Hold the trumpets, tell the champagne sellers to go home. Daniel Ek, chief executive of Spotify Technology SA, wants you to know that you should be just as bored by his company’s debut on public markets as he was.
The listing of his giant music-streaming service on the New York Stock Exchange on Tuesday was just a day like any other, Mr. Ek declared in a blog post. What really matters, he said, will be “the day after, and the following day – and all those days to come” when Spotify will pursue its mission of bringing music to the masses.
Maybe so. But Mr. Ek’s high-minded nonchalance demonstrates some of the ways that the investing ecosystem is changing – and not always to the benefit of ordinary investors.
One of the more concerning trends is the diminishing importance of public stock markets. Mr. Ek could strike such a relaxed attitude because Spotify itself isn’t going to derive a penny from its NYSE debut. It doesn’t need to. Despite its massive losses, the company has €1.5-billion ($2.4-billion) in the bank. It’s going public solely to make it easier for its employees and investors to cash out.
This wasn’t the way things worked in your father’s day. Stock markets, as you may recall, were created to help companies raise money. But their role has shifted dramatically.
Many of the world’s biggest public companies, such as Apple Inc., Alphabet Inc. and Microsoft Corp., now sit on enormous cash reserves and don’t need to reach into investors’ wallets to get even more.
Meanwhile, private markets, especially in the United States, have matured to the point where they can finance all the needs of a fast-growing company. Uber Technologies Inc. and Airbnb Inc. have tapped billions of dollars in funding without going near a public exchange.
Stock markets now play second fiddle to venture capitalists, pension funds, wealthy individuals and similar folk. Those private sources of capital raised US$2.4-trillion last year in the United States, compared with only US$2.1-trillion from public markets, according to a tabulation this week by the Wall Street Journal.
For many promising companies, there’s simply no need to go public to raise funds. As a result, they are staying private for longer than they used to, and making their debut on public markets only when they’re already mature businesses.
These belated entries into public markets make perfect sense from the perspective of early-stage investors. They want to keep a company private while it’s still growing rapidly and giving signs of greater things ahead, because they want to reap the payoff.
But what happens next? The motivation of these early investors shifts only when growth begins to slow or the limits of a company’s business model become apparent. Then, and only then, is it time to take the company public and cash out.
Unfortunately, this results in an increasingly stagnant stock market, according to Elisabeth de Fontenay, an associate law professor at Duke University. “No longer the promised land for companies poised to grow, the public stock market is quickly becoming a holding pen for massive, sleepy corporations,” she wrote last year.
If current trends continue, it’s easy to imagine a future in which the most tantalizing investment opportunities remain private and off-limits to ordinary investor. In that scenario, public stock markets will function primarily as a dumping ground for growth stories gone cold.
Spotify may fit that description better than its fans would like to admit. The company boasts of its rapid growth rate and that’s absolutely true if you look at its number of users or its revenue. However, the company is 10 years old and still far away from a profit. In 2017, it suffered an operating loss of €378-million.
Maybe it will finally begin to gush profits in years ahead. But anyone thinking of buying in now should realize the shares they’re purchasing are being sold by someone − likely an employee or early investor – who knows the company better than they do, and isn’t sticking around to find out.