Posted on April 3, 2018
Spotify, the popular music streaming service, has never turned a profit. In 2017, it posted an operating loss of $461 million. Now it wants investors to value the company above $20 billion, going public with an unconventional approach: direct listing.
The 12-year old company eschewed the standard Initial Public Offering (IPO) playbook. Rather than ring bells, blitz media, and sell to institutional investors in advance of the first day of trading, Spotify let its existing shareholders offer holdings directly to the market.
Spotify is not raising capital. Its shareholders and employees have been free to buy and sell the company’s stock for years now. Founder and CEO Daniel Ek sees a direct listing as a natural next step to a larger stage. He has taken a zen approach to the listing. It’s business as usual—nothing to get too hyped about, and it’s “just another day in our journey to fulfill our mission.”
This approach is both novel and controversial. It’s not how a tech company goes public. Which is why the approach has generated significant earned media. I’m now questioning the age-old advice that communicators should never talk strategy, they should do strategy. Sometimes the process is the story, and it’s one worth telling. And in this case, the story might be bigger than Spotify.
Spurned bankers are hoping Spotify fails for failing to see the risk of listing directly. Convention has it that you need bankers to help the company secure an appetite for its shares. Failing to do so could result in wild trading activity in the first few days and weeks— or worse, a cratered stock price within months. It’s a risky move that will prove to be an act of genius or arrogance.
That, or we’re reading too much into this — it could be just a practical decision. If the company doesn’t need to raise capital, why waste time and money on fees and distractions? As a popular consumer brand, Spotify feels it has a good pulse of its value. It also has years of private trades under its belt, so it’s not going into this completely in the dark.
The move could shift the dynamic between Silicon Valley and Wall Street. The power balance has long favoured Wall Street. As Spotify writes a new playbook on how to go public without Wall Street, tomorrow’s tech startups may follow Spotify’s lead. If this hasn’t sent shivers down the spine of the Wall Street establishment, it should. Not because this is a middle finger to Wall Street—but because it’s more of a shrug. And that’s much more offensive. Why? Because the New York Stock Exchange changed its own rules to allow the listing. That’s huge. Spotify didn’t have to play by Wall Streets rules, it played by its own. You can’t get more Silicon Valley than that.
It will take time—lots of time—to know whether Spotify made the right call. We should remember that past attempts at IPO alternatives by tech companies appeared disastrous in their early days. In 2004, Google sold shares in a Dutch auction. The move was interpreted as a disaster at the time. It priced its shares at $85, which was considered the low-end of its price expectation of $85-$95. Behind the scenes, the company was hoping the shares would sell closer to $108-$135. It closed that first day at $100.34—respectable, but not the boom the company wanted. It was considered a disastrous start. But it would turn out to be the stock that woke the market up as more consumers understood and used the Google product. By the end of the year, the stock doubled. Today, the stock trades 10 times more than where Google’s shared closed on that first day.
In hindsight, Google didn’t need to a wildly successful IPO. Perhaps Spotify doesn’t need one either. Spotify is part of a growing trend of private companies that can comfortably avoid selling shares to the public because they’re more than capable of raising money on their own.
Like Google, Spotify offers a product that consumers access multiple times a day, across devices, in and outside of the home. The user experience is filled with hits of dopamine. For many, it’s an essential app, as essential as toothpaste, heating, and transportation. As we continue to migrate our lives to the cloud, we build affinity with the apps and services we use every day. That has long been the sweet spot for traditional companies, and if Spotify is breaking new ground for tech companies, it will be the sweet spot for tomorrow’s tech stars. They can focus on building their user base, grow as a private company, and go public on their own terms. A good product, an addictive user experience, and a good story. That could be tomorrow’s ticket to Wall Street.