Spotify's Complicated Road Toward An IPO

Snapchat's parent company Snap Inc. has officially filed for an initial public offering, but the list of multi-billion -dollar companies that choose to remain private is still notable.

One of the companies expected to file for an IPO in 2017, the streaming music provider Spotify, is reportedly putting these plans on hold until next year.

Why Waiting May Not Be Smart

According to Gadfly's Leila Abboud, this might be a mistake.

Abboud noted that Spotify is the market leader in streaming music and has been able to stay ahead of even the behemoth Apple Inc. AAPL that is backed by a company with seemingly unlimited resources.

However, unlike Apple, Spotify is an unprofitable company, and there are legitimate concerns that investors won't want to invest in a multi-billion dollar company with no immediate path towards profitability.

Snap even cautioned in its prospectus that it "may never achieve or maintain profitability."

Abboud further noted that Spotify remains in talks with big record labels for over a year to finalize a new licensing deal. If investors thought Snap's disclaimer is concerning, how will investors react to Spotify's warnings that a major music label could "cut us off at any moment?"

Spotify's pre-IPO problems are further complicated by previous deals it made to raise capital. For example, Spotify raised $1 billion in convertible debt a year ago from private equity firms with strict payment terms linked to the timing of an IPO.

Spotify's debt carries a 5 percent interest rate in its first year, but the rate increases by 1 percentage point each six months until the company files an IPO. In addition, the creditors can convert their debt into equity at a 20 percent discount to the IPO price in year one but this figure will also increase by 2.5 percentage points every six months.

Bottom line, it may be time for Spotify to "face the music" and not delay its IPO even further.

Image Credit: By Philafrenzy - Own work, CC BY-SA 4.0, via WIkimedia Commons