPACs)—are gaining traction. In some cases, they have even outperformed IPOs in recent years.
Tech unicorns like Spotify and Slack spotlighted alternatives to IPOs with their successful direct listings. Their visibility compounded with the public debut of Roblox via a direct listing, which clocked in at $45.3 billion—nearly double Spotify’s already-impressive first-day valuation.
In this article, we break down the differences between IPOs, SPACs, and direct listings, their advantages and disadvantages, and why companies looking to go public prefer each option.
What does it mean to “go public”?
IPOs, SPACs, and direct listings are all common examples of how companies begin listing on the public market, but how and why do companies go public? Companies begin their life cycle as part of the private market, where they can receive funding from professional investors like private equity and venture capital firms, in exchange for equity in their business.
Companies go public when they transition out of the private market by listing their shares on the stock market, making ownership available to the general public. Going public subjects a company to greater scrutiny and regulations, but it confers the benefit of with a wider base of potential investors, more diversified ownership, and the capital they need to expand their business.
What is an IPO?
In an initial public offering, a private company offers new shares to the public, allowing the company to raise new capital, scale operations, and fund various strategic objectives. IPOs are the most common route through which companies begin to sell shares publicly, and are often highly publicized and anticipated market events.
How does an IPO work?
To initiate a public offering, the company in question will typically work with one or more investment banks to receive underwriting services. Underwriters are employed by financial institutions like investment banks to assess the risk involved in things like investments, mortgages, and insurance, and to make decisions for their company based on their evaluation.
In the case of IPOs, an underwriter can use their insight on a company’s risk to provide services like advising on share price and filing the correct paperwork with the SEC. The underwriter will also go on a roadshow to create excitement and help establish a public market for the shares, eventually culminating in the final price for the IPO.
What are the advantages and disadvantages of an IPO?
Although companies are able to tap into a larger variety of investors with an IPO, there is still no guarantee that they will raise the amount of capital they need from this public listing. Moreover, the success of an IPO will be contingent on industry conditions and related economic factors—which may even cause companies to back out of an IPO as seen in 2022 with the postponed Reddit IPO. Additionally, hiring underwriting services can cut into companies’ projected funds, since an underwriter normally receives five to eight percent of capital raised during an IPO.
IPO examples
German automaker Porsche conducted their IPO in September 2022, and had one of the most successful launches in the European market, despite surrounding volatility. In the IPO, majority owner Volkswagen sold a 12.5% stake in the company to help fund the development of electric vehicles, one of the major emerging spaces tracked on the PitchBook Platform. Shares began at €82.50 each, reaching a peak of €86.78 before finally settling at €85.50.
Here is a graph charting companies that had their IPO in 2018–2023.
What is a SPAC?
A special purpose acquisition company (SPAC) is a publicly traded buyout company that aims to acquire other companies by securing a controlling stake or purchasing them outright. They begin as a private company and then undergo an IPO themselves in order to raise funds for their operations. SPACs are also known as blank check companies because the target company is unknown to investors at the time of the IPO.
After a SPAC goes public, it typically has around two years to acquire one or more companies. When a company gets acquired by a SPAC, it goes public without paying the fees associated with an IPO. All the fees and underwriting costs are covered before the target company ever gets involved. This divergent approach to how long each company is on the market is the key difference between SPAC and IPO price valuation.
What are the advantages and disadvantages of SPACs?
Much like direct listings, SPACs are more cost effective, but come without many of the assurances of traditional IPO and underwriting services. Those in favor of SPACs reason that even though investors are financing a company sight unseen, this can actually be beneficial since it leaves less room for mispricing, and can lead to a more stable launch.
Because SPACs can’t be traded as much or to as many people as IPO shares, their price can be determined much sooner—though this comes at the cost of some of the growth potential of an IPO. SPACs also benefit from greater predictability, since they are contingent on the flat amount raised from investors, rather than the shifting price of shares under a traditional IPO or direct listing.
Though the lack of investor input concerning price would suggest a far less volatile process of going public than traditional IPOs or direct listings, SPACs are not without pitfalls of their own. Because participants in a SPAC can withdraw their investment if they don’t like a target company, the funding of a SPAC is never a given. SPACs even run the risk of having to withdraw from a buyout if they lose too many investors in this way.
