By Telis Demos, Evelyn M. Rusli and Douglas MacMillan
Music streaming service Spotify AB is working with Goldman Sachs
Group Inc. on a new round of private fundraising, potentially
putting off an initial public offering for another year, people
familiar with the matter said.
The amount to be raised and the valuation are yet to be settled,
these people said. However, the company has expressed a desire to
raise about half-billion in new financing, and investors have heard
talk of valuations north of $6 billion, the people said.
The company is talking with investors who typically buy into
companies ahead of an IPO, including mutual fund T. Rowe Price,
they added. Spotify has expressed a willingness to provide
investors with "ratchet" provisions that give them a guaranteed
return in the event of an IPO, one person said.
A spokesman for Spotify declined to comment.
Spotify, already among the most highly valued startups in the
world, hasn't yet settled on any timing for an IPO, but with this
fundraising in hand it could choose to wait until next year to
launch the deal, one of the people said.
The major record companies-- Vivendi SA's Universal Music Group,
Sony Corp.'s Sony Music Entertainment and Access Industries' Warner
Music Group--together own just under 15% of Spotify and have been
pushing the Sweden-based company to convert more of its total 60
million active monthly users, most of which listen free, to paying
customers.
The recording industry doesn't believe that advertising-based
streaming services will be able to generate enough revenue to make
up for declining sales of CDs, digital albums and tracks. Spotify
pays about 70% of its revenue to rights holders as royalties, and
said it paid $1 billion in royalties in 2014.
But Spotify believes its free service is key to attracting new
subscribers, and it has refused to withhold certain releases from
its free users, despite the wishes of some labels and artists. Pop
star Taylor Swift yanked all her music from Spotify after the
service declined to make her new album only available to its paying
subscribers, and to users overseas where she is still trying to
grow her fan base. Ms. Swift argued that artists should be
well-compensated for their work.
In response, Daniel Ek, the CEO of Spotify, said the service has
paid $2 billion back to the music industry.
This month, Spotify revealed that it had grown to 15 million
paid users, up 50% from the count in May. In November, Spotify said
it had generated EUR747 million ($842 million) in revenue in 2013,
against a loss of EUR57.8 million ($65 million).
Spotify will likely continue to lose money until 2019 unless it
negotiates a better agreement on the royalties it pays for music
rights, said analysts at Manhattan Venture Partners, an investment
bank focused on private companies.
Spotify was valued at $4 billion at a prior fundraising in 2013,
according to Dow Jones VentureSource. Private markets value the
stock at around $6 billion, according to Manhattan Ventures
Partners. Spotify and investors have been discussing valuations
north of that, though it isn't yet clear where they will settle,
people familiar with the talks have said.
Its prior fundraising, $250 million in 2013, was led by
growth-equity firm Technology Crossover. In 2012, it had raised
$100 million from investors including Goldman Sachs. Earlier
investors include Kleiner Perkins Caufield & Byers and DST
Global.
Spotify was valued at more than $5 billion in September,
according to filings by GSV Capital Corp., a private investment
fund that owns the shares. Manhattan Ventures Partners forecasts
Spotify to have revenue of $1.3 billion in 2014, and said the
market's fair value for the stock is about $5.7 billion, or 4.3
times its revenue. That is a higher multiple than Pandora Media
Inc., which is trading at about 4 times its estimated 2014 revenue
of $914 million, according to FactSet.
"Spotify is in a better position than Pandora to be able to
monetize advertising over the long-term," the analysts wrote,
citing Spotify's greater social media engagement and integration
into a wider range of apps.
But the analysts also noted that music services in general face
the problem of users not looking at the screen while listening,
limiting the value of typical Web and mobile ads. And Spotify is up
against increasing competition, including from Apple Inc.'s Beats
Music service, which Apple plans to relaunch as part of iTunes this
year. Google Inc. is also readying to unveil a video-based music
subscription service, YouTube Music Key.
Hannah Karp and Kirsten Grind contributed to this article.
Write to Telis Demos at telis.demos@wsj.com, Evelyn M. Rusli at
evelyn.rusli@wsj.com and Douglas MacMillan at
douglas.macmillan@wsj.com
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