Music to Wall Street’s ears as Spotify raises $1bn in debt tied to IPO

30 Mar 2016

Spotify has raised $1bn in debt equity from investors tied to an IPO within a year. Will this be music to Wall Street's ears or strike a bum note?

Spotify’s battle against Apple Music for the hearts and pockets of music lovers will be given impetus with the news that the company has raised $1bn in convertible debt from investors, but with strict guarantees tied to an IPO in the coming year.

The $1bn came from private equity firm TPG, hedge fund Dragoneer Investment Group and clients of Goldman Sachs. It comes a year after Spotify raised $523m for the same reasons, to take on Apple.

The latest funding round signals a new paradigm in how tech start-ups are being funded by Silicon Valley venture firms. Tech firms are turning to convertible debt – bonds that can be exchanged for stock – as investors push back on rich valuations.

According to the Wall Street Journal, Spotify has promised its investors strict guarantees tied to an IPO. If Spotify does launch an IPO in the next year its backers will be able to convert the debt into equity at a 20pc discount to the share price.

Spotify has also agreed to pay annual interest on the debt, which starts at 5pc and increases by 1pc every six months until it IPOs.

A sharp move for Spotify or a bum note?

The move will give Spotify the runway it needs to take on Apple, which has been attracting users by the wagonload since it launched its own streaming service Apple Music last summer.

In January, it emerged that Apple Music reached 10m subscribers, a milestone that it took Spotify six years to achieve.

Spotify currently has 20m paid subscribers and 75m people use the service for free.

Main image via Shutterstock

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years