Behind Pandora, There’s Walden Venture Capital—A Little-Known “Sprout Stage” Investor with Music Mania
[Updated, 8:00 a.m. ET] If there’s a tune playing at Walden Venture Capital today, it’s probably “We’re In the Money.”
The San Francisco venture firm is the second-largest shareholder in Pandora, the Oakland CA-based personalized Internet radio startup scheduled to go public on the New York Stock Exchange today under the ticker symbol “P.” Walden owns 18.67 percent of Pandora’s common stock, a chunk exceeded only by Crosslink Capital’s 22.92 percent share.
Neither firm is selling shares in the IPO—but as Pandora came out of the gate today at a reported $16 per share, Walden’s stake was worth at least $455 million. (It’s not known how much Walden paid for its shares, but it was part of a syndicate of seven investors who together put $19.8 million into Pandora in 2004 and 2005, so it stands to reap a hefty return no matter what.)
I’ve had two conversations with Walden Ventures managing director Larry Marcus in recent months. The SEC’s quiet-period rules kept him from saying a lot about Pandora, but I did get a sense of how the firm thinks about the digital media revolution, and why Marcus and his partners are attracted to the Internet music business.
It’s a sector that hasn’t traditionally been kind to investors. Indeed, Walden experienced at least one “colossal failure,” in Marcus’s words, with Snocap, Shawn Fanning’s post-Napster music venture. The company raised $25 million from Walden and other investors to build a digital registry supporting legal file-sharing, but the technology never took off and Imeem bought the startup in 2008 for an undisclosed price.
But that didn’t sour Walden on music technology. It’s now got big investments in SoundHound, a maker of top-ranked music search apps for mobile devices, and RootMusic, whose BandPage platform is used by 200,000 bands to manage their Facebook fan pages. Pandora, SoundHound, and RootMusic are “three incredibly interesting companies” that are “solving different kinds of questions for music fans—how do you connect with bands, how do you search, how do you listen,” says Marcus, whose office at Embarcadero Center is home to what’s possibly one of the Bay Area’s biggest collections of vintage video game consoles, PCs, PDAs, and other gadgets; there’s even a rare Lisa computer from Apple. “I continue to be really excited about the music space, because consumers have such a passion for music. I think it’s pretty unique [for a fund] to have this kind of concentration.”
The mini-cluster of music companies in Walden’s portfolio reflects the firm’s larger interest in early-stage digital media, entertainment, and cloud services startups. Founded in the mid-1970s by Art Berliner and George Sarlo, who are still active partners, the firm calls itself a “sprout stage” investor, meaning it seeks out companies that have a technology that’s mature enough for a convincing demo but hasn’t hit the market. “We try to avoid the seed stage, because even with great people, the transition to developing a product is a very brutal one, and it can take a lot of iteration,” says Marcus. “I want to see it after they’ve built it, and if it’s doing some amazing thing, we can work on how to bring it to market.”
The sprout in Pandora’s case was the Music Genome Project, the effort co-founded by Tim Westergren in 1999 to classify, organize, and recommend music based on nearly 400 attributes. “When I met Tim, the Music Genome Project was fully developed and functioning, and was being licensed out to a couple of industry players like AOL and Best Buy,” Marcus says. “They thought it was great—Best Buy was using it in a kiosk where you could scan a CD and it would tell you other recommended songs. AOL was using it in recommending music off of AOL Music. So we knew the technology was amazing. But when I looked at the Genome itself and felt this overwhelming sense of how incredible the recommendations were, that was the ‘Aha’ moment.”
Marcus helped the company Westergren had built around the Music Genome Project—Savage Beast Technologies—find a chief technology officer, a business development staff, and a new name, and the rest is history. While Marcus declined to speak in detail about Pandora, citing quiet-period rules, he did say that Walden’s experience with Snocap drove it toward music companies like Pandora whose businesses don’t depend on direct licensing negotiations with music labels. (Pandora pays royalties under statutory licenses managed by the U.S. Copyright Royalty Board.) “The business of actually selling music is a very difficult one,” Marcus says. “The labels still haven’t figured out how to support an early-stage company ecosystem, so for the most part investors aren’t handing over VC money toward up-front licenses. I’m more interested in technologies and services that are going to help connect users—the fans—with the music and the bands they love.”
San Jose, CA-based SoundHound is a case in point. The company’s iOS, Android, and Symbian apps helps users identify a tune by singing, humming, or playing it into their mobile device’s microphone. A new variation of the SoundHound app, simply called Hound, uses speech recognition technology to retrieve songs instantly when the user speaks the name of an artist, band, or title. “The vision of the business is to make sound and voice the interaction mode with the device, to make that the way you search for music,” says Marcus. With a business model mixing advertising and music purchases, SoundHound could eventually be as successful as Kayak in the travel business, Yelp in restaurant search, or Zillow in real estate, Marcus asserts.
San Francisco-based RootMusic, meanwhile, is helping bands make the move from MySpace to Facebook. Using BandPage, groups can set up a page where fans can listen to their music, watch videos, see concert dates, share tracks to the walls of other listeners, and buy tickets, merchandise, and music downloads. “It’s the top social music company,” says Marcus. “BandPages and Facebook are becoming increasingly interesting as a platform for discovering music. The music [bands] want you to hear is there, and they are increasingly launching media campaigns there.”
So while Apple seems to have a stronger and stronger lock on music downloads, Marcus says there’s plenty of room left for other music companies to innovate. Some choice quotes from our interviews:
- “There are going to be some very interesting opportunities around music education and even learning an instrument. Digital signal processing using the iPad as both processor and interface is going to replace a lot of hardware.”
- “The other really interesting battle is going to be over cloud services and whether people should be buying music and keeping it on the iPod or subscribing to a service where they can go and get it on demand. Those services have been a real challenge to date, but there is a lot of energy going into those, so that the functionality and the ease of use get so great that people are really willing to shell out subscriptions.”
- “I’m very bullish on products and services that take unique advantage of the smartphone’s capabilities. It could be using the cameras, the gyroscope, the touch screen.”
- “In a world where you have access to everything, what really matters most is the thing you want. So curation and personalization are the real value-added features.”
Expect to see Walden invest in more music technology startups in the future. Marcus says he’s “getting a lot of music deal flow, because it’s not an area that that many people have invested in or had success in.” And if Pandora gets its widely expected pop on the stock exchange today, Walden’s flow could increase even more.