Origin of Spotify
Approximately 10 years ago, Spotify Ltd. was launched in Stockholm, Sweden and since then has gone to employ over 1,600 workers and has revolutionized the music industry. Spotify has over 50 million paid subscription based users and millions more ad-based users. Their network gives them a competitive edge over the competition.
Nonetheless, it is still a private company.
Still a Private Company
As the industry leader in online music streaming and with a valuation of $8.5 billion, it would seem as though Spotify should already be a public company. Many of its competitors, including Apple Inc. and Alphabet Inc., are already public companies.
There are several explanations for why Spotify hasn’t made an initial public offering (IPO) yet and why it is reasonable to believe that it will relatively soon. It is believed that they haven’t IPO’d yet since Spotify has yet to have a profitable year.
It has been operating in the red since the company’s inception. Even with their revenue for 2015 being $2.162 billion USD, the company reported a net income of ($192 million) for the year. In order to stay on top of its competitors, Spotify needs capital from investors.
In 2 rounds of funding in 2016, Spotify raised over $500 million and $1 billion for expansion purposes from investors.
Debt to Investors
But what does this have to do with Spotify going public? The money Spotify has raised from investors is considered convertible debt.
In short, this means that instead of giving investors equity of the company in exchange for their capital, they are taking a loan from the investors and paying interest on it until they decide to go public.
Additionally, these investors will be able to swap their securities for discounted shares of Spotify when it goes public. According to the Wall Street Journal, the deal states that:
Investors can convert the debt into shares at a 20 percent discount if the company has a public offering in the next year, with that discount rising 2.5% every 6 months Spotify doesn’t go public. Until then, Spotify will also pay a 5% interest rate on the debt.
Should One Invest?
With this being said, it is reasonable to assume that Spotify will make the decision to make an initial public offering within the next 12-18 months. But the question on every investors’ mind is that will it be sensible to invest in this company?
No one is sure and that is one of the beauties of investing, you have to take risks to make money. If you decide to invest, be sure to conduct your due diligence and correctly evaluate what you believe the stock to be worth.