[Recall that Spotify is not doing a traditional IPO, but something called a “direct listing.” The difference between the two is a bit down in the weeds, but is crucial. In a traditional IPO (sometimes called a “full commitment underwriting”) a group of investment banks or the equivalent form an “underwriting syndicate” that buys new shares from the company at a valuation set by the underwriters. Hence the “pricing” concept for IPOs–you will hear that right before a new company starts trading. If the path to an IPO has been managed correctly, the underwriters’ valuation is higher than the last private valuation of the company’s last sale of its preferred shares to private investors.
The underwriters want to price in a range that they can resell to retail investors, so they wouldn’t ever price at $1,000 for a stock that is to sell in the open market. Think about it–how long did it take Amazon and Google to get to $1,000 in the open market? They didn’t start there.
Another reason–which I suspect is the true reason–that Spotify is not going the underwritten IPO route is because they can’t get the valuation they want. This may have something to do with another aspect I believe to be true–Spotify is not cracked up to be a public company.
Chris O’Brien in Venture Beat has a really insightful post on Spotify’s problems with valuations:
The reality is that by taking this route Spotify is pursuing a risky strategy. And it’s likely only doing so because it was backed into a corner by its investors and by private fundraising that led to a dangerously high valuation of $19 billion.
“This is not a story of problems in the IPO market,” according to Kathleen Smith, a principal at Renaissance Capital and manager of IPO ETFs. “It’s a problem with Spotify’s valuation.”
So let’s be honest–the reason why Spotify wants to trade publicly has a lot more to do with Daniel Ek’s misplaced ego than it does with any intrinsic value of his company. And don’t forget–when the dust settles, it is his company and this was his idea. Genius or goat, he will get the credit.
But of course Spotify’s “public or bust” approach is really designed to allow existing stockholders to cash out. And here’s the twist–if you’re going to sell, someone has to buy. And if you don’t have underwriters standing behind a price point, then there is no floor to the stock price if the sellers start running for the exits.
So–Spotify is trying to look to existing private market sales–very limited and nothing like public market sales–for guidance on its stock price. (Private markets are sometimes called “secondary markets” where you can buy private company shares.) Maureen Farrell in The Wall Street Journal has some reporting on this which is both murky and enlightening coverage of who Spotify is “managing” (some might say “manipulating”) its stock price already. And if you wonder what running for the exits looks like, check out the VIX crash.]
Spotify AB is counting on its surging private-market value to bolster the music-streaming service’s appeal to investors in an unorthodox public debut that could be the biggest since SnapInc.’s $20 billion IPO last year.
The listing, expected as soon as the end of March, isn’t an initial public offering, in which underwriters set a price and place shares with chosen investors before trading. Instead, the Swedish company will simply float the shares on the New York Stock Exchange and let the market find a price, in what is known as a direct listing.
While Spotify and its advisers are still determining how exactly the process will work, the company and its banks are expected to have a role in helping guide the market to a price and connecting buyers and sellers initially, people familiar with the matter said. A suggested price range is expected to be relayed to the market before trading starts, but the price will ultimately be set by what buyers are willing to pay and the price at which sellers part with their shares.
Private trading is expected to be a key part of the company’s effort to guide the market to a price, people familiar with the matter said.
The so-called secondary markets in private technology stocks are typically an afterthought in an IPO, in part because trading tends to be thin and not always a reliable indicator of value. But Spotify and its advisers at Goldman Sachs GroupInc.,Morgan Stanley and Allen & Co. are closely watching trades among private investors and have taken steps to spur volume, the people said. The company recently informed existing investors that it waived its right to buy shares before they are offered to others.