Spotify’s CFO pushed for this week’s direct listing, which could change life for Wall Street and for big tech startups.
When Spotify goes public Tuesday, the spotlight will shine on 35-year-old CEO Daniel Ek, who has built a $20 billion company and helped revive the music industry along the way.
But if Spotify’s unusual “direct listing” offering — done without the traditional assistance from investment banks — is successful, credit will go to a Spotify executive thirty years Ek’s senior, who doesn’t want any attention: Barry McCarthy, the company’s chief financial officer, who is acknowledged as the architect of the unorthodox, and to some, controversial public offering.
If the direct listing works, it could pave the way for other tech startups to follow suit. That could potentially cut out Wall Street banks and their clients from a lucrative revenue stream, and would roil the financial services industry.
But people who know McCarthy say he does not care about the broader implications of his plan — he isn’t motivated by some ideological crusade to stick it to Wall Street, nor by some high-minded attempt to chart a new future for the technology sector.
“I don’t think it’s a middle finger to Wall Street because he comes from Wall Street,” says Reed Hastings, the CEO of Netflix, where McCarthy was its CFO for eight years. “He’s as Wall Street as it gets.”
In a traditional offering, a startup hires bankers to find investors to buy its stock, a pre-qualified group willing to take the risk of taking on shares in a company that hasn’t trade openly. The bankers sort out the right price for these shares by wrangling and haggling with these investors, who then sell those shares the following day on an open exchange like the NASDAQ or the NYSE.
In the direct listing that Spotify is attempting, there will be no bankers to find qualified pre-buyers and set a price for the initial stock sale. The shares of SPOT will just open on the NYSE exchange on Tuesday.
Some spurned bankers are quietly rooting for Spotify and McCarthy to fail. Their argument: The strategy has real risk, because they haven’t been able to help the company guarantee an appetite for its shares, and they won’t step in to stabilize the stock if something goes wrong. Its stock value could swing frantically.
So if Spotify stock trades wildly in its opening days, or tanks in its opening months, McCarthy could end up as the poster child for Silicon Valley arrogance. Some bankers will see it as comeuppance for an executive who tried to fix a system that in their eyes wasn’t broken.
McCarthy first joined Spotify in 2014 as a member of its board, and moved to the CFO role a year later. As the company started edging toward a long-awaited IPO, he started selling Ek on the direct listing.
McCarthy presented the entrepreneur and his board with a clinical, “brutally logical” diagnosis of why Spotify shouldn’t sell shares to institutional investors right before trading begins.
Spotify, he argued, could avoid the regulations, fees and distractions since it didn’t need to raise money, already had a well-known consumer brand and had a good idea of how much it was worth from all the private trades done for years by existing investors.
“It’s not like Barry’s wanted to do this forever and this was the opportunity,” said one person close to the company. “Barry does not care about how history remembers him or doesn’t remember him.”
McCarthy is an unlikely iconoclast. He started his career at Credit Suisse First Boston in the 1980s, trading mortgage-backed securities when that industry first took off. He headed to his first CFO role at a different music company, Music Choice. And then at Netflix, he executed a traditional IPO under Hastings.
McCarthy helped Hastings create a fast-growing DVD-by-mail business, with a high-flying stock price — and then helped Hastings pull the company back from the abyss in 2011, when a bungled price hike, a disastrous plan to split the company into two, and the loss of crucial content from two Hollywood studios pushed the company’s stock down 77 percent in four months.
But as Hastings recalled, McCarthy wanted to be a CEO or a COO. It took him three years after leaving Netflix to find it, but he did — at Clinkle, a much-hyped payments company that raised money from A-list backers and then flamed out in spectacular fashion.
McCarthy lasted six months as COO, but avoided career disaster.
“It’s the classic tension: You can get the bigger job at the smaller company, like a Clinkle kind of thing,” Hastings said, adding with some understatement: “I’m sure he’s found Spotify much more satisfying than Clinkle.”
But his time at Netflix made him well-suited to serve as Ek’s de facto Sheryl Sandberg or Eric Schmidt — a voice of experience that carries a lot of weight for the young chief executive. Though in this case, it is the older wise man pushing the more radical idea.
His Netflix pedigree, coupled with Spotify’s Netflix-like grow-fast-now, worry-about-profits later strategy, conveys an implicit promise to would-be Spotify investors: This is another consumer growth rocket ship.
McCarthy made that connection explicit at Spotify’s Investor Day last month.
“This reminds me of my first ten years of Netflix,” he told investors, in what he said was his first public speaking event in eight years.
McCarthy isn’t cutting out banks entirely from Spotify’s public offering. The company will spend up to $50 million in advisory and other fees — an out-of-pocket expense it will pay for immediately. (If Spotify had done a traditional IPO, its bankers would have made most of their money by reselling an allotment of Spotify equity.)
That’s real money, even for banks the size of Goldman Sachs. David Solomon, Goldman’s CEO heir apparent, made a personal plea in Goldman’s pitch to Spotify, playing up his now well-publicized side-job as DJ D-Sol, according to two people with knowledge of the pitch. It worked.
Spotify has considered other alternative paths to going public. Ek and venture capitalist Chamath Palihapitiya had some very early conversations about using Social Capital Hedosophia, Palihapitiya’s planned special purpose acquisition vehicle, to acquire Spotify and “back in” to public status that way, according to multiple people with knowledge of the conversations. Social Capital declined to comment.
And even once a direct listing was chosen as the play, the company confronted hiccups.
Spotify had to spend months walking regulators at the Securities and Exchange Commission through the details of the plan. And late last year, Spotify had to hammer out a way to mollify a pair of investors who had issued debt to Spotify that would only convert to equity when the company officially IPO’d. McCarthy and Ek found a way to soothe what at one point appeared to be a sticking point in the negotiations.
That has all led to to Tuesday, when Spotify shares will trade freely for the first time. It will be a big deal for Spotify, and it may be a big deal for future startups and the bankers who want to work with them.
Good luck getting McCarthy to say it’s a big deal to him. “I don’t think he’s trying to be the hero,” said one person close to the process. “He’s not an evangelist. He’s not really trying to change the world.”
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