Spotify and the Great Leaps of Faith

Last month at The Europas - TechCrunch Europe’s version of the Crunchies - a lot of impressive start-ups were honored. But one was clearly cleaning up: Spotify , the sexy online music app that has music lovers in Europe swooning. Each time the company won, you heard two reactions from the crowd: fan boys screaming with joy and other companies’ founders groaning. “Too big for their boots,” was a phrase heard muttered a lot. But player hating is just part of life as a hot start-up right? Of course - but Spotify is living in a particular dual reality. It’s caught between the rapture of music lovers who say it’s the site they always dreamed could exist and the cruel reality of the online music business. And that meant there was a lot more drama than immediately meets the eye behind that reported $50 million funding and $250 million valuation. As one investor who ultimately passed on the deal told us, “This was one of those where you hold your nose and just pay up. Before you’ve done anything the majority of the economics are right out the door to the labels. You need huge scale to pay for all that, and then you’re still in bed with a bunch of numb nuts.” Someone in the comments of our previous Spotify story said it was Europe’s YouTube. We don’t know if they meant that in a good way or a bad way—but we agree on both. The problem with the comparison? YouTube found Google; a deep-pocketed public company that was also trying to build a video offering online and was willing to pay top dollar for YouTube’s streams, and their associated business model challenges. Several VCs we talked to used the words “leap of faith” over-and-over again in describing the decision to invest in Spotify or not. In reality an investor has to make multiple leaps of faith to do this deal, especially at a $250 million valuation. Looking at those leaps explains why so many VCs who were awed by the product ultimately passed - and yet why a few ballsy investors saw the elusive upside worth the role of the dice.