Jan 9, 2018 ยท 6 minutes

It's time to replace the unicorn as a symbol of startups valued above a billion dollars, and so I'd like to suggest the oil derrick.

It's analog and very last century, but at least it exists outside of fantasy. And what image better conjures the tirelessly churning, seemingly endless quest for real liquidity from these privately held startups than an oil derrick? It seems every year for the past few years has begun with predictions that a gusher is finally coming for tech IPOs. And yet, each year, the well remains dry.

So far, 2018 is no different, with some people exhorting startups to go public already. And there are good reasons they might consider taking the plunge. For one thing, the bull market is entering its ninth year, Methuselan by tech-sector standards. Money-losing startups fare poorly in bear markets, so 2018 may be the best chance for some time to court public markets.

For another, Snap notwithstanding, there is a growing track record of recent tech IPOs that are performing well because the companies themselves are doing well: Roku has more than tripled in a little more than three months. Stitch Fix has risen 76 percent since late November.

What's more, that so many oil derricks (sorry) are sitting unloved on the fringes of the IPO market while Uber drivers everywhere plow their savings into cryptocurrencies is telling. Depending on your view, this is either a good or bad thing. If you're a short-term speculator, the tech IPO market can't compete with the momentum of that fertile chaos. If you're a long-term investor, the absence of speculative volatility makes tech IPOs that much more attractive.

So it's been a while since the IPO market has seemed so felicitous to tech-startup holdouts. And while the company most likely to list next isn't the Airbnb or the Slack that many public investors would hope for, it's one that might be the IPO candidate the tech market needs right now: Spotify.

Here's why I say that. Spotify has quite a lot going for it, and just as much going against it. Weigh those scales out, and they seem pretty balanced. In that sense, Spotify is a kind of a Rorschach test not just for the public market's mood toward tech IPOs, but, with many of the biggest tech stocks at high valuations, for its propensity toward irrationality in early 2018.

Spotify has the pole position in a digital market that is becoming a daily habit of a global audience. Revenue from streaming music services rose 48 percent in the first half of 2017 and made up nearly two of every three dollars spent on music. Spotify has outlasted rivals like Rdio, while muscling out market share from others like Pandora. With 140 million active users and half of them paid subscribers, Spotify is the undisputed king of a growing industry.

That's usually the kind of marquee message that lures investors in to an IPO. But with Spotify, there are a few catches. The first is Spotify's marquee message itself. It's growing, yes. It's used daily by more and more people, yes. But it's still a market without a viable business model – that is, unless you're a major record label.

Spotify's 2017 revenue was estimated to be $4.9 billion. Yet royalty and distribution costs paid to labels ate up an estimated 85 percent of revenue. Meaning any spending on costs paid to Spotify staff to market its product or just keep the business running would add materially to expenses, almost certainly ensuring another year of deep operational losses.

So far, the takeaway is mixed. Spotify is the king of an industry that's growing, but still starving.

Still, some good news: In December, the company filed documents to go public. Now some bad: Spotify made that filing in confidence as a direct offering, a route that no major, self-respecting tech company has ever taken to the public stock market. Some good: The SEC may reportedly okay this unorthodox move, which only happened in the first place because of greedy investors.

Some bad: We still won't know Spotify's actual finances – and therefore won't be able to assess what it's worth – until its numbers are made available to any subscriber who wants to buy it in the public stock market. And even then, direct offerings bypass the roadshow calculations that underwriters perform to gauge investor sentiment and feedback when determining valuations.

In other words, fewer underwriter fees but potentially more volatility once the stock starts trading.

Some finer points that may not matter to individual investors after the IPO, but that still matter: Spotify's direct offering was prompted by the onerous terms of a convertible bond that financially punished the company every six months it remained private. That's bad.

Last month, the debt converted to equity, which apparently freed Spotify of that ticking clock. Not only that, but the equity was swapped for a stake in Tencent, one of the hottest tech companies in the world. Which Spotify now owns a piece of. Also, the swap valued Spotify around $20 billion, near Snap's IPO valuation and more than double the $8.5 billion valuation Spotify had three years ago.

That's very good! Right?

Maybe not. Spotify's apparent valuation as it enters the public market was determined by a market of one – that is, even more illiquid than the typical secondary market valuation that happens when a private company sells employee shares to a handful of institutional buyers. Nobody knew, after 2015, how the stock, once public, would trade in its initial few weeks. We may know even less now.

And if that's not arcane enough, consider this. Tencent may have made that generous swap because it wanted a peek into the coding genius that makes Spotify the industry leader. Tencent is also making plans to offer shares in its own streaming-music offering. Which, if Spotify shared its algorithmic secrets too freely, could well become the more desirable music-streaming IPO of 2018.

That would be bad for Spotify in the long run. If you've been on Spotify the past few years, you know that Spotify has had the killer-app for music-streaming, its magical Discover Weekly playlists. This magic was actually developed by Echo Nest and available first on Rdio, until Spotify bought Echo Nest in 2014. It didn't take long for Rdio to go out of business after that.

Which is probably fine for Spotify as long as the engineers that created Discover Weekly stay on board. But an important figure, Matthew Ogle, left Spotify last spring. And recently another content executives deemed crucial to Spotify's future growth, chief content officer Stefan Blom, has left as well.

So, choose your archetype. Is the Spotify Rorschach spot a harbinger of ill or good? If I had to read it, it will follow Pandora on a larger scale: too high flying, once public, for its profit outlook. Too well run to fulfill the inevitable predictions of its demise. Pandora's IPO, however, paved the way for Facebook's – and Facebook's stock is up nearly 400 percent despite the hard first year after its public debut.

Spotify is the Facebook of its industry, but it's stuck in an industry of Twitters – those companies whose services are embedded in our lives without extruding enough revenue. Now the finest Twitter of music streaming is coming, as directly as possible, to a stock offering near you.

May Spotify be more than a welcome mat to the IPO market for Airbnb, Slack and other companies that promise more profits.