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The music industry has undergone incredible changes since the late 90s and the advent of the internet. So why have these two companies had such different histories, even though they operate in the same space and have user bases of similar size? What is behind the impressive turnaround that SoundCloud has undergone since that fateful capital raise? Napster, the Grandad of Streaming Spotify had, at that point, declined to acquire SoundCloud three times. In the months prior, the company had cut staff by 40% and was in talks for an acquisition by Spotify, which ended up falling apart. They had to raise emergency funding of $169.5 million (at a $150 million valuation, sharply down from the previous valuation of $640 million that the company had obtained in 2014) from The Raine Group and Temasek, giving the new investors new, preferred shares and cutting the liquidation preferences of the old investors. SoundCloud arrived very close to needing to shut down. While Spotify was treading new ground, one of its closest rivals, SoundCloud, was in a very different position-the company was struggling. Price Evolution of Spotify (Jan 17th 2020) By all standards, the transaction was extremely successful.
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(Public markets are, through their liquidity and ease of trading, much more efficient at setting “true” prices than private markets, where infrequency of transactions and incentives of buyers and sellers can make each transaction unique.) Spotify did not use an investment bank for this process and thus had to cooperate closely with the SEC. It also aimed to determine a clear, market-driven price for its stock. For the company, the primary objective of the exercise was to allow existing shareholders-mostly venture capital funds and employees-more liquidity than was available to them through the private secondary market. It was already well-capitalized and did not need to raise additional funds when going public. The price of these shares is set by the underwriting investment bank, which determines the range within which investors are willing to buy shares of the company so that the IPO can clear.
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Usually, through an IPO, a company sells new shares to raise additional capital. What does this mean in practice? It means that the company did not enlist an investment bank to sound out the market, secure the interest of institutional and retail investors, and support the price and the trading of the shares after the floatation.
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First of all, the company used a new and alternative strategy to make its shares available for public trading: a direct listing, rather than a more traditional underwritten IPO. Spotify made waves when it went public with a direct listing in 2018. SoundCloud? Beyond surface similarities, the two businesses are actually quite different. We look at two of the companies that have been more innovative in the sector, and what has made them successful (or return to being successful, in the case of SoundCloud). Lessons from the music business can be applied to many other sectors that are feeling the impact of technology and changing consumer behaviors. File streaming has been nothing short of a revolution. Technology has changed every facet of the industry: from the way the audio is stored and played, the way consumers acquire it, all the way to how artists can market and distribute it. Not many industries have undergone the same level of transformation as the music industry.
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