It’s Tuesday, March 20, 2018 and today we’re talking about: the Spotify IPO, an IPO Meltdown, and Melting Down Toys”R”Us. Avg read time: 4 min 45 sec. But you’re better than average.

Spotify IPO

Dropbox isn’t the only company about to have its initial public offering. Spotify – the 11 year old music streaming service – is set to IPO in the next few weeks as well. But Spotify is doing things their own way. The Stockholm, Sweden company is doing a direct listing.

This means that Spotify isn’t spending millions to hire an investment bank, isn’t creating new shares to sell, isn’t doing a roadshow to woo potential institutional investors, isn’t setting an offering price, and isn’t selling newly issued shares to institutional investors the night before the IPO so they can then sell those shares on the public market the next day.

On April 3, 2018, current Spotify shareholders will be able to sell their shares directly on the New York Stock Exchange. This Direct Public Offering (DPO) is somewhat rare.

Maybe most importantly, Spotify won’t be raising money with this DPO since they’re not creating new shares and not actually selling any either. Only existing shareholders will be able to sell shares and only they will receive money for those shares. Finally – and this might be the coolest (and riskiest) part – buyers and sellers will have to discover prices without the guidance of an investment bank’s guesstimate. #priceDiscovery!

While both the Dropbox IPO and the Spotify DPO are worth paying attention to, only one is music to my ears. For more information, watch Spotify’s Investor Day for over 2 hours of details.

“Without deviation from the norm, progress is not possible.”
― Frank Zappa

This segment was inspired by The Indicator on March 19, 2018.

IPO Meltdown

Speaking of IPOs, I came across this great HBR story Monday that I’d never heard before about the Facebook IPO in 2012. Apparently the Nasdaq had a crisis while the stock was supposed to be trading live for the first time.

As the start of trading approached, hundreds of thousands of orders poured in. But when 11:05 arrived, nothing happened.

The computer code that was supposed to facilitate the exchange of billions of dollars for the IPO was reporting that something was wrong. Nasdaq managers decided to disable the check that was failing and move forward with the big day.

When the validation check was removed, trading started, but the workaround caused a series of failures. It turned out the check had initially picked up on something important: a bug that caused the system to ignore orders for more than 20 minutes, an eternity on Wall Street. Traders blamed Nasdaq for hundreds of millions of dollars of losses, and the mistake exposed the exchange to litigation, fines, and reputational costs.

The managers screwed up. They pushed forward when they should have stopped.

The Anatomy of a Disaster

A few weeks ago I wrote a long-form piece called The Anatomy of a Disaster where I dissected the worst industrial accident on US soil in 25 years. Nasdaq’s Facebook IPO crisis follows a similar pattern. While I focus more on causes and prevention in my piece, the HBR piece on the Facebook IPO touches more on what to do when you’re already in a disaster. Two great tips they give are:

1. “Learn to stop. When faced with a surprising event, we often want to push through and keep going. But sticking to a plan in the face of surprising new information can be a recipe for disaster.”
2. “Do, monitor, diagnose. Sometimes stopping isn’t an option. If we don’t keep going, things will fall apart right away. What can we do then?” If a patient has stopped breathing, start “with a task, such as intubating the patient. The next step is monitoring: you check if performing the task had the expected effect. If it didn’t, then you move onto the next step and come up with a new possible diagnosis. And then you go back to tasks because you need to do something — for example, administer medications or replace the bag — to test your new theory.”

(The HBR guest writers were András Tilcsik and Chris Clearfield, who recently published Meltdown: Why Our Systems Fail and What We Can Do About It)

Toys”R”Us, Part II

Yesterday I wrote about the Toys”R”Us liquidation. My prototyping, Neuroscientist brother, Tim, pointed out that the phrase category killer is a bit confusing. I wrote back:

Category killer doesn’t mean that a company killed the category.. it means that they dominated (or co-dominated) it due to their focus and scale.

Toys”R”Us was a category killer because they niched down on one thing and one thing only. So while 70 years ago the mom & pop corner stores or Macy’s or Sears may have had a toy section or toy aisle, they didn’t know toys well, their selection was bad, they couldn’t sell toys cheaply, they had no leverage with toy manufacturers, they weren’t known for selling toys, and they didn’t really care about toys to begin with.

There were other toy stores, but they were small operations, making toys in the back, or only able to buy from local toy manufacturers. They were focused but had no efficiency, no scale. There was a huge opportunity for the first chain toy store – a big-box toy store – that could bring together focus, scale, efficiency, and brand.

Toys”R”Us Becomes Category Killer

History.com published a nice piece Monday about the history of Toys”R”Us. Returning from WWII, Charles Lazarus’ intuition told him that America was about to have a lot more babies. After opening a baby furniture store in his father’s bike repair shop, customers started asking for toys. As parents kept returning to buy toys for their growing children, Lazarus got out of the children’s furniture business and went all in on toys.

Big-box stores like Toys ‘R’ Us astonished the era’s consumers, who had simply never seen stores that big and crammed with merchandise. “What Lazarus really captured was this sense of American abundance after the war and after all those years of depression,” says Richard Gottlieb, founder of Global Toy Experts and an authority on the toy business.

From Wikipedia: “At its peak, Toys “R” Us was considered a classic example of a category killer, a business that specializes so thoroughly and efficiently in one sector that it pushes out competition from both smaller specialty stores and larger general retailers.”

Sadly, after Lazarus retired, Toys”R”Us began to lose it’s way. In 2005, Bain Capital, KKR, and Vornado Realty Trust announced a leveraged buyout (LBO). And as is typical for these types of private equity plays, the cost cutting began.

But as Toys ‘R’ Us dialed back its offerings, it cut back on the magic, too. When Toys ‘R’ Us changed its focus from the toys themselves to undercutting the competition, “You didn’t get the elation anymore,” says Gottlieb. “They failed because they ceased to love toys.”

Had Toys”R”Us remained focused on their core values and competency, I think they could have adapted and weathered the back-to-back storms of Walmart (the biggest big-box store) and Amazon.