As a passionate and regular Soundcloud user I was saddened (but not at all surprised) to learn that the music streaming network is in financial difficulty.
Apparently, they have lost over $70M in the last 2 years alone. To date, they have raised over $150M. According to this leaked document, in 2014 they lost $ 2.25 for every $1 in revenue.
All of this raises some interesting questions. How much “should” a startup burn before it has a proven business model and path to profitability? How does a startup get to raise so much capital if they have not yet figured out how to build a “real business”?
The answers here are driven by three big factors:
- Opportunity size: The bigger the overall market, the more you can spend to capture it
- Engagement: If you build something that matters, and users are all over it, then you know there is value (even if that value is not reflected in the business model today)
- Growth rate: High engagement usually results in a high growth rate (especially with a consumer service that has a viral component). Growth, above all else, gets investors all hot and bothered.
Soundcloud’s first VC was Union Square Ventures. They have a clear thesis around large networks of highly engaged users. And they have a track record of delivering premium returns with that thesis.
So, I sure hope Soundcloud turns the corner and figures out how to build a sustainable business for the long term. But with monetization of ~ 11 cents per user, they have a ways to go!