February 21, 2011 7:34 pm

Fundraising to lift Spotify to $1bn valuation

Spotify, the Anglo-Swedish digital jukebox service, is close to raising a large, new round of funding at a $1bn valuation, led by Digital Sky Technologies Global, the Russian investor.

The transaction, which is yet to be finalised, is likely to include input from other investors to raise about $100m in total, according to people familiar with the negotiations, making it the digital music company’s largest round to date.

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It would put Spotify in an elite group of European internet companies to achieve a billion-dollar valuation, in spite of still being lossmaking. The funds will help it to challenge Apple’s iTunes as the dominant retailer of music online and to launch new services, people familiar with its strategy said.

Spotify and DST declined to comment.

DST Global, which listed its Russian internet business, Mail.ru, in London last year, has invested in several leading digital media companies, including Facebook, Groupon and Zynga.

Spotify, which was founded in 2006 by Daniel Ek and Martin Lorentzon, has its headquarters in the UK, with its main technical team in Stockholm. Existing investors include Li Ka-shing, the Hong Kong telecoms billionaire; Wellington Partners, a London-based venture capital firm; and Northzone Ventures, a Nordic investor.

More than 10m people across European countries use its advertising-supported service to listen to a catalogue of 10m tracks for free, on-demand over the internet. But it has attracted fewer than 1m paying subscribers to its mobile and ad-free premium service, a conversion rate that concerns some record labels investors in the company.

Concern over its business model and the probable returns for artists and labels has held up a planned launch in the US for more than a year, although it is now starting to secure contracts with US labels. Spotify has not commented on Apple’s planned 30 per cent commission on subscriptions through its iPhone app store, which some analysts say could undermine the economics of many digital music services.

Auditors to Spotify’s latest accounts, published in the UK last November, warned the company could struggle to continue as a going concern; the company said then that it was negotiating further funding to support its “ambitious growth plans”.

The accounts showed Spotify lost £16.6m in the UK in 2009, on revenues of £11.3m, prompting some observers to suggest its fundraising fuelled concerns of a bubble in tech valuations.

“$1bn is pretty frothy for a loss-making business, whilst growing fast,” said one venture-capital investor in a rival music service.

Pär-Jörgen Pärson, a partner at Northzone and a Spotify director, declined to comment on news of the fundraising, which was first reported by the Techcrunch blog.

“Spotify has always kept an eye open for strong partners to build its business around,” he said. “I think the company is doing marvellous things in the European market. It deserves to be treated like one of the true game changers in the internet right now.”

Additional reporting by Mary Watkins

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