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Harder, Better, Faster, Stronger: How European VC backed a tech titan

25 May 2018

Spotify, the leading music streaming service, went public on the New York Stock Exchange in early April in an unconventional direct listing masterminded by the Swedish company’s founder, Daniel Ek.

Company executives didn’t ring the opening bell. On the trading floor, they shunned the usual interviews. But despite the lack of fanfare, this highly-anticipated flotation, which valued the company at an unprecedented $26 billion, was a milestone for European venture capital.

A 23-year old Daniel Ek established Spotify in 2006 with co-founder Martin Lorentzon, a fellow Swedish serial entrepreneur who had previously bought Ek’s adtech company, Advertigo. Spotify’s entry into the music industry came at a time when digital piracy was rife and traditional labels were struggling to maintain sales. By creating a platform for streaming, it was able to reach consumers and monetise music in a fresh way. But they didn’t do it alone. Over the company’s 12-year history, it has benefited from funding and expertise from European VCs – and Invest Europe members – including Swedish firms Northzone and Creandum, Wellington Partners in Germany and Switzerland’s Lakestar.

Northzone’s General Partner, Pär-Jörgen Pärson knew something special was going on at Spotify’s Stockholm office in 2007 because of the buzz their slick new app was creating. High-profile names following the company’s progress included Sean Parker, the Napster founder who went on to become Facebook’s first president. In a Fortune magazine interview shortly before the listing, Pärson explained why he was initially drawn to Spotify. “They had a level of ambition that I hadn’t seen before in Sweden and were very aware of what they were building,” he said. “They weren't settling for the good enough; they were going for the best.” On Creandum’s website, General Partner Fredrik Cassel reflects on why he was attracted to Spotify around the same time: “The pitch already from the start was, ‘This needs to be better than piracy’, and of course anyone who tried it knew that it was. It was just better.”

Fortunately for their investors, these experienced European VCs understood the company’s huge potential early on. By the end of March 2018, Spotify had 170 million monthly active users, of which 75 million were premium subscribers paying for the streamer’s services. As a result, the funds at these venture capital firms will have seen their shares in the company soar in value to record breaking levels. When they exit the investment, these shares could be realised as returns worth billions to their investors. That’s on a par with the level of returns most often seen in Silicon Valley tier one funds, the US’s high-octane heartland of investment in innovation.

This is great news for European venture capital. Spotify’s IPO will grab the attention of global investors seeking impressive returns during this extended period of low interest rates. Indeed, Invest Europe’s 2017 industry activity data report reveals the total value of VC-backed companies going public increased by 60% last year. And by listing on the stock exchange instead of being sold to a US or Chinese conglomerate, Spotify keeps its headquarters in Stockholm. It is leading the wave of tech titans that are now being born, growing up and flourishing in Europe.

On the day before Spotify’s listing, Ek published a letter on the company’s website, writing: “I am proud of what we’ve built over the last decade. But what’s even more important to me is that tomorrow does not become the most important day for Spotify. It’s the day after, and the following day that matters – and all those days to come.” This commitment reflects the determination of entrepreneurs and the VC industry in Europe. Indeed, European venture capital raised €7.7 billion in 2017, close to 2016’s record €8.2 billion fundraising year, according to Invest Europe data. For the first time in 2017, European venture funds raised on average almost €100 million at final closing, almost double the average of ten years ago. Clearly, more and more investors are seeing the potential of investing in European VC. As the next innovative success stories emerge, they will reap the rewards. Moreover, with the European Commission’s new ‘VentureEU’ programme, launching six new pan-European VC funds-of-funds backed by €410 million of fresh EU funding, global institutional investors with deeper pockets will soon gain access to the market.

Daniel Ek signed off his letter with a title from French DJ pioneers Daft Punk – another world famous example of Europe’s credentials in music and innovation. This rallying cry for Spotify could also apply to the ambitions and prospects for European venture capital: “Harder, Better, Faster, Stronger.”

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Nenad Marovac, Chair for 2017-2018, Invest Europe; Founder and Chief Executive Officer, DN Capital

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