Spotify has successfully raised $1bn in convertible debt from investors, setting the clock ticking on its long-awaited IPO in the process.
Private equity company TPG and hedge-fund Dragoneer Investment Group are the main investors, plus clients of Goldman Sachs, according to the Wall Street Journal, which outlined the conditions attached to the deal.
It’s all about the IPO: if Spotify goes public within a year, the investors will get a 20% discount on converting the debt into equity – but that discount goes up by 2.5% every six months after that time.
“Spotify also agreed to pay annual interest on the debt that starts at 5% and increases by 1 percentage point every six months until the company goes public, or until it hits 10%,” reported the WSJ, adding that Spotify has told investors it intends to go public within two years.
There are some interesting leaks around the margins of this story: both the Journal and TechCrunch have been told by sources that Spotify had plenty of cash in the bank ($600m said the WSJ, and €570m said TechCrunch).
It’s clear that Spotify wants to be seen as acting decisively to swell its reserves for opportunities ahead, rather than be seen – as some critics do – as a company haemorrhaging money in a race against time to go public before deeper-pocketed rivals force it out of business.
Taking the optimistic view, what are those opportunities ahead? Talk is inevitably turning to acquisitions, although some of the mooted targets – Pandora, Tidal, Vevo and SoundCloud notably – might bring market share at the expense of focus at a crucial time for Spotify.
We’re more interested in what smaller, smarter acquisitions could bring to Spotify, remembering how past purchases of Tunigo and The Echo Nest presaged the company’s current efforts around programmed playlists and personalisation. From direct-to-fan platforms to machine-learning, there are plenty of intriguing areas to shop in.
General costs, from finally launching in Japan to settling publishing lawsuits to commissioning more original video content to sealing its (overdue) next round of licensing deals with major labels, can’t be ignored as a use for the latest cash injection.
Plus, as Spotify tries to reach an ever-more mainstream audience at a time when some of its main rivals – Apple Music and Google Play / YouTube – are preloaded on the two dominant smartphone platforms, marketing costs will only increase too.
There is no shortage of things for Spotify to spend its $1.6bn cash reserves on, then. But the main point remains the ticking clock for that IPO, with 2017 now looking the most likely year for Spotify to go public.