by Paul R. La Monica
Spotify is about to make its eagerly anticipated — and bizarre — debut on Wall Street.
The company is going around the investment bankers and taking itself public. Nobody knows what the price will be when the stock starts trading.
But Mitchell Green isn’t concerned. He’s the founder and managing partner of Lead Edge Capital, a venture firm that has already invested hundreds of millions of dollars in Spotify at various prices over the past two years.
He believes Spotify is in a sweet spot because of its pure focus on music. He thinks worries about competition from Apple (AAPL) and Amazon (AMZN) are overdone.
“Bulls on Wall Street think Spotify can do $2 billion in operating profit in a few years. That’s a rounding error for Apple and Amazon,” Green said. “They have better stuff to focus on.”
$2 billion in profit would indeed be big bucks for Spotify. One Wall Street analyst predicts the company could be worth $43 billion or more — five times the valuation when Spotify last raised money from private investors.
Green agrees. And he thinks Spotify, with its more than 70 million paid subscribers worldwide, can keep making deals with major musicians that will set it apart from the competition.
Taylor Swift, for example, recently made an alternate video for her song “Delicate” and offered it exclusively on Spotify. Swift famously removed her music from Spotify and other streaming services in 2014 but made her back catalog available to them once again last year.
“Spotify is building an artist marketplace. There’s a reason why Taylor Swift dropped the new music video on Spotify first,” Green said. “The company’s core competency is music. The record labels and artists need Spotify. They have to work together.”
Even if Spotify proves immune to the threats of Apple and Amazon, there’s still that wacky direct listing to think about.
In a standard IPO, a company hires investment bankers to pitch the stock to new investors. The company issues new shares, and bankers first establish a price range before settling on a final price on the night before the stock starts trading publicly.
That won’t happen with Spotify (SPOT). Existing investors — the people who got in while the company was still private — will sell shares directly on the New York Stock Exchange.
Spotify’s founders, Daniel Ek and Martin Lorentzon, own more than 40% of the total shares. They also have something known as beneficiary certificates, which give them more voting rights.
Including those certificates, Ek and Lorentzon have a combined 80.5% say in any decisions that shareholders make about the company. That number will come down if Ek and Lorentzon sell a big chunk of their Spotify shares through Tuesday’s direct listing.
That’s because most big investors in the Spotify sale are not subject to so-called lockup agreements. Those agreements typically prohibit company insiders and other prominent investors from selling stock in an IPO for a period that usually lasts three to six months.
Ek and Lorentzon are free to sell some of their shares Tuesday. So are three firms with sizable holdings in Spotify: Sony’s (SNE) music division and the investment companies Tiger Global and Technology Crossover Ventures. They own a combined 18.2% stake.
The only major investor still subject to a lockup period is the Chinese social media giant Tencent(TCEHY), which owns a stake of more than 9%.
But Green said he’s not worried about Spotify’s decision to sell the stock directly on the NYSE. He believes that even if insiders sell, large institutional investors will jump at the chance to buy Spotify on Tuesday.
“Demand for the stock could be crazy. Big mutual funds will start buying the stock,” he said. “There’s really no difference between a direct listing and Day 181 of a lockup. Stocks don’t collapse after a lockup ends.”
That is true. But tech stocks in general have been sliding because of worries about the Facebook(FB) data scandal, President Trump’s feud with Amazon and the prospect of increased regulation.
So even if Spotify’s future looks promising, the timing for the stock sale suddenly looks delicate.