Examples of SPACs
Large private equity firms like TPG and The Carlyle Group are active sponsors in the SPAC market. Household brands like Hostess or newer companies like DraftKings have gone public by merging with SPACs.
What is a direct listing?
A common alternative to selling stocks publicly via IPO is through the process of direct listing (also known as a direct public offering). In the direct listing process, the company lists existing shares rather than issue new ones to raise new capital. This eliminates the need for a roadshow or underwriter, which saves the company time and money.
Historically, this method has been used primarily by budget-conscious small businesses seeking to avoid the fees associated with traditional IPOs. But some of the most successful direct listings have come from already-established private companies—with sufficient investor demand and hype, companies have been able to bypass the need for an underwriter to set stock prices.
What are the advantages and disadvantages of a direct listing?
Direct listings present a cost-saving alternative to IPOs, which comes with both benefits and drawbacks on account of having fewer guardrails. In the lead-up to their direct listing, companies can use tactics like hiring advisors to cover many of the same functions as underwriters for a flat fee, rather a percentage-based commission. Unlike IPOs, once the process of going public is complete, direct listings give shareholders the opportunity to immediately sell their stake, without experiencing any waiting period. This can also help avoid the dilution that issuing new shares could cause.
However, there are risks associated with removing the safety net that underwriters and lock-up periods provide. Without an intermediary, there is no guarantee that the shares will sell, and it can be more difficult to protect against volatility.
To help mitigate some of these risks, companies undergoing the direct listing process can turn to secondary transactions. Secondary transactions give shareholders the chance to sell equity before a direct listing and provide a level of price discovery, which may reduce early market volatility.
Direct listing examples
Spotify, Slack and Roblox make up some of the most valuable and a high profile direct listings, but other well-known tech companies like Asana, Palantir Technologies, and Coinbase have also gone public through direct listings. Other examples of tech companies that have used direct listings to go public are job-hosting platform Ziprecruiter and the web service company Squarespace.
Below is a graph charting the growth of direct listings from 2018–2023.
At a glance: SPAC vs IPO vs direct listing
Tying it all together, here’s a quick reference showing some of the main similarities and differences between these three modes for going public.
| SPAC | Traditional IPO | Direct Listing IPO |
| Is a publicly traded buyout company | Process by which a private company goes public | Process by which a private company goes public |
| Raises capital via IPO | Offers new shares to the public | Sells shares directly to the public without intermediaries |
| Looks to buy a private company that fits investment strategy | Raises new capital from public investors | No lockup or holding periods for investors |
| Buys private company, which then goes public without paying for IPO | Requires a roadshow and underwriters, which can be costly | Eliminates need for roadshow, investment banks or underwriters |
Frequently asked IPO, direct listing, and SPAC questions
What is the purpose of an IPO?
Companies participate in IPOs in order to become a publicly traded company, which diversifies ownership and opens them to a wider investor base, and to raise funds for growth.
Are IPOs more risky?
Because of their use of an underwriter, who is professionally trained to assess risk, IPOs normally have prices that are appropriate to their level of risk.
Can I sell an IPO on listing day?
IPOs are usually subject to a holding period whereby investors that bought shares are not able to sell them for a given time.
What does SPACs mean?
SPAC stands for special purpose acquisition company, a company that buys controlling stakes in private companies.
What is the difference between an IPO and SPAC?
When a company is acquired by a SPAC, it is able to go public without all the costs associated with an IPO. Additionally, IPOs typically diversify ownership by going public, while SPACs attempt to perform buyouts.
How do SPACs make money?
SPACs raise money by going public themselves through an IPO and later directing those funds to buy stake in companies.
How is an IPO different from a direct listing?
IPOs involve the use of an underwriter and a roadshow, which inform the price of the IPO, while direct listings eschew these to save of costs.
Do direct listings raise capital?
Yes, direct listings sell shares of a private company, raising capital and going public in the process.
How does a direct listing work?
A private company begins to sell shares on the public stock market at a price that they have set without the use of an underwriter, thereby going public.
Who sets the price in a direct listing?
The company sets the price of its shares.
More on IPOs, SPACs, and direct listings
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Take a closer look at SPACs in 2022 and the emergence of deSPACing
Read our article on the future of SPACs
Check out our analyst projections on what’s next for SPACs
Download our SPAC market update analyst note
Learn about the factors that influenced IPOs in 2022
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