Spotify’s Duck Walk

Apr 2018

Take a leading music service, conjure up a duck walk and if you’re of a certain age you’re probably already stringing a Chuck Berry playlist together in your head (hopefully ad-free!).

But outside the stages the late rock and roll hero low-stepped across in his long career, there’s a saying that goes, “If it walks like duck…”

Spotify undoubtedly knows a thing or two about Chuck, and after yesterday’s successful and daring direct listing, they’ve got the financial media going “Around and Around” on what could be a hot new trend for tech companies wary of Wall Street tradition and high banker fees. Surely the company chose an intriguing route to market and its performance as a US-listed company will be fun to watch. But CEO Daniel Ek’s teasing pre-listing blog post – straight out of the founder’s letter playbook though blessedly shorter -- would have you believe that his company’s listing is just one symbol of why Spotify is different than your typical public company. In the end, the ruthlessly efficient U.S. markets will be the judge of that.

As an entertainment provider, Spotify clearly knows how to play to a crowd. Ek’s proclamation said all the right things to the right people. His employees get the credit for building the company, musicians get to benefit financially from Spotify’s noble mission, and investors get to hear a CEO talk refreshingly about playing for the long term.

It wasn’t a shareholder-specific communication per se, but it was definitely designed to send a message to Wall Street. In planting the seed that foregoing IPO traditions like bell ringing and making the rounds with media on listing day is a harbinger of long-term success – while dissing companies who seize the “one-day splash” opportunity afforded by such exploitative initiatives as capital-needy opportunists – Ek is spinning his tune to an investor audience that knows better.

First, the dis. To paraphrase Chuck, Ek is “playing the press just like a’ ringing a bell.” Spotify might have decided to forgo a day of interviews but weep not for the company. Spotify has collected a swimming pool full of one-day splashes. Its direct listing has generated tons of coverage in what would normally be a quiet period for companies in the typical registration process. Give Ek and their PR team their due for that, but when trashing the system be careful not to trash your future peers. Savvy companies with good brands know a marketing opportunity when they see one, and the two stock exchanges bend over backwards to provide that opportunity when courting listings.

Now let’s talk about long-term thinking. Buzz-building aside, the best companies coming public are all about the long-term – they weigh the decision carefully, and some like Spotify take more than a decade before pursuing a listing. And they’re not always doing it for the capital, as Dan would have you believe. IPOs are usually first and foremost about providing liquidity and establishing a currency to use to recruit and retain talent and for later strategic opportunities. This is why tech unicorns in particular would risk the potential “down round” of an IPO. Yes, most sell new shares too, but as any smart CFO knows, you’re much better off raising capital when you can as opposed to when you have to. By the way, while Spotify didn't raise capital in its public listing, the listing itself satisfies a long-ago promise to give investors who did supply capital a ready exit.

And that brings me back to the duck walk. Spotify might be strutting into the markets differently, but as of today they’ll quack no differently than the companies against which they’ll be competing for investor attention. Like any traditional IPO there are questions – Spotify’s challenges include managing its strategically critical relationship with the record industry, navigating intensifying competition with folks like Amazon and Apple, and turning red ink into black.

Going public is a milestone; it’s also just the first day of being public. Being public is about delivering under a bright spotlight every day, every quarter, every year, in good times and bad. What you say you’ll do matters much less than what you actually do when it counts, and with the world watching, your performance now becomes interlinked with brand reputation. Snap, last year’s big name to come out, knows this well by now.

Of course, Ek is correct at a high level: playing for the long term is the right answer. But suggesting that they’ll be different from any traditional IPOs is at best clever spin and at worst naïve. In the US markets your progress toward long-term value creation gets measured daily. Quality companies know that and don’t come to the markets unprepared.

Ek closes his post by claiming Spotify is only in “the second inning”. If they don’t hit for average in the coming quarters, Chuck’s broker would likely tell him the stock has “No Particular Place to Go.”

Originally Published on LinkedIn