Spotify is no stranger to our generation. It has revolutionised the way people listen to music since its launch in 2008 October. Currently, Spotify provides its freemium service in 66 countries. Spotify went public in 2018 April. The initial offering of Spotify opened at a $165.90 per share, resulting in the total valuation of $29.5 billion.
The total valuation of Spotify is indeed an excellent achievement, and only a few have achieved it. But the way they went public was even noteworthy. They used the direct listing method to go public. In that way, they bypassed the Wall Street bankers.
Spotify's Direct Listing
We know how a traditional IPO works. The company hires an investment bank to handle the IPO. The banks offer bids to companies on how much money the company will get and how much the bank will get. This whole process of banks handling IPO is called underwriting. The idea of direct listing is removing these banks and selling shares directly to the buyer. The direct listing of Spotify was a further different version. Usually, spin-off companies or companies trying to come out of bankruptcy works direct listing. A huge company such as Spotify pulling off direct listing was possible due to two reasons. Spotify had positive cash flow, and their service was well-known worldwide. This unique situation enabled them to skip marketing for investors. According to Spotify, they choose this approach to ensure liquidity for their shareholders and provide equal access to buyers and sellers.
How It Went
When Spotify announced their direct listing, we were promised volatility. But that didn't happen. A quarter after the listing, the performance looks pretty standard. This actually can be argued to be a success. But, while listing in New York Stoke Exchange, Spotify claimed their share value would be more volatile than any underwritten IPO, and we are still on hold for that to happen.
However, Spotify succeeded in cutting out Wall Street giants from taking advantage over Silicon Valley startups. This would remain a success story for many startups to surpass big bankers. Spotify succeeded with 40 per cent growth after three months of their listing. Even though the volatility claimed by them wasn't there, they did not nose dive as predicted by many.
How Much They Saved?
Morgan Stanley was the company who advised Spotify on this matter. They reportedly charged around $35 million. With a valuation of roughly $29 billion, the usual process would have cost them $196 million at a rate of 7 per cent of the raised amount.
Well, is it the best way to make your company public?... I can't say yes. The Spotify had a fair amount of advantage to carry out a direct listing of this size. They were not seeking to raise additional capital. They were offering liquidity to the current shareholders. The 140 million users of Spotify allowed them to be a well-known brand among the investors. This brand recognition is actually what you get when you hire an investment banker. As long as you can these issues, you can try for a direct listing.