Case SoundCloud: through thorns to new rounds of financing

Published on February 03, 2017

Case SoundCloud: through thorns to new rounds of financing

    Recently we talked about audio applications and audio networks, including SoundCloud.

    Today we wanted to share news about how the platform lost $ 50 million, due to which its management plans to hold out until the next round of funding and what dangers lurk “promising” startups on the road to success.

    Photo kev-shine / CC-BY

    Prehistory


    SoundCloud was registered in 2007 in Berlin, and the site was launched a year later and quickly began to compete with the popular at that time MySpace service. The platform is intended for publishing music tracks, podcasts and direct interaction between artists and their fans, although initially it was created to exchange tracks between musicians.

    In the first two years of operation, the service gathered a million subscribers, and in 2012 the number of subscribers reached 10 million. The project has repeatedly attracted investment, and today SoundCloud is considered the largest music and audio platform. Growth was fairly rapid and regular, the amount of investment increased with each round, as well as the number of unique users and subscribers.

    The investment round A was held in 2009: then the company received $ 3.3 million from Doughty Hanson Technology Ventures (a branch of the British venture capital company Doughty Hanson & Co). Series B investments in 2011 were $ 10 million (Union Square Ventures and Index Ventures). Upon reaching 5 million users, SoundCloud received money from the A-Grade Foundation, founded by Ashton Kutcher and Guy Oseary, however, the amount of the transaction was not disclosed.

    What happened


    Investments in 2014 amounted to $ 60 million (Institutional Venture Partners), and the company itself was estimated at $ 700 million. At the same time, the founders of SoundCloud solved problems with copyright-protected audio recordings. According to experts, the solution to this issue should have been quite expensive. The issue of licensed content also caused the major music labels to oppose the integration of SoundCloud with the Twitter Music app.

    In 2016, $ 70 million invested in the projectTwitter. By this time, SoundCloud had already entered into contracts with major recording studios, including Sony Music, Warner Music Group and Universal Music Group. At the same time, the number of users reached 175 million people per month. And in March 2016, the company decided to launch SoundCloud Go, a paid streaming service. Now, to get access to full audio recordings, users have to buy a subscription, and only 30-second previews are available for free listening.

    Only after the launch of the streaming service it became known that in 2015, the year of preparation for this launch and the period of signing license agreements, the company lost$ 52 million. The next round of investment is expected only in December 2017, but considering all the risks and difficulties, co-founder Alex Ljung (Alex Ljung) is not sure that the platform will last without additional unplanned cash infusions.

    However, he is very optimistic and believes that despite the losses, profit in 2017 will increase by 137%. But experts do not share his optimism: even if the predictions of the founders come true, this amount may not be enough to cover the huge costs of payments to labels and copyright holders. In addition, the competition between audio broadcasting services has increased significantly, and quite a lot of services offer paid subscriptions, for example, Amazon, Apple, YouTube, Pandora, and Tidal.

    So, it is unclear what will happen with the company further. And although SoundCloud is trying to scale up the business in the area of ​​subscriptions and improve its product, the experts call the takeover of Google startup or Spotify, which, according to rumors, showed their interest, as one of the plausible scenarios for the development of the situation.

    Startup Financing


    The problem of lack of permanent and stable income has touched many Internet companies. Not so long ago, the media platform Medium also faced a shortage of funds. The company, which has existed since 2012 and promotes a new model of online media, was forced to lay off a third of its employees and reduce the costs of sales and other business processes. At the same time, until recently, the business was doing well too: the company received a total of $ 140 million in investments and was estimated at $ 600 million.

    Today larger companies and start-ups are faced with the problem of revaluation of cost down. Western sources even call it a new trend in Silicon Valley. For example, Jawbone, an acoustics and fitness bracelet company, in early 2016lost half the cost (about $ 1.5 billion). But in fact, this has affected far not only American companies: the most expensive Chinese startup for the production of smartphones Xiaomi, according to experts, has fallen in price by about 10 times.

    The case with each company is unique in its own way: someone cannot cope with the competition, someone suffers because of a poorly thought-out economic model. But the main problem is that the startup is rated too high at the initial stage. This requires continuous growth of efficiency indicators to attract investments of the next round. Therefore, in order to preserve the possibility of attracting investment in the later stages and not to lose additional funding, experts advise companies to raise rounds at a lower score.

    As for SoundCloud, let's hope that the project will get better, and healthy competition between the streaming platforms will only benefit them.

    PS And we also write about interesting things from the world of sound and talk about the manufacturers of acoustics and audio systems in our magazine “Hi-Fi World”.