3 Lessons for Entrepreneurs From Spotify, Which Won Over Taylor Swift and Just Made its Billion-Dollar IPO Shares of the streaming service opened at about $165, valuing the company at close to $30 billion.
By Hayden Field
As the bell rang Tuesday morning at the New York Stock Exchange, music streaming giant Spotify went public in a historic move for the music industry. Company shares opened at $165.90, the cost of about 13 physical CDs, or close to 130 songs on iTunes. The opening price pegged Spotify's market value Tuesday morning at close to $30 billion.
When CEO Daniel Ek launched Spotify in 2008, his business plan shook up the industry. Music streaming revenue in the U.S. has multiplied more than elevenfold since 2010 -- growing from around $500 million to, in 2017, roughly $5.7 billion -- and experts say there's likely no going back. Ek's business plan hasn't changed much since its original incarnation -- the idea that consumers either listen to ads or pay a regular fee for access to essentially all music. The company's $1 billion "IPO" isn't traditional, either.
For the moment, the company's big move, seen by some in the industry as a gamble, seems to be working out. About 30 million outstanding shares of Spotify's 178 million total were traded on Tuesday, and the price dropped just around 10 percent. By the end of day, the company's market value was close to $27 billion, and as of Wednesday, Ek's shares (about 9 percent of the company) were worth $2.3 billion.
Here are three lessons you can learn from Spotify after its big day.
1. Don't be afraid to take a nontraditional approach.
Spotify's "IPO" is actually called a "direct listing." Instead of a traditional IPO, which involves more middlemen in the form of investment banks and institutional investors, Spotify is choosing to allow existing shareholders to sell their shares to potential buyers immediately. Spotify's direct listing also allows shareholders to sidestep the traditional 180-day lockup period and see an immediate return.
As for why the company went the nontraditional route? Most companies raise capital and use IPO proceeds to fuel growth, but "Spotify doesn't need that -- it has plenty of cash on its balance sheets," says Matthew Kennedy, IPO market strategist at Renaissance Capital.
The company's five reasons for going with a direct listing align largely with its core values. For example, instead of preferred access to bankers, a direct listing grants equal and simultaneous access to the public. It also doesn't hurt that this plan should save Spotify roughly $35 million in fees, Kennedy says. But although the likes of Airbnb and Uber might sit up and take notice, he warns that a direct listing likely isn't the best choice for the majority of tech companies. The insurance that a traditional IPO and its underwriters provide can be important for stability -- especially if the company isn't a household name.
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2. Do something differently -- or better -- than everyone else.
Almost 377 billion songs were streamed in 2017, up more than 50 percent from the previous year, according to a report by BuzzAngle Music. That number left song sales in the dust. As the world's largest music streaming service, Spotify is leading competitors including Apple Music and Pandora -- and although it wasn't technically the first of its kind (Napster launched in 1999), the company aimed to revolutionize music streaming with easier access for consumers and a new idea for turning a profit.
That kind of "different or better" approach is a good way to frame your own business idea, and one key is often finding your niche and solving a chief problem. For example, Netflix's original incarnation -- allowing consumers to rent and return movies via snail mail -- capitalized on a problem in the industry and offered a solution.
"Spotify's done that as well," says David Brickley, host of Entrepreneur Wrap and CEO/owner of STN Digital. Sit down and think about the problems in an industry you know well, then brainstorm solutions. "You have enough coffees with people, [and] you start to hear the same problem over and over again in the industry," Brickley says.
Once you've got a business plan, practice your elevator pitch that clearly details why your idea is different and which problem you're solving.
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3. Turn adversaries into allies.
Singer Taylor Swift made headlines in 2014 when she pulled her entire music library from Spotify over a revenue conflict. Since then, she's reinstated her songs on the streaming service -- and last week, she announced that the music video release for her song "Delicate" would only be available on Spotify. Turning a business opponent into a partner isn't very common, but Spotify officials and Swift came to a level of understanding. So how do you do it -- and why?
"It's being a good human … even if somebody is a competitor and not necessarily on your side," Brickley says.
Most industries are much smaller than you'd think, so treating everyone -- even your opponents -- with respect is a good rule to live by, especially since you might end up working together one day. If you're butting heads with another key industry figure, keep in mind that the best way to sow goodwill is asking for their expertise. And if you need to have a tough conversation? Do it in person.
"You can disarm them better psychologically, if you will," Brickley says. "90 percent of communication is nonverbal."
Related: An IPO Isn't Just a Way to Raise Money -- It Shows a Company Is Mature and Deserving of Trust
