Spotify avoids stock market to raise $1bn debt

Music streaming service Spotify has followed Uber’s lead by choosing to raise $1bn (€880m) in convertible debt, instead of a more traditional round where investors buy shares.

Spotify will now hope its valuation rises from here, just as that of the taxi-hailing app has done since it issued convertibles last year.

Otherwise, the Sweden-based firm will have given private equity firm TPG, hedge fund Dragoneer, and Goldman Sachs clients a sweet deal at the expense of its own founders, venture backers, and employees.

According to the Wall Street Journal, the debt comes with strict terms, namely that if Spotify goes public in the next year TPG and Dragoneer can convert to shares at a 20% discount to the IPO price.

If it doesn’t, that discount will start increasing.

There’s also a coupon — a feature more common to private equity than venture funding — which means Spotify must pay 5% interest a year.

This too will rise after a year, by 1 point every six months until the company goes public.

So why did Spotify do this? It probably wanted to avoid a “down round” equity funding, valuing it lower than the $8.5bn ascribed in June.

Investors have been pushing back on sky-high valuations for fast-growing, loss-making tech companies, hurting both publicly listed ones as well as private peers.

Fidelity has marked down Spotify shares by 27% since August, wrote Wall Street Journal.

So Spotify is betting it will be worth more after a year than now, making the exacting terms of the convertible more palatable than selling equity.

Despite Apple Music’s launch last year, Spotify remains the biggest streaming service with a presence in about 60 countries.

It has 30m paying subscribers and about 100m who listen free with advertising, compared to Apple Music’s about 10m paying customers.