Lessons Learned from High-Profile DPO Failures

Direct Public Offerings (DPOs) have become an increasingly popular method for companies, especially startups and tech firms, to go public without the traditional fanfare—or expense—of a conventional Initial Public Offering (IPO). By forgoing underwriters and offering shares directly to the public, companies can maintain more control over their processes and messaging. However, as enticing as this route may be, several high-profile DPOs have run into difficulties that offer valuable lessons for entrepreneurs, investors, and regulators alike.

These failures are not merely cautionary tales; they serve as roadmaps to better decision-making. Delving into the missteps offers foresight into improving strategies, understanding risks, and managing expectations in the spirited pursuit of public capital.

Misjudging Market Readiness and Investor Sentiment

Perhaps the most glaring error made by some firms choosing the DPO route is failing to accurately gauge the market’s readiness for their direct listing. While skipping the traditional underwriting process provides cost advantages and a faster route to market, it also removes a vital layer of investor education and price discovery that can stabilise demand.

Take the case of Spotify’s 2018 DPO. Although it was technically successful in terms of execution, the company experienced significant volatility in its early trading days. Despite being a leading name in the music streaming industry, Spotify faced difficulty convincing a broader market of investors of its long-term profitability. The direct listing left no room for banks to market the shares to institutional investors in advance, creating an aura of unpredictability around the launch.

This pattern repeated, albeit with more severe consequences, in the case of WeWork. Although it ultimately never made it to a public listing via DPO or IPO due to concerns flagged during its pre-IPO phase, the warning signs—overvaluation, governance issues, and a lack of profitability—were indicators that had it gone forward with a DPO, it might have crumbled under similar scrutiny. The key takeaway here is that ensuring market readiness is a crucial first step, one that cannot be bypassed merely by opting for a different listing mechanism.

Overconfidence in Brand and Narrative

Several companies that pursued high-profile DPOs leaned heavily on the strength of their brand rather than the allure of sound financial fundamentals. This is especially true for companies that grew in the startup ecosystem, where brand identity and user growth often overshadow revenue streams and profitability during early fundraising rounds.

This strategy hits a wall when transitioning from venture capital domains into the public markets, which demand more robust and reliable financial narratives. Take for example the listing of Palantir, which faced skepticism for its unconventional structure and opacity surrounding its financial situation and customer pipeline. The company’s enigmatic image and ties to intelligence services did not translate well into a compelling story for public market investors, who look for clarity in financial projections, governance structures, and long-term viability.

When brand becomes a substitute for substance, public market investors often respond with caution. This caution can translate into underwhelming share performance, eroding investor trust and damaging long-term valuations.

Governance and Transparency Shortcomings

Public investors demand a level of transparency and operational governance that many private firms, particularly startups, are not accustomed to providing. A DPO accelerates the timeline for a company to become public without necessarily making it more disciplined in terms of corporate governance. This can be disastrous.

One poignant lesson comes from the opaque structures some companies maintain even as they step into the public spotlight. Dual-class share structures, while attractive to founders wishing to retain control, are often viewed unfavourably by institutional investors. These structures give disproportionate voting rights to company insiders, effectively insulating them from accountability. While not automatically a red flag, when combined with poor communication and a lack of strategic direction, they can threaten investor confidence.

Furthermore, with DPOs typically skipping the baked-in accountability processes of underwriting banks, any gaps in governance become all the more pronounced. Absent the scrutiny that underwriters would typically provide in traditional IPO processes, critical flaws in leadership structure or accounting practices may go unaddressed until it is too late.

Pricing Pitfalls and Lack of Market Support

In a traditional IPO, underwriters help set the initial price of the stock based on investor demand and market conditions. This pricing process is not just about valuation; it also ensures a balance between supply and demand, creating a buffer against extreme volatility. In contrast, DPOs depend primarily on market forces and existing shareholders’ willingness to sell, often resulting in chaotic early trading.

For example, several companies undergoing DPOs found themselves either significantly overvalued at listing—prompting a sharp drop in stock prices—or undervalued due to conservative investor appetite, undermining internal expectations of capital generation. In the absence of a pricing safety net like greenshoe options or anchor investors, stock prices fluctuate more wildly, sometimes sparking a crisis of confidence right at inception.

