Stronger by Paying Salaries and I Have 1 Billion Employees

In 2012, Spotify had just completed its Pre-Series E funding round, with a post-money valuation of 1.5 billion US dollars.

After eight months of rapid expansion, a re-evaluation based on its current market share and number of paying subscribers placed its valuation at around 2.5 to 3 billion US dollars.

Compared to its 26 billion US dollar IPO valuation six years later, there was room for eight to nine times growth. Compared to its peak market cap of 149 billion US dollars, there was an opportunity for over sixty times the profit.

For Chen Yansen, investing in Spotify could, one, yield generous investment returns, and two, complement the application ecosystem for the Alexa Smart Speaker.

Besides, Daniel Ek’s fees weren’t high. If it were Apple’s iTunes, Cook might have charged him a 30% music royalty fee.

Therefore, Spotify was clearly a worthy investment at this time!

Chen Yansen looked at Daniel, a deliberate expression of hesitation on his face. After pondering for more than ten seconds, he slowly began to speak.

"Senlian Capital has yet to venture into overseas investments. I’m personally optimistic about Spotify’s future, but that’s contingent on solving a series of problems, such as high copyright costs, an unclear path to profitability, sluggish user growth, and a low paid conversion rate."

For a music software company, difficulty with profitability was enough to make 99% of potential investment firms back away.

After all, an investor’s core objective is to make a profit, not to pay out of their own pocket for an entrepreneur’s dream.

The copyright predicament had ensnared Spotify like a quagmire.

Daniel nodded slightly and, sitting up straight, replied, "Mr. Chen, I admit that copyright fee expenditures are indeed Spotify’s biggest obstacle to profitability.

To that end, I have been in communication with record companies like Universal, Sony, and Warner. We’re preparing to optimize the royalty payment model to a per-stream basis, which would lower the copyright costs for less popular songs."

"And Universal, Sony, and Warner will agree to that?"

Chen Yansen countered with a smile.

’Who would spit out a juicy piece of meat once it’s in their mouth? The more users Spotify had, the higher the royalties for the record companies. It would be a cold day in hell before Universal, Sony, and Warner agreed to that! He used the word ’preparing,’ but there were no contracts signed. It was clearly just phrasing cooked up to secure funding.’

Seeing that Chen Yansen wasn’t taking the bait, Daniel couldn’t help but sigh. ’Asian investors are mostly the shrewd and rational type.’

Three years ago, Li Jiacheng’s Wei Gang Capital had participated in Spotify’s Series B funding. During negotiations, the Li Family’s financial analysts had presented a stunning valuation algorithm model that managed to drive the price down by a full 20 million US dollars.

’In his opinion, even though Chen Yansen didn’t have professional financial and legal staff with him, the man was clearly a sharp businessman who would be difficult to fool.’

Daniel thought for a moment, then looked at Chen Yansen and said, "If Spotify is dragged down by copyright fees, Universal, Sony, and Warner stand to lose 500 million US dollars a year. As Spotify’s market share continues to grow, that number will only get bigger—even 2 or 5 billion US dollars. They won’t just sit by and watch Spotify fail."

’The three major record companies might make concessions, but how big those concessions would be remained an unknown.’

His business acumen and operational skills were good, but constrained by the high copyright fee expenditures in Europe and America, the founding team’s equity in Spotify had dwindled with each funding round.

Before this, he had successively met with investors from Goldman Sachs, Fidelity Capital, and Coca-Cola, but after some discussion, he found that the highest offer was only 2.8 billion US dollars, a far cry from his minimum acceptable figure.

That was why he had tentatively asked about Chen Yansen’s interest in investing. He wanted to bring in an investor from outside Europe and America to dilute the shareholders’ holdings and secure his own controlling stake.

Chen Yansen smiled and said noncommittally, "Perhaps."

"Spotify is preparing for its Series E funding round..." Daniel decided to be direct.

"You want me to invest in Spotify?" Chen Yansen cut him off, asking with a look of surprise.

"That’s right! Of course, whether we can actually cooperate will depend on your interest, Mr. Chen," Daniel replied.

"What’s your target valuation?" Chen Yansen asked, leaning back and taking a sip of the hot coffee on the table.

Hearing this, a hint of joy appeared on Daniel’s face. He quickly replied, "3.4 billion US dollars. If you’re interested in investing, Mr. Chen, I’m willing to part with 5% of the equity."

Chen Yansen shook his head slightly, answering his own question. "That’s too high. Do you know what the typical valuation is for a music app in Hua Country with 20 million daily active users and 5 million paying subscribers? Three to five hundred million US dollars at most."

The moment Daniel heard "three to five hundred million US dollars," he grew anxious. Leaning forward, he immediately responded, "But Spotify is facing a global market! The potential is different. Once it successfully goes public, its future market cap won’t be less than 10 billion US dollars."

Chen Yansen said with a light chuckle, setting down his coffee cup, "I heard Universal Records is in secret talks with Apple about an exclusive licensing deal. If Spotify can’t afford the copyright fees, the big three record companies might just wait for Spotify’s funding to dry up and then acquire it on the cheap."

"N-No... Impossible!" Daniel denied, his face pale with disbelief.

Chen Yansen made a noncommittal sound, his tone deliberately casual. "Maybe it’s just a rumor. Can’t be taken seriously."

But Daniel’s composure was already shattered. He was terrified that Universal, Sony, and Warner would backstab him, and combined with the investors’ unreasonable lowballing, he actually started to believe about half of it.

Chen Yansen continued, "The 5% equity stake is fine, but I can’t accept a 3.4 billion US dollar valuation. Below 3 billion US dollars, there’s a possibility of cooperation."

"A 3 billion US dollar valuation is too low. The number Goldman Sachs gave was over 3 billion," Daniel immediately refused.