Spotify will prove a lonely pioneer with unconventional IPO
Music streaming company is rare in that it has the finances and brand to avoid traditional IPO
Being public is not as onerous as sometimes claimed. After all, Mark Zuckerberg wishes Facebook had floated earlier. Elon Musk frequently taps public investors for more capital without them losing patience in Tesla. Don’t like the idea of quarterly earnings calls? Neither does Jeff Bezos. He stopped showing up for them nine years ago. Amazon shareholders seem to have coped: the e-commerce company’s market value is now the third highest in the world at $750bn.
What has led to the dearth of initial public offerings is simply the glut of private capital — from sovereign wealth funds and mutual funds anxious not to miss out on the next big thing. At some point that unwinds. Consider Redfin, the online estate agent, which went public last July. “For three or four years there was a unicorn bubble: you could get a higher price for your stock in the private markets,” says Glenn Kelman, chief executive. Then the economics reverted to normal. “Fidelity and other shareholders told us we would get one price in a private placement and a higher price if we sold it in the public market. At that point we knew immediately we’d go public.”
How unpleasant is goingpublic? Certainly, the traditional route can be arduous and expensive. It is good for investment banks such as Goldman Sachs and Morgan Stanley, which typically reap fees worth up to 7 per cent of the IPO proceeds. It is good for well-connected institutional investors, which get to jump the queue and perhaps flip their allocation of stock for a quick and easy profit.
In search of a better way, Spotify is about to shun the traditional IPO with a direct listing which will see the music streaming company land, unceremoniously, on the stock market. Perhaps this is the model for future unicorns — but don’t bet on it. For all its arcane rituals, the traditional IPO has survived repeated attempts to disrupt it before.
“I do think the tech industry will be watching,” says Rick Kline, a lawyer at Goodwin Procter, who has worked on IPOs including Snap, the biggest of last year. But he cautions: “I have not had other companies ask me about it. There are only so many companies that fit into the bucket: large and prominent enough not to want the marketing and well-funded enough not to need the proceeds that an IPO provides.”
Redfin’s Mr Kelman praises the IPO roadshow, gruelling as it can be, as a good discipline. He says a chief executive should be able to explain the company to investors. If the story is not intelligible, perhaps there is something more profoundly wrong.
What about the bankers’ fees? “If the income you resent is investment bankers’ income you’ve got it all wrong,” says Mr Kelman. He is more sceptical of the earnings of “the people who buy stocks, and particularly people at hedge funds who buy stocks”. The lead bankers on the IPO — in Redfin’s case Goldman Sachs — do provide value, Mr Kelman says, “sitting through four months of drafting sessions, putting up with all your craziness”.
In a recent blog post, he mentions other services The price on the day of your IPO isn’t as important as some people thinkfrom Goldman: buying a cake for his chief technology officer’s birthday, for instance, and tolerating Redfin’s decision to avoid private jets. On the other hand, he reckons the supporting cast of bankers has it much easier: “Within the ranks of the people selling the stock, there are people in the syndicate that are fairly comfortable and well paid.” And Goldman is looking for fatter fees down the line from follow-on offerings and mergers and acquisitions advice. “They constantly remind you, ‘we’re not making much money on this one’.”
They are not making much money on Spotify, but they are making some. The irony is that even the alternative route comes with tolls to investment bankers to help prepare the direct listing. So why bother? Of particular appeal to Spotify, according to people familiar with the company’s thinking, was an ability to give earnings guidance to prospective investors and avoid the typical lock-up that delays some existing shareholders from selling stock. This may come at the cost of volatility.
Mr Kelman said he did not consider alternatives to an IPO. For one thing, Redfin wanted to raise capital, so Spotify’s direct listing was not an option. For another, he did not see the point of spending time designing different paths — such as Google’s 2004 Dutch auction. “The price on the day of your IPO isn’t as important as some people think,” he says. Only over the first couple of years will come the real test for Redfin, as for other newly public companies. “It’s going to become very profitable or it won’t — and our stock price is going to rise or fall accordingly.”