Spotify new funding in the works, wants $3.5B valuation

Less than a year after landing $100M at a $1B value, Spotify seeks more cash to boost value 350%

Facebook friend and freemium music service Spotify is raising another big round of funding, and is supposedly trying to get the company valued at $3.5 billion.

Such reports are coming from investors that have been approached to participate in the latest round of funding, Business Insider reports. 

Now it has only been a few months since Spotify raised a $100 million round at a $1 billion valuation so a more than three-fold increase in less than a year is an exceptional jump, one that many may be hesitant to make, especially with so many services offering similar music streaming and Pandora continuing to peter on the public markets. 

For a quick look at what one of the public companies offering similar, but not identical services to Spotify, here is a snapshot of Pandora's rocky year on the NYSE.

Ticker: P
IPO debut: June 15
IPO price: $16
Now trading at: $10.62
Mark cap: $1.75 billion
Estimated 2012 Q1 rev: $72 million - $75 million

Even though the smart streaming music service prepared its investors that the company would not be profitable until well into 2012, the demand for shares in Pandora pumped the initial soft offer of $7 per share up to the final debut price of $16 per share.  It appears that it would have faired better for the company if the soft offer of $7 was followed through on since the company took a nose-dive in the fall.

While Pandora saw an opening pop up to $26 in early trading, the stock closed remarkably close to the opening at $17.42.

Pandora continued to see blows to its stock through the year as public disclosures on quarterly forecasts continued to show low expectations and in November the stock saw a 33% drop.

The company stock is now trading nearly 40% below its opening price and has proved to be the biggest tech loser of the last 16 months.

Pandora revenue grew by 71% to $81.3 million in Q4 of 2011, but its losses also jumped from $1.4 million to $8.2 million. The company reported that 89% of its Q4 revenue was attributed to advertising, adding up to $72.1 million.

But the amount of time users spent listening was up an impressive 99% from Q4 2010, to 2.7 billion hours. Pandora's active user base is now 47 million people.

Pandora also predicted between $72 million and $75 million in revenue in the first quarter of 2012 and the company also predicts another loss in Q1. Using the 2012 estimates, this places the company price-to-revenue multiple at about 7X. 

Spotify's financial footing

Founded in 2006 by Daniel Ek and Martin Lorentzon, the UK-based music service has 15 million songs licensed and 10 million users -- three million of which pay monthly service fees.  

Given its significant presence in music, its last round of funding was back in June from DST, Kleiner Perkins and Accel, bringing the total VC capital to more than $189 million. 

Considering that Spotify is a musical example of Hulu, which almost sold for $4 billion last year, it isn't unthinkable, and Spotify has up the paid membership growth similar to Hulu, but hasn't seemed to really let its US roots take hold for very long before expecting a serious pop in valuation. 

At the start of the year, Hulu's premium paid service, Hulu Plus reached the 1.5 million paying customers mark. 

That's a 5X growth rate from the 300,000 paying subscriber base signed up to Hulu Plus at the end of 2010.  Hulu Plus offers more shows, movies, ad-free viewing and access to full series' rather than selected episodes.  

The company grew 60% from 2010 to approximately $420 million in revenue for a service that allows users to watch Hulu content on their computers, TV, gaming devices, tablets and smart phones. 

Netflix still holds the lion's share of online television and movie watching for the same $7.99 rate of unlimited streaming on multiple devices, even after loosing nearly a million subscribers due to rate hikes and missteps. Netflix still clocks in at close to 23.8 million subscribers.

The advantage Spotify has is that it isn't going head-to-head with a service like Netflix. The disadvantage is that it is going up against the free option (pirated music), the ownership option (iTunes), and dozens of customizable radio options like Turntable, Rdio, and Pandora.

Firms said to have passed on the deal include late stage firm TCV and every-stage-investor Andreessen Horowitz, according to Business Insider.

Spotify has not returned requests for comment, but it will be interesting to see just how big of a round of funding this will be and if the valuation does, indeed, end up in the $3.5 billion mark. I would expect if it is then we may not have to wait much longer before the company starts offering more services to prove its money-making abilities. Perhaps cutting strong deals to sell content and maybe even music videos like Vevo has. 

Perhaps Spotify has some great growth numbers to disclose, but if the membership and pool of people paying for content hasn't skyrocketed, and it doesn't have some sweet deals in the pipeline then this new valuation may be little more than a pipedream.