Inside the dusty brains of the first backer of Spotify – looking at how we were right and wrong about Spotify in 2007
At the Stockholm Arlanda airport, getting ready to fly to New York for Spotify’s Capital Markets Day, I dug through the deepest corners of Dropbox to look for an old slide. On Thursday Spotify will present their fundamentals and vision to investors, and it’s hard not to be reminded how eleven years ago we gave the same thing a shot on that slide, before the fund led Spotify’s first institutional round of funding. So rather than hosting an event in NYC, we added Spotify to our humble “Hot List”, the early stage of our screening process where we pitch the company to the rest of the team.
Our Hot List is typically a short list of companies that merit special attention, and to inform the group we put too many words on one slide (a practice that continues to today). Looking back at this slide really is a time capsule from 2007 of what we thought about Spotify, technology, and the music industry. Some of our views were right and some were wrong, but luckily a few ideas were wrong for the right reasons.
We attached the slide above with numbers redacted, because things may have changed before the actual deal was on the table and we would hate to confuse the record. But we left all our factual errors for the world to see.
What we were right about:
“Better than piracy” was key
I remember in 2007 all the headlines about music were about the death of the industry. How piracy was killing its revenue and how there was no way back. I personally felt part of that demise- as someone who considered themselves active music consumer I found myself going where the almost-instant and almost-endless supply of music was: Limewire, uTorrent – you know most of them.
So one thing we really bought into was one of Spotify’s fundamental beliefs at the time: in order to win against piracy, you need to provide a service that was … “Better than Piracy”. That meant truly instant access to every song you could think of… and preferably free to use. We really wanted to believe that by doing so, Spotify would open up a massive audience. And that that audience would be valuable.
But there was a lot more behind that phrase. In order to succeed, Spotify’s small team had to deliver the world’s music catalogue instantly and reliably. If there was even a couple of seconds delay after clicking on a song, it wouldn’t feel like you had access to the world’s music! I remember the team obsessing about this and not compromising. “Better than piracy” was where the bar was. At the onset Spotify relied on P2P technology which was proprietary and which they had tuned to work in a brilliant way. This structure kept costs down but, most importantly, provided a hands-down better experience than any other legal (or illegal) music solution.
Playing fair with rights holders was key
At the time of this Hot List slide, Spotify was still negotiating with rights holders on how to license its music at scale. As you can see, after the first few meetings with the team, we were a bit hesitant to have Creandum back them before understanding how the rights situation would play out.
According to the slide there was even consideration about splitting the deal up (which I had forgotten — this otherwise stupid idea must have been scrapped shortly thereafter). This rights holder topic, and the discussions that followed over the many months until Creandum backed them taught us about the strengths of the founders. They were playing hardball to increasingly keen investors, while at the same time being sufficiently patient to get truly viable deals with rights holders. Allowing for a free, truly interactive part of the service was key – otherwise the ‘better than piracy’ promise would just not hold. They knew what they wanted, and they went out and got it.
Looking at the bigger picture, we felt very comfortable with the founders’ approach to always play fair with rights holders with no grey zones. Our late-night discussions about Spotify and rights would ultimately build the mental model that led Creandum to pursue companies like Epidemic Sound and Soundtrack Your Brand, and not some of the other opportunities in the music space.
Team was key
One thing that shone through was that Daniel Ek and Martin Lorentzon were world-class entrepreneurs that had the skills, network, and passion to build something as massive as Spotify. We wrote about this on our website profile.
You would look at the quality of discussions and arguments that Daniel, Martin and other team members – senior and less senior, had and you would ask yourself, “are the other companies I’m looking at pushing themselves to that level?” Are there even ones in Europe with the same ambitions and high standards for themselves and their recruitments? At that time there really wasn’t and I’m even hard pressed to point one out in the 11 years that have passed. And it’s not like I haven’t looked…
We all know now how crucial recruitment is for any early-stage company, but was even more so for a consumer tech startup in Stockholm in 2007, where the tech entrepreneurship scene looked nothing like today. The team succeeded by building a world-class talent pool in Stockholm when the startup scene was only starting to take off in Europe. We can easily give Spotify thanks as to why Stockholm is now leading lists of European startup capitals. And of course on a personal note an even bigger thanks for helping to propel Creandum’s brand to where it is today.
