- 2018-10-12
Why did Spotify choose to go public directly?
The US initial public offering (IPO) market has gone wrong.
The IPO process that we are currently familiar with was born on October 13, 1971, when Intel raised less than $10 million through 64 underwriters. After financing, Intel's valuation is 58 million US dollars. But since 1971, the IPO has not changed much, and this process is no longer feasible in many key aspects. These aspects include the quiet period (restrictions on the information that the company can tell investors before going public), the prohibition on sales that prohibit employees from selling their own shares, and the scale of underwriting fees.
This is why Spotify, a streaming media service company where I serve as the chief financial officer, chose to go public directly. But the really important issue is the huge discounts that investors get from newly listed companies. Bankers told us that when setting prices for new shares, they must work hard to enable them to rise by 36% when they start trading.
This kind of increase is insisted by those institutional investors who bought shares of IPO companies in advance, in return for their risky purchases of untested company stocks. When popular stocks such as LinkedIn are listed, investors have doubled their profits in one day, and ADT's stock price plummeted in January, causing investors to lose 12%. From an economic point of view, it is reasonable for investors to make the above requirements, but the system punishes individual companies that are successful.
At Spotify, we chose a more free-market approach. Direct listing refers to the sale of stocks directly to the public, without the need to pay underwriters, who convene investors to buy stocks at a set price. Avoiding the lock-up period is a very important reason why we decided to directly go public on Spotify, but direct listing also has obvious financial benefits. First, we saved underwriting fees-ranging from 3.5% to 7% of the amount raised. But the greater cost savings is to avoid IPO discounts.
Think of it this way: the greater the increase in the closing price of your newly issued stock on the first day, the higher the "cost" of your IPO. It is investors who have bought stocks before the market opens that profit from rising stock prices, not the company.
Many news reports I read about Spotify’s direct listing also emphasized the fact that unlike many newly listed companies, we don’t need to raise capital to support growth. This is a fact. We have deliberately chosen a company development path so that we can go public without raising additional funds.
Other companies may not have such luxury, but they can still benefit from direct listing. Please see the reason. Deciding whether a company needs financing is an important strategic issue. The question of whether a public listing is required is also. But mixing the two is wrong. Financing through an IPO is a completely tactical decision and should be weighed against all other financing options applicable to both unlisted and listed companies. The cost of many other options is much lower than that of a traditional IPO. If you want your company to go public, it's a different issue-one that should not be just about financing.
For example, at Spotify, if we need financing today, we believe that we can sell new stocks in the public or private market at a discount of 2% to 4% below the fair market value and pay 1% to the investment bankers we hire Consultant fees.
We can also sell convertible bonds, or both. Any company that chooses to go public instead of a traditional IPO can do the same. There is no reason to think that listings must be taken into consideration when a company decides how to obtain growth funding.
The main challenge after the listing of streaming music service Spotify is to prove that it is a company that can continue to operate, rather than "a castle in the sky." In the future, in the face of competition from financially strong technology giants such as Apple, Amazon, and Google, can it maintain its dominant position in the streaming music field without burning money?
In its listing application, the company disclosed that it had incurred significant operating losses in the past few years and warned investors that it may take some time to generate profits on a sustained basis.
Spotify said that from 2015 to 2017, its operating losses were US$290 million, US$430 million and US$466 million, respectively. This is the cost that the company attributed to the licensed content and had to pay royalties to music labels, publishers, and other copyright holders (such as composers). That is, Spotify's revenue increased by US$2.37 billion in 2015, US$3.6 billion in 2016, and US$4.99 billion in 2017. This shows that there is potential-even if it may take a while to achieve profitability.
Spotify's opening price was $165.90, and 5.6 million shares were traded in the first transaction. This puts the company's total valuation at only US$30 billion, US$7 billion more than financial analysts and experts initially expected. Although Spotify's opening day on the New York Stock Exchange ended at a price of US$149.01 per share, it was still 13% higher than the initial reference price of US$132.
The advantage of Spotify is that it is the largest streaming music service with 157 million monthly active users, of which 71 million are paying users. Most importantly, Spotify said that the annual growth rate of paying users reached 46%, and the annual growth rate of monthly active users was also 29%. In contrast, Apple’s Apple Music has 36 million paying listeners, and Amazon’s Amazon Music just says that there are "tens of millions" of paying subscribers. The challenge for Spotify is to continuously introduce new users while turning existing users into paying users, so as to continue to maintain its lead over competitors.
In order to do this, Spotify's strategy is roughly the same as that of other technology companies: continue to invest in artificial intelligence and machine learning to make its services more intelligent and personalized. The company showcased some of the results of this research, such as the "Discovery Weekly" launched in 2015, and recommended new music based on your listening habits. People like this feature so much that Pandora, a streaming media service that is also publicly traded, decided to launch its own version.
Spotify co-founder and CEO Daniel Ek said: "Public performances should not change Spotify’s mission: "By giving one million creative artists the opportunity to make a living from art, billions Fans of have the opportunity to enjoy and be inspired by it. But this is easier said than done, because sometimes Spotify must make a decision to appease shareholders, not users. This is the risk that every company has to take when it goes public. "