Spotify
Raises $1 Billion in Debt
Spotify,
the music streaming unicorn, is adding more cash to its war-chest to go up against
Apple Music and Soundcloud in the form of a whopping $1 billion in convertible
debt. Private equity firm TPG, hedge fund Dragoneer Investment Group, as well
as clients of Goldman Sachs participated in the funding, which is reported by
the WSJ. This money is greatly need as the startup continues to take the model
of rapid growth over becoming profitable, that Uber made oh so famous. As of
now Spotify has around 30 million paying subscribers to their premium service
out of 100 million users, but has seen its competition grown from the likes of
Apple’s music streaming service, which launched last summer and has more than
11 million paying subscribers, as well as from the audio platform SoundCloud
which announced this week that they will soon have their own on-demand music
subscription services.
Convertible
Debt?
So
before we get into explaining why Spotify decide to raise debt instead of
equity we must first understand what kind of debt Spotify is raising. Convertible
debt are bonds that can be exchanged for stock, but wait Spotify doesn’t really
have stocks in the sense of a public company type stock does it? Well this was
part of the agreement between Spotify and its lenders. Spotify is apparently telling
its investors that it plans on going public in the next two years, and this
deal between Spotify and its debt lenders come with the guarantee that this
debt can be converted to equity as 20% discount to the share price of its IPO,
and after that year, that discount increases by 2.5 percentage points every six
months. Adding to that Spotify is also agreeing to pay annual interest on the
debt starting at 5%, increasing 1% every six months until the company goes
public or until it hits the cap of 10%.
So
why Debt over Equity?
While
there can be various reasons on why Spotify decides to take the debt route, one
of the main reasons might be the fact that the company just can’t find funding
that would top its previous valuation of $8.53 billion. By taking on debt
Spotify can avoid a down-round, which means raising at a valuation lower than
the previous. By avoiding a down- round Spotify can keep its place holder on
its huge valuation in the midst of talks of a tech-bubble, and a volatile
market. Preventing a down-round also keeps employee morale high, because no
employee in public or private markets wants to hear that the value of their
companies’ stock has dropped.
Final
Thoughts
As
Spotify gears up for an IPO it will face immense pressure from its investors to
try and become profitable, as well as try to keep its valuation, in a public
market. While many people in the private markets might be indifferent to its
sky high valuation the public markets are not as friendly, as seen in the IPO
of Square and Box. Good luck Spotify I hope you can figure out a way for me and
80 million other users to pay for your premium services, while you do that I’ll
still listen to the next 30 minutes of uninterrupted music after listening to
some words from your sponsors.
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