What we were wrong about
Mobile (we had no idea of how important it would become)
Today mobile is driving Spotify’s growth, and in their F-1 the company proudly calls themselves a “mobile-first platform”. The iPhone was launched the same year as this Hot List slide, so perhaps it’s fair to have missed the massive impact mobile would have on nearly every industry, including music.
I think it’s fair to say that although mobile was discussed and we liked it, we clearly focused on Spotify as your desktop music library replacement, not the “Sony Walkman” replacement. I blame my own heavy usage of Winamp…
As silver lining to missing this trend, it was really a magical moment when Spotify was demoed as a mobile app for the first time on a Nokia Series 60 phone. I remember my jaw dropped to the floor. This was impossible! Gustav – then head of mobile – streamed whatever song the board wanted from that cellphone (think it was an N96) that only a year or two prior was basically a brick. We continue to ask ourselves: What massive technological changes are we missing today?
The impact of individual tech, however stellar, is transient
Thinking about technology, we were wrong about (or perhaps too much in love with) how important Spotify’s initial tech stack was. Back in 2007 we really dug into understanding the quality and defensibility of the P2P solution, but since a long time now Spotify has been powered by the cloud.
Here’s how we think about this now. Individual tech solutions become obsolete much quicker than we thought back then, but what’s important are companies’ abilities to attract top tech talent and stay ahead of the curve on tech and product. This remains one of the CORE BELIEFS of Creandum, inspired by what Spotify has shown the world to be possible. And hadn’t it been for the relentless focus on product and tech to support it, I think there’s a big risk Spotify could have missed or joined the transformation to mobile-first too late. Perhaps that was the last chance to disrupt the company.
As we all know now, tech is often an important and much needed component for startups to disrupt the market or change the game, but it is only those companies that can transcend the advantage that the tech delivers and build a stellar mix of product, marketing / brand and a superior growth engine that succeed big.
Trying to model what’s in front of you like a biz you know instead of focusing on the power of change
At first glance, we saw Spotify as something closer to next generation of radio than anything else. So initially we spent quite some time trying to approximate the market size through the lens of e.g. radio advertising.
What we missed of course is that once consumer access is disrupted, everything changes. Spotify transformed access to music, and could charge for that new, incredibly smooth access. And just look at Uber and their peers for transportation or KRY for digital health; Once you allow consumers to access a service or product like they WANT TO – you can create an unstoppable wave. If you have the means (ambition, team and funds) to catch it at the right time, this can build phenomenal businesses. Spotify did this and has been building on top of their distribution power, leveling up the product many many times over based on data.
Perhaps my favorite example in the Spotify ecosystem is the Daily Mix – which uses my (and that of many others like me) past consumption data to suggest playlists with a nice blend of artists I know and love with artists & songs that I most likely will love and know. So when once charging primarily for a new a and disruptive infrastructure & aggregation service, the company has moved on to create another kind of value for its users. There is simply no way I can live without the tailored music experience that Spotify delivers. To me it is priceless.
Fund strategy – Creandum should have invested the WHOLE FUND, right?
Creandum took a super gutsy bet in Spotify’s A-Round, we’re happy with that. I still remember the night, over dinner right after the company had past its first million monthly active users somewhere 2008, when Daniel first articulated his view that this could reach 100M MAUs. I felt in awe of his vision and ability to dream big.
But is there an argument that Creandum should have bet even bigger even longer on Spotify? Quite a few of the financing rounds in the company’s history will likely produce totally outsized returns for also those investors that got in later. This again just goes to show that there is such a disproportionate value aggregation to the outliers in venture. And that as a VC you should always double down on the winners.
Double down can mean many things though. And betting the fund is not realistic. Had Creandum been even more aggressive in this one phenomenal company – then maybe it would have risked the fundraisings of a few of the other good performers in that fund since Creandum wouldn’t have been there for them as an internal supporter of the next round. And looking at how Creandum ended up playing it, the fund is still one of the best performing early stage funds of all times out of Europe ;).
Now arrived in my hotel room in New York I couldn’t be more excited to see what comes out of Spotify’s Capital Markets Day, and to see the team communicate their vision for Spotify on the world stage. Looking back at this slide reminds me of how so many things have changed since 2007, but one thing that’s remained constant is Spotify’s uncompromising drive to build the best music streaming product on the market. We’re so grateful to have been a small, early part of that.
