Why SoundCloud’s $50 Million Round Might Actually Make Sense

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If you’ve been in this space long enough – like, a year – you’ve probably developed an allergic reaction to huge funding rounds.

It just seems so speculative and disaster-prone!  Case in point: just a few days ago, Beyond Oblivion melted into a bonfire of wasted cash, specifically $87 million across two rounds.  As the blood started flowing, Beyond CEO Adam Kidron quick listed licensing as the biggest dagger, and we’re not sure refunds are being issued.

Then there’s Spotify, which grabbed another $100 million last year, but is getting dogged by serious profitability and sustainability questions.

Which brings us to SoundCloud, the Berlin-based, web sonification extraordinaire that just received $50 million in financing.  Kleiner Perkins Caufield & Byers (KPCB) led the round, while bringing the broader valuation of this company towards $200 million.  This is all part of a huge bet on internet sound, and a desire to chase the category-killer equivalent of YouTube or Vimeo.  “[KPCB investor] Mary Meeker showed very clearly in her recent State of the Internet 2011 presentation that sound is the next frontier on the web,” explained SoundCloud founder and CEO Alexander Ljung.

Sounds fantastically ambitious, and dangerously expensive.  Actually, KPCB is also an investor in Spotify, but unlike that bet, SoundCloud’s model isn’t predicated or dependent on expensive major label licensing demands.  Meaning, disproportionately large amounts of this financing won’t be siphoned off towards major content owners, with deals that must be renewed after a relatively short period.

So instead of hemorrhaging 75 percent of available funds towards licensing, SoundCloud can focus on building its platform, attracting extremely talented (and well-compensated) executives, and boosting the value proposition for paying subscribers (which tallied 5 million in June).

In fact, we’ve heard that one earlier SoundCloud investor – Union Ventures – is mostly avoiding music startups that involve expensive and potentially show-stopping licensing costs.  Because if anything, it seems that major labels are mostly entering these negotiations with short-term cash interests in mind, not a shared goal towards longer-term business growth.  And that’s no good.

> SoundCloud was started in 2008 by Ljung and Eric Wahlforss.  Last year, the company pulled a $10 million Series B, and its initial round was in the $3.3 million range.  GGV Capital also participated in the latest round.