Two unicorn start-ups are landing blows on another well-established, conventional business model with a tech-driven disruptive approach that, if successful, will open the flood gates to thousands of copy cats and threaten the very existence of a stayed, inherently conservative industry.
By Dave McKenna April 9, 2019
If you visit the Graveyard-of-Former-Glory, you will notice the headstones of once-great enterprises laid low by the leveling forces of technology. Remember Blockbuster? When was the last time you paid for a stock quote? Who “reads the paper” on paper anymore? If you are a What’s-a-Landline millennial, have you ever even heard of these things?
It is now a well-worn story; iconoclastic start-up challenges an incumbent industry with a new business model built on current technology, making the transaction more efficient, collapsing incumbent privileged access to the buyer, and creating enormous value by distributing the economic benefit of the efficiency between the buyer and the new tech platform.
Spotify disrupted the music industry over a decade ago with a platform for content distribution that bypassed the record labels entrenched channels and shortened the distance between artist and consumer. In 2018 Spotify shocked Wall Street when it chose to bypass the established IPO process and took its shares directly to the public, cutting out the investment bank’s syndicate.
Traditionally the big Wall Street investment banks have been the gatekeepers to public capital markets. They help the listing company navigate the regulatory environment, promote the new offering through its substantial network of big money investors, and provide a level of price stability in the offering by purchasing large blocks and effectively guaranteeing a market.
“Companies have more flexibility than they may realize when it comes to raising capital” – Barry McCarthy, Spotify CFO
All of this access and support comes at a steep price to the listing company, effectively increasing the cost of the transaction while providing very lucrative returns to the bank’s best customers. For decades it is just how the game has been played.
In April of 2018, Spotify went public using a direct placement process in which the investment banks were substantially sidelined. Spotify offered shares directly to the public without the typical roadshows to develop buzz and calibrate the level of market demand for pricing decisions. There was no large private block sold to an investment bank at a deep discount. No syndicate of banks who would parse the block out to its most-favored investors. Some derided it as a non-IPO IPO, an oddity, and a risky stunt.
But this non-IPO was actually a blockbuster hit resulting in a valuation of $26.6 billion, doubling the initial valuation estimates. None of the worst-case scenarios came to pass; a warning that Spotify itself acknowledged were real risks in its prospectus. In fact, the Spotify non-IPO direct placement was kind of normal. No massive price swings, a general upward trend for several months, tracking with the overall market. Normal, normal. CEO’s took note.
Now another member of the unicorn royalty it about to rerun the same play. Slack is planning direct placement IPO in June or July of 2019. Here is another example of big-name start-up with nine or more zeros in its valuation bypassing the conventional IPO channel and going direct to the public with its offering. Airbnb is said to be considering a similar play later this year.
There is plenty that is unique about Spotify, Slack, and Airbnb. Spotify did not come into the public market to raise capital, it was seeking additional liquidity. Slack has $900 million in the bank and can basically raise “free money” as far as the eye can see. Airbnb is an international mega-brand that has no need for help from Wall Street’s to tell its story or price its shares. These are not normal companies and they can afford to bypass “normal” channels. Good to be a unicorn.
However, there is also good reason for Wall Street and John Q. Investor, to pay attention. We may be witnessing the beginning of the end of another well-established business paradigm; the Wall Street brokered capital market entry. We’ve seen this before. Any business model that is built on privileged access to the consumer and adds costs to the transaction in exchange for that access will be under increasing pressure from upstarts using technology to replace their access l and transferring the benefits to themselves and the buyers.