Spotify may be getting impatient, and that's good news for investors.
Rather than selling shares in the world's largest music service in a traditional IPO, Spotify may sell stock in the company through a process known as a direct listing, according to a source close to matter.
Rather than hiring bankers to serve as underwriters for a typical initial public offering, a direct listing would allow the company's original investors as well as founders such as CEO Daniel Ek and some stock-holding employees to directly sell their stakes to the public.
A direct listing would cede the discovery of that opening price to market forces rather than allowing bankers and institutional investors to set an opening price. The story that Spotify is considering a direct listing was first reported by MergerMarket; Spotify declined to comment on the story.
"Spotify must be very confident that they can raise enough interest from investors without investment banks to do that for them," said Josef Schuster, founder of IPOX Schuster, a Chicago IPO investment firm. "That could save a lot of money if they go that route."
Banker fees for an initial public offering usually range between 6% to 7%, Schuster said. For a company like Spotify with a valuation between $8 billion and $10 billion, avoiding those costs could save Spotify as much as $100 million, he added. A direct listing would also enable Spotify to list its shares more quickly than having to wait for an IPO.
A direct listing could come as soon as the fall, whereas an initial public offering isn't expected until sometime in 2018.
If Spotify's interest in a direct listing is genuine, it would also demonstrate that the Swedish company isn't in need of the kind of cash that is typically raised by issuing new shares and selling them via an IPO, said Santosh Rae, an analyst at Manhattan Venture Partners, a venture capital firm.
The downside to a direct listing is that bankers can convince their institutional investor clients to buy into an initial public offering, thereby lending stability to a given stock. Without such investors, trading can become volatile, Rao added. Normally, direct listings are used by small companies that don't expect much trading in their shares, or anticipate a big jump in their value.