Spotify Seeks to Raise About $500 Million

By Telis Demos and Evelyn M.Rusli 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 stock offering for another year, said people familiar with the matter.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 $500 million in financing, and investors have heard talk of valuations north of $7 billion, the people said. The company is talking with investors who typically buy into companies ahead of an IPO, including mutual-fund operator T. Rowe Price Group, 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.Spotify declined to comment.Already among the most highly valued startups in the world, Spotify 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 and digital downloads. Spotify pays about 70% of its revenue to rights holders as royalties, and said it paid $1 billion in royalties in 2014.Spotify argues free services are 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 her music from Spotify after it declined to make a new album available only to paying subscribers or users overseas where she is 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 said it has signed 15 million paid users, up 50% from May. In November, Spotify said it had generated €747 million ($842 million) in revenue in 2013 and lost €57.8 million ($65 million).Spotify was valued at $4 billion at a prior fundraising in 2013, according to data provider Dow Jones VentureSource. Private markets value the stock at around $6 billion, estimates Manhattan Venture Partners, an investment bank focused on private companies.Its prior fundraising, $250 million in 2013, was led by equity firm Technology Crossover. In 2012, it raised $100 million from investors including Goldman Sachs. Early 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 forecast Spotify had 2014 revenue of $1.3 billion, 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 four times its estimated 2014 revenue of $914 million, according to data provider FactSet Research Systems Inc.“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. Write to Telis Demos at and Evelyn M.Rusli at

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