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This is the future. The value added by investment banks does not justify 10's or 100's of millions in fees. It's one of the biggest remaining inefficiencies i

This is the future. The value added by investment banks does not justify 10's or 100's of millions in fees. It's one of the biggest remaining inefficiencies in company growth that needs disruption. The reason it hasn't happened yet seems straightforward. Companies are hesitant to be beta testers of a new model where so much is at stake. No one ever got fired for running an IPO through Goldmen Sachs. The principle of people making obscene amounts of money doesn't bother me one bit. It would be nice if teachers had higher salaries, but NBA players make more money than teachers for many objective reasons. This situation is different. Does anyone think this is the best we can do? One quick example: http://blogs.reuters.com/felix-salmon/2013/03/11/where-banks-really-make-money-on-ipos http://blogs.reuters.com/felix-salmon/2013/03/11/where-banks...

JumpCrisscross 10y ago
You may be conflating what's going on here with a direct public offering [1]. Google, for example, did not use an underwriter in its DPO-style offering [2]. (Partly as a result, they massively underpriced.) Spotify isn't doing a DPO nor an IPO. They will simply allow their shares to be traded by third parties. Since Spotify, itself, is raising no cash there isn't a need for an underwriter nor an auction process. Each investor will need to figure out listing, trading, clearing and settlement, et cetera mostly on their own. [1] https://en.wikipedia.org/wiki/Direct_public_offering https://en.wikipedia.org/wiki/Direct_public_offering [2] http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1534&context=btlj http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?arti...
- acchow 10y ago
  Partly as a result, they massively underpriced Snapchat had underwriters and popped 50% on opening. Isn't that also massively underpriced? Life insurance and health insurance companies don't make the obscene margins and figures that investment banks do. Investment banks basically rob you silly when they underwrite. It's not insurance. It's clear that you will be underpricing if you want your IPO to be underwritten.
  - easytiger 10y ago
    > Investment banks basically rob you silly when they underwrite The cost of taking risks can be very high. There are not inconsiderable likely downsides.
    - WhitneyLand 10y ago
      This is true and important to understand. However the point is that after considering this and all other value add, it's still vastly over priced, and is propagated by a happenstance of a few unhealthy market dynamics. Please, take a look at the link I posted above. Do you agree with how those fees are applied?
    - acchow 10y ago
      I agree there are downsides. But IB profits on IPOs are excessive and not mild like you'd expect of an insurance company. Hijacking the term "underwriting" is a bit dishonest.
- WhitneyLand 10y ago
  No, IB fees are definitely a factor in this decision. I believe the WSJ mentioned that was part of the decision process. Also, the Google result is really hard to draw any conclusions from. It's one data point vs. many underwritten deals of which some have done better. some have done worse. The the main point is I do not see any reason, at least in principle, that the current model could be vastly improved.
- bjterry 10y ago
  > Each investor will need to figure out listing, trading, clearing and settlement, et cetera mostly on their own. I would think at a minimum Spotify would convert all equity holders to common stock and would register the shares with the appropriate clearinghouse depending on where they were listing. Even if they didn't register with an exchange they could be be traded over the counter. More likely they would register with an exchange and take care of those mechanical details for their investors. The real risk here is that they list but don't get any analyst coverage and no one wants to act as a market maker for the stock initially. Analyst coverage is part of the quid pro quo for an IPO, and companies typically want to see analyst coverage of past IPO clients, with BUY ratings on those stocks. Personally I don't think coverage commitments matter that much. Modern markets are price efficient. Spotify is big enough that they would get coverage and market makers without paying the IPO tax. And they can do a much cheaper follow-on offering after the shares have been public, with greater certainty as to the price. For smaller companies it's much easier to languish without anyone paying attention to your stock, and this would be much riskier.
pbreit 10y ago
"so much is at stake" is the reason companies hire someone to do it.
- WhitneyLand 10y ago
  How is that relevant? Does it mean if the stakes are high it's impossible to overpay so don't question it? People paid through the nose for IBM PCs because a lot was at stake. But not because IBM actually lessened their risk, but because it took a little time before people realized they were leaving money on the table unnecessarily.
  - pbreit 10y ago
    Companies use their PCs all day every day. IPOs happen once. Plus your argument might suggest that companies should make their own PCs.
acjohnson55 10y ago
> No one ever got fired for running an IPO through Goldmen Sachs. Worse outcomes have happened: http://www.nytimes.com/2012/07/15/business/goldman-sachs-and-a-sale-gone-horribly-awry.html http://www.nytimes.com/2012/07/15/business/goldman-sachs-and...

