Spotify is, as of today, officially a public company. If its unusual "direct listing" approach is successful--as some analysts predict--it could herald a new wave of technology startups eschewing Wall Street investors, and the more traditional IPO. Shares soared in initial trading, opening at $165.90 apiece for a $29.5 billion valuation, and closed 10 percent lower at $149.01.
Technology entrepreneurs are watching closely. "The takeaway is that if [the direct listing] is successful, and Spotify is able to raise the amount of capital they think they can, other entrepreneurs will consider this," says Jay Sukits, a finance professor at the Joseph M. Katz Graduate School of Business at the University of Pittsburgh. "Tech founders will see that they can walk away with all of the capital, and don't necessarily have to pay an investment bank to take them public. That's a big deal," he adds.
Unlike with a traditional IPO, Spotify is not issuing new shares, but rather selling a large portion of its existing stock. And instead of hiring investment banks to find pre-qualified buyers to purchase the shares, the company is issuing that stock directly to the public.
Spotify CEO Daniel Ek, who launched the company in 2006 in his native Stockholm, Sweden, insists that the public debut is not a financing event--and that the business does not need any more cash to continue growing. "Spotify is not raising capital, and our shareholders and employees have been free to buy and sell our stock for years," Ek said in a blog post on Monday. "While tomorrow puts us on a bigger stage, it doesn't change who we are, what we are about, or how we operate."
A convergence of factors unique to Spotify could position it for success in the weeks to come. The company, which generates revenue through advertising sales and paid subscriptions, captures as much as 40 percent of the streaming market with more than 71 million paying subscribers, according to the company's most recent F-1 filing with the U.S. Securities and Exchange Commission. Spotify says it is on track to generate $6.5 billion in revenue this year, up some 30 percent year-over-year. Although the company remains unprofitable, racking up $2.8 billion in losses over the past five years, CFO Barry McCarthy has noted that operating losses have actually decreased as a percentage of revenue. "I think Spotify will be received very well," noted Brian Hamilton, the co-founder and chairman of Raleigh, North Carolina-based research firm Sageworks, in a CNBC interview ahead of the listing.
Still, the business faces steep competition from tech giants including Apple, Google, and Amazon, which have the benefit of a built-in customer base, and hardware such as the Amazon Echo, to lure new users to their respective streaming platforms. Although Apple Music only counts around 38 million active users--or roughly half that of Spotify--its share of the market is growing at a rapid pace, particularly in the U.S.
There are drawbacks to this method of going public, meanwhile, that founders are wise to consider before following suit. For instance, although Spotify is potentially saving millions in underwriting-related costs, it means there is no third party to step in and stabilize stock price if something goes wrong. In its F-1 filing, Spotify goes so far as to note that "our listing [does not have] the same safeguards as an underwritten initial public offering," which the company says could result in volatility.
In the long-run, says the Katz School's Sukits, founders are wise to watch the issuance closely. "The downside to all of this is that it may be an unsuccessful IPO," he tells Inc. "Maybe they don't get the distribution they need to raise the amount of funds they would like to raise," he adds. "It's hard to say because this is so unprecedented."