Soundcloud’s losses: How much is too much?


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!

  • I completely agree with what you’re saying in this article.

    Joking aside, there is so much doom and gloom talk around how bad the raising environment is right now if your balance between growth and revenue is too skewed towards growth. I hope they still have a lot of capital left to figure it out.

    • So much of what we see in tech is extremism, driven by opportunity and greed. When times are good, valuations go way up, companies raise (and spend) more than they need. When times are bad, the contraction goes too far in the other direction. There has to be a better way (though maybe this is just human nature).