WEBVTT - The Soundcloud Story 0:00:04.200 --> 0:00:12.640 Get technology with tech Stuff from dot com. Hey there, 0:00:12.640 --> 0:00:16.560 and welcome to tech Stuff. I am your host, Jonathan Strickland. 0:00:16.640 --> 0:00:19.959 I'm a senior writer with how stuff Works dot com, 0:00:19.960 --> 0:00:23.480 where we explained how the universe works one topic at 0:00:23.520 --> 0:00:27.280 a time. And as you probably know, I am one 0:00:27.320 --> 0:00:30.720 of the people in charge of the computer and Electronics channels, 0:00:31.120 --> 0:00:34.760 senior writer for those channels, so I cover all stuff 0:00:34.800 --> 0:00:38.040 what goes beep, as my former co host Chris Palette 0:00:38.040 --> 0:00:41.960 would say, and uh, today we're going to talk about 0:00:42.000 --> 0:00:45.760 a web based service, one of the really popular ones 0:00:46.440 --> 0:00:53.920 that has suffered some problems recently. In August, this particular service, 0:00:54.040 --> 0:00:58.520 the streaming music service SoundCloud, wasn't really serious trouble. The 0:00:58.560 --> 0:01:02.200 company was teetering the brink of collapse. It was in 0:01:02.360 --> 0:01:05.520 desperate need of investment money to stay afloat, and for 0:01:05.680 --> 0:01:09.760 about twenty four hours, the tech world, including myself, watched 0:01:09.880 --> 0:01:12.240 to see if a rescue line would be thrown to 0:01:12.280 --> 0:01:15.639 the company or if it would sink, leaving the people 0:01:15.680 --> 0:01:21.600 who still use the service completely stranded. I guess marooned. 0:01:21.720 --> 0:01:25.440 Perhaps I should keep using the ocean metaphors. As it 0:01:25.480 --> 0:01:29.280 turns out, SoundCloud lived to stream another day, but I'm 0:01:29.280 --> 0:01:32.880 getting ahead of myself. Where did the service come from, 0:01:32.920 --> 0:01:35.000 and what's the story behind it and how did it 0:01:35.040 --> 0:01:38.000 get so close to going under and what pulled it back? 0:01:38.600 --> 0:01:43.119 At least for now, well ten years before SoundCloud found 0:01:43.120 --> 0:01:48.200 itself in this precarious position, it was born Alexander Leong 0:01:48.720 --> 0:01:52.320 and Eric wall Force. And I know I'm butchering their names. 0:01:52.320 --> 0:01:57.120 They're both Swedish, and my Swedish is as as bad 0:01:57.160 --> 0:02:02.000 as any of my completely unfamiliar languages. Right, I know 0:02:02.120 --> 0:02:05.160 I'm going to butcher names. I apologize from this point 0:02:05.840 --> 0:02:09.720 forward for all of that. I just know that I'm trying. 0:02:10.560 --> 0:02:13.120 I might be failing, but I'm putting forth an effort. 0:02:13.760 --> 0:02:19.120 So Leung and wall Force joined forces to create these 0:02:19.160 --> 0:02:22.320 streaming service SoundCloud. But let's learn a little bit more 0:02:22.320 --> 0:02:25.359 about both of them before we get into the company itself. 0:02:25.840 --> 0:02:29.560 So Alexander Leong was born in the United Kingdom, but 0:02:29.680 --> 0:02:33.160 he spent his childhood in Sweden. From the sounds of it, 0:02:33.360 --> 0:02:37.840 he was quite the little brainiac. He attended Stockholm University 0:02:37.880 --> 0:02:40.360 from two thousand one to two thousand four, and there 0:02:40.360 --> 0:02:47.200 he studied such diverse topics as literature, politics, international relations, philosophy, 0:02:47.360 --> 0:02:50.800 and film music. He went on to study marketing at 0:02:50.840 --> 0:02:53.840 the Stockholm Technical School from two thousand five or so, 0:02:53.919 --> 0:02:57.600 and then he took more courses in human computer interaction 0:02:57.960 --> 0:03:02.280 at the at the Royal Technical Institute. And this guy 0:03:02.560 --> 0:03:05.160 would leave me in the dust unless we were to 0:03:05.200 --> 0:03:08.320 get into a real deep discussion about Chaucer or Milton 0:03:08.440 --> 0:03:11.440 or Shakespeare. I bet I could hold my own in 0:03:11.480 --> 0:03:15.119 those cases. But it sounds like he was really interested 0:03:15.200 --> 0:03:19.799 in a huge spectrum of topics. Now, while he was 0:03:19.919 --> 0:03:22.960 learning all this stuff, he was also working in a 0:03:23.000 --> 0:03:28.000 sound design company called A L. C. Lud Design from 0:03:28.000 --> 0:03:30.040 two thousand to two thousand three. He was a sound 0:03:30.080 --> 0:03:33.560 designer and composer for that company. So he was filling 0:03:33.560 --> 0:03:36.600 his brain with tons of different subjects while also working 0:03:36.680 --> 0:03:39.760 as a creative professional. Now, he got that job because 0:03:39.840 --> 0:03:43.680 he recorded an album. He was a musician and decided 0:03:43.720 --> 0:03:47.160 to record his own music and it got some notice 0:03:47.280 --> 0:03:49.680 in the professional world, and this company said, hey, why 0:03:49.680 --> 0:03:51.920 don't you work for us in sound design? Sounds like 0:03:51.960 --> 0:03:54.800 you're really talented. Uh. He would actually go on to 0:03:54.840 --> 0:03:58.440 say that he was making quote very very very very 0:03:58.560 --> 0:04:03.560 bad music end quote. He did not He really downplays 0:04:03.640 --> 0:04:05.760 the quality of the work he did back when he 0:04:05.800 --> 0:04:07.240 was a kid, but it was good enough for him 0:04:07.280 --> 0:04:10.040 to land this gig, so he was working at the 0:04:10.040 --> 0:04:13.400 same time as he was studying. Now after his studies 0:04:13.400 --> 0:04:17.760 were over, Alexander moved on to work with SF Anytime, 0:04:17.839 --> 0:04:21.719 which was a video on demand service that serves customers 0:04:21.720 --> 0:04:28.119 in Sweden, Finland, Norway and Denmark. Uh And I looked 0:04:28.160 --> 0:04:31.839 into SF anytime while I was researching this podcast. I 0:04:31.839 --> 0:04:34.920 wanted to see what it looked like. And the library 0:04:35.120 --> 0:04:39.080 is really impressive, though there are a lot of boomlouts, 0:04:40.120 --> 0:04:44.920 like a lot of them. Alexander's job at s F 0:04:45.040 --> 0:04:50.000 Anytime was as a business and product developer. While he 0:04:50.080 --> 0:04:53.480 was working with s F Anytime, he also founded his 0:04:53.520 --> 0:04:58.560 own cross media production studio called Young Studios, and he 0:04:58.640 --> 0:05:03.960 founded a company called acril P, a media production agency. 0:05:04.080 --> 0:05:07.240 So as that media production agency, he worked with some 0:05:07.720 --> 0:05:12.360 clients of some renown a few companies you've probably heard of, 0:05:12.680 --> 0:05:17.680 like Coca Cola and MTV and Phillips. And this guy's 0:05:17.720 --> 0:05:22.120 resume makes me tired just from reading it. So he 0:05:22.160 --> 0:05:25.160 had founded two studios, plus he was working at SF 0:05:25.200 --> 0:05:29.599 Anytime all concurrently, so he's doing all this work around 0:05:29.640 --> 0:05:33.080 the same time. He left SF anytime in two thousand 0:05:33.120 --> 0:05:36.160 and six, he stuck with the companies he founded acrol 0:05:36.200 --> 0:05:39.640 P and Young Studios until about two thousand seven, and 0:05:39.680 --> 0:05:42.960 it was in two thousand seven that he partnered with 0:05:43.120 --> 0:05:46.840 Eric Walforce to form SoundCloud. So now let's go and 0:05:46.880 --> 0:05:52.000 talk about Eric. We've learned about Alex. Let's learn about Eric. Well, 0:05:52.040 --> 0:05:55.200 first of all, there's less information that's publicly available about 0:05:55.400 --> 0:05:58.120 Eric than there is about Alex. He was also raised 0:05:58.120 --> 0:06:01.160 in Sweden. His grandfather was a member of the clergy 0:06:01.400 --> 0:06:05.880 and his mother directed his local churches choir. Though Eric 0:06:05.960 --> 0:06:08.960 would