Spotify investor Lakestar won’t be selling its shares — and thinks it should be a $100 billion company

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  • Music streaming company Spotify will go public today via a direct listing — meaning it won’t issue new stock but will allow insiders to sell shares on the public market.
  • Small shareholder and early investor Lakestar will not be selling its shares.
  • Lakestar founder and CEO Klaus Hommels said he thinks Spotify can be a $100 billion company with 700 million subscribers.
  • But Spotify still has to compete against big rivals such as Amazon and Apple, and work out how to turn a profit while paying fat royalty fees out to labels and rightsholders.

When Spotify floats on the New York Stock Exchange today, it’s a chance for investors and insiders to sell their shares on the public market.

But there’s one early backer who won’t be selling its holding: European venture capital firm Lakestar.

Founder and CEO Klaus Hommels, who also invested in Spotify personally in 2008 before founding Lakestar in 2011, told Business Insider he was committed to a future vision of Spotify as a “$100 billion company” with an eventual subscriber base of 700 million users.

“For sure we won’t sell,” he said. “If you are in the [investing] business as long as I am, you … have committed so many mistakes on your way by selling too early that the thing you learn is not to be influenced by momentary emotional overreactions. My clear view — and it’s also the banks’ view — is that Spotify should be a more than $100 billion business. This listing is a little time window in its journey. We don’t think we should sell.”

An earlier investor at GP Bullhound pegged Spotify’s valuation at around $20 billion. The company has predicted it will have up to 96 million subscribers by the end of its fiscal 2018.

Hommels wouldn’t say how big a stake he or Lakestar currently holds, but it will amount to a small percentage of Spotify’s overall business. Spotify listed out its major shareholders in documents filed to the SEC in February, and Lakestar is not on that list. According to Crunchbase, Lakestar last participated in a funding round for Spotify in 2012, since which it has raised a growth round and debt financing.

There are three ingredients to merit that valuation, Hommels said.

The first is that millions of people around the world have yet to discover streaming. The way most people can access music in non-streaming markets is to buy a CD and put it in a CD player, which is prohibitively expensive. (Hommels doesn’t mention that people with cheap phones in developing markets could probably just stream off YouTube.)

The second is that Spotify already has “broad distribution” — in other words, it’s the biggest music streaming service globally.

And finally, Hommels points to Spotify’s executive team which is “unbelievably committed” and “highly gifted.” Hommels specifically praised Ek’s vision for music and that fact he is “not driven by money”, and CFO Barry McCarthy, a Netflix veteran and the driving force behind Spotify’s unusual direct listing.

Spotify can beat Apple and Amazon because music isn’t just a ‘side product’ to sell hardware and services

Spotify might be the most popular streaming service now, but tech giants like Amazon and Apple offer their own rival services with added extras.

Amazon Prime Music comes free with the wider Amazon Prime subscription, which has added benefits such as one-day deliveries and original shows on Prime TV. Apple Music is newer and has struggled to dent Spotify, but plans to expand and offer more original content. Apple also has a lot of cash.

Hommels doesn’t namecheck Amazon or Apple specifically, but criticises Spotify’s rivals for turning music into a side project. 

“It’s a team where everyone lives and breathes music,” he said. “[Daniel Ek] thinks hard about the problem, of how to make the music industry better and how to be more helpful to artists. Executing against that is much more powerful than making music a side product of another company.”

For both Amazon and Apple, music is about bringing you into their wider ecosystems. If you subscribe to Apple Music, chances are you might buy an expensive HomePod speaker to listen to it at home. And Amazon Prime Music is a good way to upsell you into the wider Prime offering.

This, said Hommels, makes Spotify’s rivals much more dangerous to the music industry than Spotify itself — and that’s why it isn’t in record labels’ interest to put the firm out of business through extortionate licensing deals.

“This is the best player in the market to allow margins to rise,” explained Hommels. “The other players are way more dangerous. They devalue music, put it into bundles, subsidise it with hardware. But the value of music has a different meaning with Spotify. No other company is thinking with the same interests as the music industry and artists. The whole industry has a higher interest in allowing somebody to serve them.”

He added: “Spotify has always tried to find a cooperative way with the labels. In the end, some of the biggest people profiting from Spotify are the labels currently. I think they will keep on going. For some reason, it’s always more catchy to say that if someone wins, someone else has to lose. In this case, it might not be that somebody has to lose.”

SEE ALSO: A Spotify investor who predicted its $20 billion valuation says everyone is wrongly focusing on its losses

SEE ALSO: A decade-long investor in Spotify said there is a big hint about how it will cut out record labels

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