Spotify Direct Listing: 1-Year Anniversary

Michael Wenner
Apr 4th, 2019
A successful startup lifecycle runs through the humble inceptions from a determined founder and a single laptop to a multimillion-dollar exit. Out of the many ways a startup may exit, the one that every founder dreams of is seeing their company come across the ticker tape at a national stock exchange, marking their public debut. Traditionally, companies go public through an IPO (initial public offering) where they issue new shares to raise massive amounts of capital that will fill the company’s coffers. On the downside, an IPO also means that the private shareholders, consisting of founders and early stage investors such as VCs, are diluted and must wait for the lockup period to expire to exit.

This presents a conundrum to companies that don’t necessarily need to raise new capital or want to dilute ownership but still want to provide shareholders with the ability to exit their investments through the public stock market. On April 3, 2018, it appears these companies got their answer: they can mimic Spotify by pursuing a direct listing.

Why did Spotify go the direct listing route?

There are likely a couple key reasons. For one, they were already generating positive free cash flows before the listing, and thus did not need to raise capital. Moreover, by listing directly, they were also able to save the large fees usually charged by investment banks as well as enable their early stage investors to cash out without enduring the lockup period before selling their shares.
Source: YCharts; Market Data as of 4/3/2019

On the first day of the listing, Spotify closed just over $149 per share, beating the reference price of $132 set by NYSE. This allowed their private investors to realize a sizable return on investment as private trading reportedly ranged between $37.50 and $125 per share during 2017. We wrote a bit about our investors’ returns at that time here. With favorable Wall Street forecasts and a partnership with Samsung, Spotify was able to climb to an all time high of $198.99 in August 2018. Since then, several lower than expected quarterly results have brought the share price back down to the current $140-145 range.

What is the legacy of the direct listing?

With so much dry powder ready to be deployed in the private markets, startups are able to stay private for many years before they have to tap the public markets for additional capital. In fact, startups have raised so much private capital that now direct listings are a possibility for an ever-growing number of companies that don’t need additional cash. In just a year since Spotify’s IPO, two of Silicon Valley’s most revered unicorns, Slack and Airbnb, are reportedly exploring direct listings (although neither has confirmed nor denied the rumors). Until another major unicorn successfully executes on a direct listing, it is unknown whether Spotify has begun a trend that will allow startups to cut out expensive investment banking fees and offer immediate liquidity to their private market shareholders. Nevertheless, Wall Street firms will be watching Slack and Airbnb closely with disappearing profits on their mind.
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