JumpCrisscross 10y ago

You may be conflating what's going on here with a direct public offering [1]. Google, for example, did not use an underwriter in its DPO-style offering [2]. (Partly as a result, they massively underpriced.) Spotify isn't doing a DPO nor an IPO. They will simply allow their shares to be traded by third parties. Since Spotify, itself, is raising no cash there isn't a need for an underwriter nor an auction process. Each investor will need to figure out listing, trading, clearing and settlement, et cetera mostly on their own. [1] https://en.wikipedia.org/wiki/Direct_public_offering https://en.wikipedia.org/wiki/Direct_public_offering [2] http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1534&context=btlj http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?arti...

acchow 10y ago
Partly as a result, they massively underpriced Snapchat had underwriters and popped 50% on opening. Isn't that also massively underpriced? Life insurance and health insurance companies don't make the obscene margins and figures that investment banks do. Investment banks basically rob you silly when they underwrite. It's not insurance. It's clear that you will be underpricing if you want your IPO to be underwritten.
- easytiger 10y ago
  > Investment banks basically rob you silly when they underwrite The cost of taking risks can be very high. There are not inconsiderable likely downsides.
  - WhitneyLand 10y ago
    This is true and important to understand. However the point is that after considering this and all other value add, it's still vastly over priced, and is propagated by a happenstance of a few unhealthy market dynamics. Please, take a look at the link I posted above. Do you agree with how those fees are applied?
  - acchow 10y ago
    I agree there are downsides. But IB profits on IPOs are excessive and not mild like you'd expect of an insurance company. Hijacking the term "underwriting" is a bit dishonest.
WhitneyLand 10y ago
No, IB fees are definitely a factor in this decision. I believe the WSJ mentioned that was part of the decision process. Also, the Google result is really hard to draw any conclusions from. It's one data point vs. many underwritten deals of which some have done better. some have done worse. The the main point is I do not see any reason, at least in principle, that the current model could be vastly improved.
bjterry 10y ago
> Each investor will need to figure out listing, trading, clearing and settlement, et cetera mostly on their own. I would think at a minimum Spotify would convert all equity holders to common stock and would register the shares with the appropriate clearinghouse depending on where they were listing. Even if they didn't register with an exchange they could be be traded over the counter. More likely they would register with an exchange and take care of those mechanical details for their investors. The real risk here is that they list but don't get any analyst coverage and no one wants to act as a market maker for the stock initially. Analyst coverage is part of the quid pro quo for an IPO, and companies typically want to see analyst coverage of past IPO clients, with BUY ratings on those stocks. Personally I don't think coverage commitments matter that much. Modern markets are price efficient. Spotify is big enough that they would get coverage and market makers without paying the IPO tax. And they can do a much cheaper follow-on offering after the shares have been public, with greater certainty as to the price. For smaller companies it's much easier to languish without anyone paying attention to your stock, and this would be much riskier.

pbreit 10y ago

"so much is at stake" is the reason companies hire someone to do it.

WhitneyLand 10y ago
How is that relevant? Does it mean if the stakes are high it's impossible to overpay so don't question it? People paid through the nose for IBM PCs because a lot was at stake. But not because IBM actually lessened their risk, but because it took a little time before people realized they were leaving money on the table unnecessarily.
- pbreit 10y ago
  Companies use their PCs all day every day. IPOs happen once. Plus your argument might suggest that companies should make their own PCs.

acjohnson55 10y ago

> No one ever got fired for running an IPO through Goldmen Sachs. Worse outcomes have happened: http://www.nytimes.com/2012/07/15/business/goldman-sachs-and-a-sale-gone-horribly-awry.html http://www.nytimes.com/2012/07/15/business/goldman-sachs-and...