The finance industry isn’t exactly known for its dynamism, and more often than not, surprises are bad. But there is something of a critical mass forming in the tech industry as private company valuations continue to rise. This has many investment banks salivating at the prospect of bringing a giant such as Uber public via an IPO, but the anticipation may be met with disappointment. Spotify has stated that it is planning to go public by the end of 2018 Q1, but they are eschewing norms and opting for a direct listing, prompting some unpleasant questions about the future of IPOs.
A direct listing is a type of offering where the company offers its securities directly to the public in order to raise capital; or, as Erin Griffith puts it so clearly, “If an IPO is like a wedding, a direct listing is running off to elope. A faster, easier, cheaper route to the same result.” But, there are pitfalls to eloping, while the result is less of a hassle, you may create a disconnect between yourself and your family – in this case, the markets. With a direct listing, Spotify places themselves on a stock exchange, typically the NASDAQ or NYSE, without having to appeal to an investment bank for underwriting but allows the market to create their stock price through simple supply and demand.
A direct listing is a type of offering where the company offers its securities directly to the public in order to raise capital
A direct listing seems to be the right move for Spotify, they’re a very well-known tech company with high potential for future expansion and seemingly exponential growth opportunities given ubiquity of streaming technologies. We know the inherent benefits of a direct listing, it’s cheaper and faster, but what’s the stipulation, why don’t all companies do this? The largest threat is simply the volatility of the stock price. Traditionally, investment bankers and underwriters of the like will create a demand for the share and set the price, but in this case it is entirely up to the market. The only tangible difference between a direct listing and an IPO is that there is no closing price the day prior to opening.
If all goes well Spotify could be the spark in the proverbial powder keg that is Silicon Valley. The number one issue for any growing business is cash. Rather than looking for angel investors, venture capitalists, or offering SEOs, if Spotify succeeds with their direct listing other tech startups will look at public offerings to be a viable option for funding.
If Spotify succeeds, it may very well lead to a trend of direct listings, making a primary function of investment banks – acting as an intermediary between investors and corporations, increasingly obsolete.
Ok, but how does this relate to me? That’s a fair question. Well, Spotify could be a trendsetter, a Virgil Abloh of the finance world; they could be changing the way we look at the stock market, especially with regard to investment banking. If Spotify succeeds, it may very well lead to a trend of direct listings, making a primary function of investment banks – acting as an intermediary between investors and corporations, increasingly obsolete. Meaning, for those wanting to go into investment banking a successful listing could lead to fewer jobs or altering priorities in the banking world. For startups, every dollar matters; if they can cut costs, they will, and this listing will either result in a fairy or precautionary tale regarding the future of startup funding. Whether or not this is a good move for Spotify is to be determined, but, one thing is for sure, the investment world will have their collective eye on that Spotify ticker come opening day.