A Nasdaq-Listed CEO’s Reflection: Why We Avoided VC Funding & Decided to Direct List Instead

Just over a year ago, Crown Electrokinetics uplisted to the Nasdaq. Our ticker: CRKN.

It was a big moment in the life of our company. But our direct listing was really just the beginning of a tremendous year of growth, as we continued to accelerate the commercialization of smart-window technologies that will save our customers money on their energy bills and reduce carbon emissions at the same time.

I’ve fielded hundreds of questions from customers, new hires and investors since our direct listing. And in those discussions, after we talk about the way our technology works and how we are bringing customers through the door, one of the most common questions I’m asked is: “Why did Crown go public so early?”

The answer to that question is critically important, not just to me, but entrepreneurs everywhere – whether they realize it or not.

First, entrepreneurs and their investors should know that Crown’s journey to the second-largest stock exchange in the world via direct listing isn’t that uncommon.

It’s what I did with my last company, Marathon Patent Group, now called Marathon Digital Holdings (Nasdaq: MARA), which started in the intellectual property sector and is now a leader in the cryptocurrency market. And many other firms have chosen the direct-listing path instead of IPOs or SPACs, including: Coinbase, Amplitude, Roblox, Slack, ZipRecruiter, Warby Parker and Squarespace.

For Crown, we took the first step of direct listing on the OTCQB Venture Market in June 2020. Then, seven months later, our stock was approved for trading on the much larger Nasdaq Capital Market in a process called “uplisting.” In conjunction with that uplisting, we also completed a $21.5 million public offering.

So what have we learned from direct listing and why should it matter to you as an entrepreneur or investor?

1. You keep more of the equity. Relying on venture capital for years, hoping for a blockbuster IPO or SPAC at the end of the rainbow, can lead to massive dilution for company founders and early investors. Sometimes, the dilution after multiple VC funding rounds is so extreme, the founders of a startup lose control of their company. Going public via a direct listing keeps founders and early investors in the driver’s seat.

2. You can access a wider investor base, faster. In addition to losing control of your company, handcuffing yourself to a handful of VC funds or high net worth individuals limits your potential to grow. You are effectively betting that their judgment is infallible, from what the company is worth, to which markets you should be in, to what senior staff you should be bringing on. Why shouldn't retail investors be given the same access as venture funds and high net worth individuals? Make fundraising more open and democratic; let smaller investors grow with the company. This already happens on Kickstarter, with a fraction of the oversight and transparency of a publicly traded company, so don't tell me it's too risky for retail investors.

3. Your executive team is better aligned with shareholders. The dilution that comes with multiple rounds of VC funding also means less equity for the management team and employees. Does splitting 10-20% of equity between dozens and dozens of executives and senior staff – which is pretty typical for a VC-backed tech firm – provide those individuals with much incentive beyond their paychecks? Not really, no. When the people making day-to-day operational decisions have a bigger ownership stake in a company, they are highly motivated to deliver stellar results, which rewards all shareholders. As Charlie Munger said: “Show me the incentive and I will show you the outcome."

For our company, direct listing provided the financial resources and investor confidence we needed to accelerate the commercialization of electrokinetic technology, identify customers who want to buy this technology, and start taking orders for our first product: the Smart Window Insert.

We tripled the size of our team with highly qualified, deeply experienced professionals in engineering, marketing and manufacturing, and as I write this in early February 2022, our first dedicated production facility is about to come online in Oregon – not far from the labs where electrokinetic film was developed, initially by Hewlett Packard and then by Crown’s research team, which includes a number of former HP engineers.

Now, before you race to file your S-1, please know that there are significant hurdles to going public via direct listing – some of which we’ll summarize next. But this isn’t meant to discourage you, just prepare you. And remember: Any executive team that wants to access public markets, via direct listing or not, will have to pass these tests at some stage:

1. It's laborious and difficult. The regulatory requirements for a publicly traded company far exceed anything that applies to privately held firms – and rightly so. Plan for 6-12 months of intense work dealing with FINRA’s Public Offering System, the filing requirements of the SEC and any questions that financial regulators have about your paperwork. This work will of course culminate in an S-1 registration statement, dozens or even hundreds of pages long, but there’s a lot more to the process than just one big filing shortly before your listing.

2. It’s costly. Understanding and demonstrating compliance with U.S. securities law is hard, even for the most experienced corporate executive. You can’t do it alone and that means hiring attorneys (preferably, the good kind). So while every company is unique, don’t be surprised if you rack up legal expenses in the neighborhood of $500,000 to $1.5 million while pursuing a direct listing.

3. It comes with considerable, indefinite scrutiny. This is perhaps the biggest adjustment you will need to make. Becoming a publicly traded company demands a whole new level of transparency and accountability. Background checks. Public disclosure of financial performance. Timely reports on events that have a material impact, good or bad, on your business. Extreme caution around company information and much more. I have found that this outside scrutiny, however uncomfortable, ultimately drives better results for your business, your customers and your shareholders. But it should factor into how you build your core team. More experienced founders, especially those that have helped run public companies, have a huge advantage over those who haven’t. 

In conclusion: As you build and grow a startup, there are lots of ways to raise capital, and I’m not suggesting that a direct listing can or should be the only way. If you are more comfortable with VC funding and eventually an IPO or SPAC, by all means, stay on that road.

But I believe too many startups just assume the VC road is the only one available and commit themselves to it without understanding the pros and cons and without fully assessing the alternatives.

 As Jay Heller, VP and Head of Capital Markets for Nasdaq, says: “Everything we offer clients in an IPO, we offer in a direct listing.”

Speaking for myself and my leadership team at Crown, I believe that direct listing is a more efficient, investor-friendly and results-driven way to raise capital as a startup. More early-stage companies should strongly consider it.