say that as a kid he resented being dragged 0:06:09.040 --> 0:06:12.840 to church, he found it to be intolerably dull. It 0:06:12.880 --> 0:06:14.680 was only later, as an adult that he began to 0:06:14.720 --> 0:06:19.040 develop an appreciation for religious music. He says that even 0:06:19.080 --> 0:06:22.000 secular people can have an interest in that style of 0:06:22.080 --> 0:06:26.360 music and its complexities and harmonies, and the various aspects 0:06:26.400 --> 0:06:30.719 of religious music that you can encounter, particularly things like 0:06:30.800 --> 0:06:33.479 intricate chance that can date all the way back to 0:06:33.480 --> 0:06:37.680 the medieval era. He would attend the Stockholm School of 0:06:37.680 --> 0:06:40.120 Economics for three years, and then he also earned a 0:06:40.160 --> 0:06:43.160 master's of Science degree from the Royal Institute of Technology 0:06:43.160 --> 0:06:47.039 in Stockholm. He later would move to Berlin, Germany. He's 0:06:47.040 --> 0:06:50.279 an avid supporter of various nonprofit organizations and he does 0:06:50.279 --> 0:06:53.719 a lot of volunteer work now. In the mid nineteen nineties, 0:06:53.760 --> 0:06:57.039 he worked as an interaction designer for a company that's 0:06:57.080 --> 0:07:01.360 called Gate five. Gate five was a company that designed 0:07:01.400 --> 0:07:06.720 location based services for mobile devices that included stuff like 0:07:06.960 --> 0:07:12.880 mapping programs, route planning software, personal navigation tools, and content management. 0:07:13.360 --> 0:07:17.239 In two thousand six, Nokia would go and acquire Gate five. 0:07:17.880 --> 0:07:21.080 In addition to his work and technology, he also pursued 0:07:21.160 --> 0:07:25.320 a love of music. He is known as fours fo 0:07:25.560 --> 0:07:28.760 r s S a musician who creates music tracks that 0:07:28.800 --> 0:07:33.640 are experimental in nature. Typically, his work fuses different elements 0:07:33.720 --> 0:07:36.640 to make something new. You might find a piece that 0:07:36.680 --> 0:07:41.320 combines elements of jazz, house music, ambient music, and Gregorian chant, 0:07:41.400 --> 0:07:44.720 for example. Or there's a piece I love called funk 0:07:44.960 --> 0:07:50.080 for Nerds that makes great use of piano, bass, guitar, cello, percussion, 0:07:50.160 --> 0:07:53.320 and glitchy digital sounds to create a really cool vibe. 0:07:54.200 --> 0:07:57.880 You can actually find it on SoundCloud. So wall Force 0:07:57.920 --> 0:08:01.320 and Leon met at the Royal Institute of Technology and Stockholm, 0:08:01.440 --> 0:08:04.360 and the thing that first united them was a common problem, 0:08:04.560 --> 0:08:09.520 and it was not a problem that involved music, despite 0:08:09.560 --> 0:08:11.520 the fact that both of them were musicians and both 0:08:11.520 --> 0:08:17.280 of them were avid seekers of music online. The initial 0:08:17.320 --> 0:08:19.960 problem that brought them two together had to do with 0:08:20.000 --> 0:08:23.120 the Mac operating system. Now, as le Young would explain, 0:08:23.200 --> 0:08:25.800 he says, I was having this problem where I couldn't 0:08:25.880 --> 0:08:29.560 sink my calendar with I cal the school's calendar feed. 0:08:29.800 --> 0:08:31.360 And I go up to this guy with a Mac 0:08:31.440 --> 0:08:34.600 laptop and I'm like, hey, I notice you have a Mac. 0:08:34.760 --> 0:08:37.000 Do you know how to do this? And no joke, 0:08:37.280 --> 0:08:39.520 He's sitting there trying to get the exact same thing 0:08:39.559 --> 0:08:42.840 to work. And that's how Eric and Alex met. They 0:08:42.880 --> 0:08:47.080 met over the difficulty in sinking their personal calendars to 0:08:47.120 --> 0:08:51.760 their school's calendars using Max software. Just think, if this 0:08:52.320 --> 0:08:56.520 school had been using PCs instead of Max, SoundCloud might 0:08:56.640 --> 0:09:00.400 never have existed. It was only through this chance meeting. 