The Berlin music startup Soundcloud is catching its breath after borrowing $70 million earlier in March. Following the naming of the company’s financial providers, Ares Capital, Kreos Capital and Davidson Technology Growth Debt Fund, many market observers are wrestling with a single question: Is this a “saving grace or a kamikaze campaign? (German)”
This is based on an assumption that startups should only use debt as a second option: It is not uncommon for shareholders and corporate executives to tailspin out of control. Not so coincidentally, Fred Wilson, a SoundCloud investor and Union Square Ventures partner, wrote about this concept in his blog three days before the information went public. The takeaway? If a company opts to take on debt instead of doing a “real” financing round with their own capital, watch out. There might be a problem.
In SoundCloud’s case, the need for outside capital – for a second time since 2016 – was likely due to an inability to agree on a fair valuation before doing another equity round with potential and existing investors.
Prospective buyers rated the company at significantly less than the $700 million that startup was valued before their financing round last summer, according to a report by Recode. SoundCloud’s founders and early investors are said to have strongly disputed the low valuation and insisted on a networth of $1 billion.
Ambiguity regarding SoundCloud’s valuation is tied to an ongoing internal crisis facing the 10-year-old company. The startup has reported yearly losses, and it is unclear how well the subscription model – which kicked off in 2016 – is doing. And just yesterday news broke that the David Noël, a loyal SoundCloud employee since 2009 and most recently Head of Internal Communications, is leaving the company to start a new project. This follows after COO Mark Strigel and Vice President of Finance and IT Markus Harder also left the company.
But there are still those who believe in the company, like Eran Davidson. Davidson, which you might have already guessed, is the man behind Davidson Technology Growth Debt Fund, one of SoundCloud’s recent financial supporters. Davidson spoke with Gründerszene about the deal and shared his optimist view on the company’s trajectory.
“I wouldn’t have done it if I wasn’t convinced that this is a great company and that they’re also well undervalued,” Davidson says. “SoundCloud is by far the biggest music platform in the world, though I really don’t care too much about the numbers. They have 175 million active users!” Globally there less than ten companies that have so many active users, he claims.
Davidson also points to the large amount of user-generated content on the platform. More than 135 million tracks are hosted on SoundCloud. “It is no coincidence that the top 3 music labels and a range of top VCs have invested in SoundCloud,” he continues. There is still “lots of untapped potential.”
“I have never had a single doubt about the company.”
This article originally appeared on Gründerszene.