As 2019’s bumper crop of initial public offerings either languishes or wildly exceeds expectations, Slack Technologies Inc. is taking a route to the trading floor that it hopes will yield a much more boring outcome.

Following in the footsteps of music-streaming service Spotify Technology SA last year, the workplace messaging application is set to start trading on the New York Stock Exchange Thursday via a direct listing. It’s just the second large company to test the unusual method and will be closely watched by other potential candidates to see how successfully the company and its advisers pull it off.

Investors got their first hint of how things are going when Slack’s reference price was set at $26 per share on Wednesday. Unlike the offering price paid by investors in a traditional IPO, the reference price doesn’t establish the valuation, though it’s partly based on recent trading in private markets. Its main purpose is to provide a starting point to allow trading to begin under New York Stock Exchange rules.

Slack gained its first buy rating on Thursday, ahead of its debut, as Atlantic Equities said the adoption of the company’s messaging technology within businesses is proving as viral as WhatsApp has been for consumers.

With IPO heavyweight advisers from Goldman Sachs Group Inc., Morgan Stanley and Allen & Co. helping to steer Slack through its listing alongside market maker Citadel Securities, all eyes will be on how the first day of trading plays out. But the company and its investors aren’t looking for a meaningful stock pop — and want to avoid the volatility — that often accompanies high-profile share sales, according to a person familiar with the process.

On Wednesday, Slack said that its investors had converted additional Class B stock to Class A shares, increasing the number that could be sold to 194 million from 181 million, out of a total of 504.4 million. Especially because there’s no lock-up period, there’s a risk of too few investors wanting to buy or too many wanting to sell.

“A direct listing can be considered risky for a variety of reasons,” Alejandro Ortiz, an analyst at SharesPost, said in a note. “There is an increased chance of substantially more supply than demand for Slack’s shares. All of this could result in heightened volatility in the early hours and days of trading.”

Reference Price

Fifteen months after its own direct listing, Spotify trades about 12% above its reference price of $132, at about $148 a share on Wednesday. That’s well below where the stock opened on its first day of trading in April 2018, though, at $165.90 apiece.

On Thursday, much of the attention at the exchange will be focused on one man. Pete Giacchi, a longtime market maker at the NYSE for Citadel Securities, will be tasked with opening the stock –- just as he was for Uber Technologies Inc.’s listing in May, people with knowledge of the matter said. It could be a long wait: Spotify’s shares took more than three hours to start trading, and it will take a while to make sure that the pricing and trading volumes coming in are at levels that Slack and its advisers are comfortable with.

Supply, Demand

Morgan Stanley, as the named adviser to the designated market maker, will be constantly trying to get a sense of supply and demand for the shares to advise on that opening price. The bank’s team includes global head of technology capital markets, Colin Stewart, as well as David Chen, who leads software banking. John Paci, the co-head of U.S. equities trading, will help advise the designated market maker on where the stock should open based on buying and selling interest gleaned from investors, according to people familiar with the details.

At Goldman Sachs, the work will be led by Nick Giovanni, co-head of the global technology, media and telecommunications group, equity capital markets head David Ludwig and Will Connolly, co-head of the West Coast financing group and head of technology ECM.

One thing Slack’s listing will have in common with an IPO: executives including Chief Executive Officer Stewart Butterfield and finance chief Allen Shim are expected to be pacing the floor of the NYSE for the open. They may not stick around all day, though. They will likely spend some time at the offices of their advisers before celebrating with employees and customers, according to a person with knowledge of the matter.

Representatives for Slack, Goldman Sachs, Morgan Stanley and Citadel Securities declined to comment.

Private Funds

Slack’s decision to bypass a traditional IPO — and the opportunity it brings to raise funds — is yet another sign of how benevolent private markets have been to tech startups in recent years. Slack’s earliest major investor, venture capital firm Accel, has directed a fire hose of money at the messaging company over the years, investing from several of its funds to accumulate a 23.8% stake.

In addition to Accel, Slack captured the imagination of elite investors such as Andreessen Horowitz and Social Capital. But it was SoftBank Group Corp.’s behemoth Vision Fund, which also owns stakes in Uber and WeWork Cos., that accelerated Slack’s fundraising when it led a $250 million investment in 2017.

One of the main reasons that Slack has remained well capitalized, however, is that it burns through less cash than some of SoftBank’s other investments. Uber, for instance, accumulated more than $10 billion in operating losses in three years. While Slack expects higher-than-usual losses in the second quarter, that still amounts to only about $75 million to $77 million for the three months, even including expenses related to the listing.

Growth vs. Profitability

The high demand for IPOs by the likes of money-losing companies including Uber, Lyft Inc. and Beyond Meat Inc. proves that investors remain focused on growth prospects over profitability –- in the short term at least.

With Uber leading the pack with its $8.1 billion offering, 79 companies have raised $28.88 billion in U.S. IPOs this year, according to data compiled by Bloomberg. That includes five other listings topping $1 billion, including the $2.34 billion IPO by Uber’s ride-hailing rival Lyft.

With no lock-up period for a direct listing, Slack investors could be jittery about any updates from the company, perceived competitive threats or other risks.

Tiny Speck

In its filings, Slack has warned investors that it’s a relatively new business, launching only in 2014 after existing for several years as a gaming company called Tiny Speck. Its rocket-ship ascent has attracted plenty of investors, but gives new potential shareholders only a limited trajectory to study.

Another challenge for Slack is one that fellow mega startups like Uber have grappled with, namely whether they can move beyond the core offering that their early years of success were built on. While Slack has improved its product so that it can serve larger companies, many customers still consider it an easy-to-use, aesthetically pleasing workplace messaging platform, despite speculation that it could evolve into a catch-all portal for business applications.

One thing that could make Slack’s debut more unpredictable than Spotify’s is its investor base. Because the company’s ownership is more concentrated among fewer, larger shareholders, it could be more difficult to gauge the supply of shares that are likely to be traded, one person with knowledge of the process said. Both buyers and sellers may also hang back on day one to see how trading goes before getting involved: Just 30 million of Spotify shares changed hands in its trading debut, less than a third of the total available.

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