In late March, Spotify raised $1 billion in convertible debt from TPG, Dragoneer and clients of Goldman Sachs. The financing, like many recent investments in large private technology companies, is designed to fund company growth, as Spotify intends to increase its already large base of 30 million paying subscribers. But unlike last year's significant pure-equity plays in Lyft($1 billion in total financing, with half coming from GM) and SoFi (also $1 billion), the recent Spotify funding has significant covenants:
- If Spotify IPOs before April 2017, TPG and Dragoneer can convert the debt into equity at a 20 percent discount to the share price of the public offering (after the first year, the discount increases by 2.5 percentage points every six months).
- Spotify agrees to pay annual interest on the debt, starting at 5 percent; the interest rate increases by 1 percentage point every six months until the company goes public, up to a ceiling of 10 percent.
- TPG and Dragoneer can sell their shares 90 days after the IPO, three months before employees and other investors can sell.
The deal is a high-profile financing agreement for a technology unicorn that sets out a clear timeline for an IPO, and carries financial repercussions should Spotify not IPO before October 2017.
However, the strong U.S. dollar and the low price of oil weighed on domestic markets in Q1 2016—the slowest quarter for U.S. IPOs since 2009. Not a single technology company went public in Q1, and with market volatility top of mind and a presidential election in November, the IPO window may remain narrow, with little visibility into its reopening.
The backlog of technology unicorns stuck in the current IPO pipeline only complicates the situation further.
So what does this all mean? Unicorns find themselves in an unusual predicament: built to pursue astronomical growth, they are now potentially limited by an investing community that is more cautious than it was in 2014 and 2015.
While an IPO remains the preferred exit for unicorns (and, in many cases, the only exitoption for companies with very large valuations), the IPO market is muddled and stagnant. As a result, alternative investment structures (such as the type TPG and Dragoneer offered Spotify) and strategic relationships may become more common in unicorn financing, as these companies continue to seek a balance between funding tremendous growth and demonstrating a clear path to sustained profitability.
Learn more about our perspectives on the state of markets in our new report.
Sources: Bloomberg, Statista.com, Wall Street Journal, SoFi
This material, including without limitation to the statistical information herein,is provided for informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable, but which have not been independently verified by us, and for this reason we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction.
Companies referenced are not affiliated with Silicon Valley Bank or any of its affiliates.
SVB Analytics is a member of SVB Financial Group and a non-bank affiliate of Silicon Valley Bank. Products and services offered by SVB Analytics are not FDIC insured and are not deposits or other obligations of Silicon Valley Bank. SVB Analytics does not provide investment, tax or legal advice. Please consult your investment, tax or legal advisors for such guidance.