Reading: Alternative Going Public Strategies

The preceding considerations imply that a direct listing is most likely not the listing strategy of choice for the "typical" firm. But it could be suitable for so-called "unicorn" companies. These are privately held startups that are valued at over $1 billion. 

Because of the "magic" that often surrounds these firms, they receive significant publicity and are closely followed and admired by many (potential) investors. Very often, they are also backed by well-known and reputable venture capitalists or private equity companies and therefore generally have good capital market access. These firms do not need to go public to raise capital—they can raise it privately.

For "unicorns," the previously described information asymmetry might therefore be less of a challenge. To the extent that they fulfill the listing requirements set by the stock exchange, they might therefore indeed opt for a direct listing.

Spotify's Direct Listing in April 2018

A prominent example of such a unicorn is the going public of the Swedish music streaming giant Spotify on the NYSE in April 2018. The firm shocked the investment community by opting for this much rarer listing strategy than the traditional IPO.  

Relating to the points mentioned above, there two main reasons why Spotify could pursue this route successfully:

• Lower information asymmetry: With more than 70 million subscribers, Spotify was the world's largest music streaming service at the time of listing. With its global brand and a product that is well-understood by the market, there was no big need to explain the firm to potential investors. 
    
  
• No immediate cash need: Moreover, the firm was cash flow positive at the time of listing. There was consequently no immediate need to raise capital to finance growth.

Moreover, the founders of Spotify argued that a direct listing is fairer and more transparent, as it does not involve a primary market on which the underwriting syndicate can allocate shares with great discretion to its favorite customers. With a direct listing, all investors (and shareholders) have the same rights and opportunities to buy and sell shares. 

The founders of Spotify were also willing to accept the greater valuation uncertainty that is associated with a direct listing. Since there was no bookbuilding, no "issue price," and no post-listing support from the underwriters, there was considerable speculation among investors and the press about the "fair" price of Spotify's shares:

• In its filings, the firm indicated a price range of past transactions between $90 and $132.5 per share. This corresponds to an almost 50% range! 
   
• One day before trading started, the NYSE then indicated a reference price of $132 for Spotify's shares.
   
• The next day, actual trading started at $166 and the stock then ended the session at $149, or approximately 13% higher than the indicated reference price.

However, the founders of Spotify were not especially concerned about these short-term fluctuations in the price, as their focus was on the longer-term valuation of the company. They were convinced that the market would succeed at valuing the company so that trading would normalize quickly.