It works! ~ On Spotify’s direct listing

People asked me about my opinions during Spotify’s first two trading day valuing it at $24B~$30B. At this point I only have one comment:

It works! Great!

“It”, obviously, means direct listing.

I had written a lengthy piece on my weekly Chinese column at the largest online media in Taiwan, Storm Media, when Spotify filed their F-1 form. (Unfortunately it’s in Chinese only). In the piece I analyzed the noisy financial numbers as well as the not-so-promising negotiation landscape against music right owners. I also went out on a limb to predict the company to reach a market cap of 30B€ in 10 years, based on an assumed terminal market share of a terminal overall music market, leading to a stable terminal ARR with a stable operating cash flow percentage , and an assumed zero growth.

While 30B€ in 2028 is not the same as $24B~$30B now in 2018, I think I was not that far off depends on your view of the discount rates. This is why I didn’t have any further comments post-IPO about its market cap when people asked me.

On the other hand, all VCs heaved a sign of relief after seeing that the volatility of the 1st day was surprisingly low, especially given the fact that there were no underwriters, no subscribers and no lock-up period for existing shareholders. This means direct listing can work and it’s gonna be a huge boost to the late-stage deals.

Bad news for investment bankers though. It used to be that startups go IPO early to raise money to fund growth. IPO investment bankers take a 5%~7% cut by helping them that. Now late-stage startups get ample late-stage capital from private investors and the only rationale left to do IPO is to create liquidity. Investment bankers would argue that traditional underwriting is the only way. Spotify tried direct and it worked, almost like a charm. This stripped away the argument that underwriting is absolutely needed.

The consequence is that there will be more startups going public via direct listing to create instant liquidity for all shareholders, while the investment bankers, relegated to a mere advisory job, will be making much smaller fees.

Having entered the industry during the dot-com bubble in the 90’s where IPO bankers made shit loads of fees without ever creating anything, I wouldn’t sympathize for them though.

Originally published at http://www.jmyang.com on April 5, 2018.