0:09:01.760 --> 0:09:03.719 Who's to say if that's true or not. I mean, 0:09:03.760 --> 0:09:06.080 the chance meeting part is probably true, but the whole 0:09:06.120 --> 0:09:09.720 PC thing is me just being silly. Before long, both 0:09:09.800 --> 0:09:14.640 young men were running into a different, but equally frustrating problem. 0:09:14.679 --> 0:09:18.160 Each was interested in composing and recording music, which they 0:09:18.160 --> 0:09:21.720 could do that was pretty much easy for them. They 0:09:21.760 --> 0:09:24.600 had all the tools they needed in order to compose 0:09:24.640 --> 0:09:27.640 and record stuff. But then, how where do you publish it? 0:09:27.800 --> 0:09:29.720 How where do you host it? How do you get 0:09:29.760 --> 0:09:33.040 people to discover the work you've created so that they 0:09:33.040 --> 0:09:36.760 can actually listen to it and hopefully enjoy it. They 0:09:36.800 --> 0:09:40.240 decided that it was a problem that they could solve 0:09:40.280 --> 0:09:44.199 themselves by making their own platform. They decided it was 0:09:44.240 --> 0:09:46.640 going to be a web based music service that would 0:09:46.640 --> 0:09:49.400 allow people to upload their tracks and then share them 0:09:49.440 --> 0:09:51.319 with the rest of the world, and it would give 0:09:51.360 --> 0:09:55.200 amateurs and independent artists the opportunity to reach audiences and 0:09:55.240 --> 0:09:58.280 share their work, as well as discover other work that 0:09:58.440 --> 0:10:02.440 might serve as inspiration for further musical exploration. It could 0:10:02.440 --> 0:10:06.840 allow for collaborations and remixes and all sorts of creative expressions, 0:10:06.880 --> 0:10:09.240 and it wouldn't have all the hoops you'd have to 0:10:09.320 --> 0:10:12.359 jump through to get your music onto some other services 0:10:12.360 --> 0:10:16.640 like Spotify. They decided to call this new service SoundCloud, 0:10:16.720 --> 0:10:19.680 as it would store audio tracks in the cloud of 0:10:19.720 --> 0:10:24.600 the Internet. So this was an idea to help democratize 0:10:24.840 --> 0:10:30.200 music publishing. Obviously, if you're a musician, the traditional route, 0:10:30.480 --> 0:10:33.880 especially before the web based days, was that you had 0:10:33.920 --> 0:10:36.920 to get discovered by a music label and have that 0:10:37.000 --> 0:10:40.280 music label sign you to an agreement where they would 0:10:40.280 --> 0:10:45.679 produce albums or otherwise, you know, publish your your work 0:10:46.120 --> 0:10:48.320 so that a larger audience might be able to find it, 0:10:48.360 --> 0:10:49.920 and it would be up to the music label to 0:10:49.920 --> 0:10:53.440 promote that and maybe you go on tours to support it, 0:10:54.280 --> 0:10:57.640 that sort of thing. But not everyone has access to that. 0:10:57.920 --> 0:11:01.400 Only a very few people ever are lucky enough to 0:11:01.800 --> 0:11:06.320 follow that particular pathway. If the web opened up the 0:11:06.320 --> 0:11:10.199 opportunity to get discovered in brand new ways, entire audiences 0:11:10.240 --> 0:11:14.920 could find your work based upon your efforts to get 0:11:14.920 --> 0:11:17.600 it out there. You could publish your work to the 0:11:17.640 --> 0:11:22.360 web and get that link out and through viral sharing, 0:11:22.640 --> 0:11:25.600 you could actually become a known quantity and you never 0:11:25.640 --> 0:11:28.000 even had to speak to a music label in order 0:11:28.040 --> 0:11:31.160 to do this. Now, there were some questions about how 0:11:31.200 --> 0:11:33.360 would you make money from that if you were hoping 0:11:33.400 --> 0:11:36.520 to make music your career, But from a perspective of 0:11:36.559 --> 0:11:39.080 actually getting