By now we've grown accustomed to gigantic tech unicorns mounting bloated and unconvincing IPO pitches to ultimately disappointingends. But leave it to the Swedes to subtly undercut our cynical expectations:
Music streaming giant Spotify confidentially filed IPO documents with the SEC at the end of December, Axios has learned from multiple sources.... The direct listing means no road show or other typical IPO accoutrements — including some of the Wall Street fees, although several investments banks are involved.
For those unfamiliar with the obscure practice, a direct listing is an IPO without the “O.” Spotify's previously private shares will become legally tradable, but the company itself won't be allocating any new shares to banks to offer up for the ravenous masses. Instead, all that will happen is that whoever currently owns Spotify stock will be able to offer it on public markets if they so choose, and slowly Spotify will begin trading like any other stock.
The whole thing is sensible and restrained in a way that only a bunch of Scandinavians could devise. The fact that it will frustrate the tech press – which champs at the bit for IPO-related scoops – as well as investment bankers – whose most highly remunerative services have been deemed inessential by one of the biggest startups out there – only reinforces how smart a move it is. Even if it's an anticlimactic exit for a company that has elbowed aside behemoths like Google and Apple in its quest to reinvent how we listen to music, it's understandable why Spotify would want to avoid the bullshit dog-and-pony of the IPO roadshow and the clusterfuck of an overhyped public offering.
All that wisdom aside, though, the Spotify public listing is still – if only by default! – a pure sell signal.
Why do big unprofitable tech startups do IPOs? There are tons of reasons, the most obvious of which is “raise money.” But public offerings are less pressing in a world where Masayoshi Son will give you a billion dollars if you so much as hand him a napkin with the letters A.I. scrawled on it. Maybe if you're Blue Apron you need an IPO to stay afloat, but plenty of unicorns can afford to go the Uber route of eternally delayed IPO, at least as long as interest rates remain relatively accommodating and VCs stay generous.
The most basic reason for a company to IPO is to cash out. Founders, equity-holding employees, angel investors – everyone gets itchy to sell once a valuation is sufficiently stretched. This incentive obviously doesn't feature prominently in road-show presentations, but practically speaking it's one of the strongest catalysts for a company to go public. People wanna get paid.
In ordinary IPOs, there's some balance between this unspoken remunerative motivation and all the stated reasoning, whether it be raising cash to expand or reducing the cost of capital or whatever. But for Spotify, these other motivations don't apply so much. Since they're not raising any money, the most pertinent motivation is that insiders want to cash out.
Ordinarily, insider sales are a sell signal, if a weak one. It could be that executives are dumping stock because they're privy to bad news or else doubt the price can rise much higher. Or they could just need to free up some cash to buy that private estancia in the Argentine pampas they've always wanted. Single sale offers little information; a pattern of sales becomes a signal.
Spotify's reported direct listing will, by default, fall in the latter category. For there to be any appreciable demand, lots of insiders will have to offer up lots of stock. Clearly Spotify expects lots of stock to be forthcoming, or at least enough to get the thing trading. Perhaps trading volume will remain low and Spotify stock will begin its public life in a whirlwind of volatility, as Matt Levine predicts. But whatever happens, a public Spotify will be borne upon a wave of insider sales.
This isn't to say Spotify, as company or investment opportunity, is bad. Aside from losing hundreds of millions of dollars a year, it's a promising enterprise, satisfying a broad and growing demand for ubiquitous and inoffensive background music. But its direct listing is an odd paradox, a gesture of seeming prudence that really just boils down to the mundane desire to cash out with no other compelling justification. Either way, it's hard for potential investors to get riled up about it. And maybe that's the point.