Additionally, DPOs generally lack stabilisation support during their initial trading periods. Without investment banks actively managing order books, companies going public via DPOs must rely solely on the market’s honest and brutal response, resulting in potentially damaging levels of volatility.

Risk Amplification Due to Lack of Lock-Up Periods

A significant difference between traditional IPOs and DPOs is the absence of lock-up periods in the latter. Traditionally, a lock-up restricts insiders from selling shares immediately after the listing, thus preventing an initial flood of supply into the market that could depress the share price.

In high-profile DPOs, this absence of lock-up means employees and early investors can quickly liquidate their holdings, often out of a desire to cash out or hedge future uncertainties. This mass exit can trigger a negative perception among market participants, further accelerating declines in share price.

Square’s IPO in 2015 stands as a counterpoint where a lock-up period provided stability, whereas companies choosing DPOs frequently suffer post-listing share dumps that erode initial investor enthusiasm and further complicate efforts to foster long-term support in the marketplace.

The Overdependence on a Tech-Centric Market

Many DPOs have been launched by technology firms, which showcase intense growth but often sacrifice profitability in the short term. While the tech market does embrace innovation and scalability, it remains highly cyclical and sensitive to macroeconomic variables such as interest rates and regulatory shifts.

This sector-centric overdependence played a role in how certain DPOs floundered during turbulent market periods. For example, in moments when investor sentiment around tech shifts—perhaps due to valuations appearing unsustainable or signals of tighter regulatory scrutiny—even companies with strong user growth can find themselves under pressure.

Relying heavily on a market trend or sector momentum rather than a balanced and diversified investor thesis leaves companies vulnerable. The moments when investor appetite diminishes are precisely when the structural vulnerabilities of DPOs come to the fore.

Limited Analyst Coverage and Institutional Buy-In

Another unintended consequence of sidestepping the traditional IPO route is that companies often receive limited coverage from financial analysts. Under traditional IPOs, banks not only underwrite IPO share sales but also often provide ongoing research and analyst insights, which can help reassure early investors and increase trading volumes.

In the DPO model, this level of post-listing support is missing unless the company proactively invests in investor relations and market-making efforts. Without analyst coverage, public awareness is poorer, institutional participation is thinner, and volatility tends to be more pronounced.

Institutional investors, in particular, prefer investments with ongoing research and transparency. Without these entities buying in heavily, liquidity suffers, and stock performance can stagnate. The lack of external validation creates a feedback loop of scepticism that can be hard to break.

Lessons for Aspiring Public Companies

What, then, can aspiring candidates for a DPO learn from these fumbles? Firstly, strong fundamentals still matter. Financial soundness, clarity in reporting, and tangible paths to profitability must be prioritised long before the first share is offered.

Secondly, don’t allow the seduction of a recognisable brand or unique culture to cloud the transparency required by a public listing. Investors can appreciate eccentricity, but only to the point that it doesn’t hinder transparency or long-term viability.

Thirdly, companies must prepare proactively for life as a public entity. That includes setting up internal controls, revisiting corporate governance structures, and educating employees about the implications of freely tradable shares. When done well, companies can build investor confidence and create a stable trading environment, even without traditional supports.

Finally, companies should consider a hybrid model wherein they borrow some of the rigour from the IPO process—like conducting mock roadshows or engaging third-party advisors to simulate pricing scenarios—while maintaining the structural simplicity and cost-effectiveness of a DPO.

Conclusion

The allure of a DPO, especially for mission-driven, innovative companies, lies in the control and transparency it offers. Yet, as the stories of several high-profile disappointments show, it’s not a shortcut to public market success. It’s a tool—potentially powerful, but requiring prudent use and careful planning.

Understanding the specific pitfalls—ranging from pricing chaos and liquidity droughts to governance gaps and investor communication failures—is the first step toward building a resilient and trustworthy public company. Those who ignore the lessons embedded in these high-profile botched attempts risk repeating them. On the other hand, those who listen, adapt, and prepare stand a far better chance of thriving once they make their market debut.