out in front of people, it suddenly became 0:11:39.280 --> 0:11:42.880 way easier. If only the platform were there, and that's 0:11:42.880 --> 0:11:44.760 what Alex and Eric sat out to do. They wanted 0:11:44.760 --> 0:11:47.800 to make a platform where the average person could upload 0:11:47.840 --> 0:11:53.240 audio and find an audience. That was their goal. So 0:11:53.600 --> 0:11:56.079 they got to work and they started to build out 0:11:56.120 --> 0:12:00.200 this company. They chose Berlin as their headquarters. While Course 0:12:00.200 --> 0:12:02.080 has said that they chose Berlin because it was a 0:12:02.120 --> 0:12:05.600 city that was friendly to businesses, meaning there were fewer 0:12:05.640 --> 0:12:08.520 barriers to get around when you're getting started, and also 0:12:08.559 --> 0:12:13.640 because Berlin is a city filled with creative people, including artists, musicians, actors, 0:12:13.720 --> 0:12:18.560 and more. Designing the service itself was no small task. Obviously, 0:12:18.600 --> 0:12:21.040 you're talking about anything that's based on the web. There 0:12:21.040 --> 0:12:24.960 are multiple components that go into play. It included designing 0:12:25.000 --> 0:12:27.320 the back end of the service, which meant you had 0:12:27.360 --> 0:12:30.000 to go out and buy hardware that would host the 0:12:30.040 --> 0:12:33.600 actual files and interface, or you had to rent that 0:12:33.720 --> 0:12:37.679 space from some other company to actually hold all the 0:12:37.679 --> 0:12:40.600 physical audio files that would be uploaded to the service. 0:12:40.960 --> 0:12:43.800 It also meant creating the user interface, something that would 0:12:43.800 --> 0:12:48.200 allow people to easily navigate the site, upload audio, discover 0:12:48.280 --> 0:12:51.440 audio tracks, and all of that would take several months 0:12:51.440 --> 0:12:54.200 of work. So they started in two thousand seven, but 0:12:54.240 --> 0:12:56.200 It really wasn't until two thousand eight that they were 0:12:56.240 --> 0:12:58.760 ready to unleash SoundCloud and allow people to come in 0:12:58.800 --> 0:13:01.600 and use it once they get the beta testing phase. 0:13:02.880 --> 0:13:04.960 One goal the two had from the very beginning was 0:13:05.000 --> 0:13:08.199 to target a global market. They could have just focused 0:13:08.240 --> 0:13:10.880 on a service that would cater to Europe or two 0:13:11.400 --> 0:13:14.400 areas like Sweden, Finland Norway, the areas they had been 0:13:14.400 --> 0:13:18.160 working in up to that point, but they were very 0:13:18.280 --> 0:13:20.600 sure that there were artists all around the world who 0:13:20.640 --> 0:13:23.120 were feeling the same sort of frustration that they had 0:13:23.200 --> 0:13:26.160 experienced of not having a way to get their work 0:13:26.240 --> 0:13:30.000 out to an audience. And this wasn't limited to musicians. 0:13:30.480 --> 0:13:34.160 Any sort of audio work would apply on SoundCloud, so 0:13:34.360 --> 0:13:36.720 you didn't even have to make it be music. It 0:13:36.760 --> 0:13:39.680 could be anything. It could be spoken word, it could 0:13:39.720 --> 0:13:43.760 be poetry, it could be a lecture series. Any of 0:13:43.800 --> 0:13:47.320 that was fair game for SoundCloud, and the two set 0:13:47.360 --> 0:13:49.680 their sites pretty high. They wanted something that people around 0:13:49.720 --> 0:13:52.600 the world would be able to take advantage of. To 0:13:52.679 --> 0:13:55.280 get funding to run the business, the two held a 0:13:55.320 --> 0:13:59.920 couple of rounds of seed funding. Now the full numbers 0:14:00.080 --> 0:14:03.040 for the seed funding have never officially been disclosed, but 0:14:03.160 --> 0:14:07.640 This typically is a relatively small amount of money that 0:14:07.720 --> 0:14:11.559 a company will will get from angel investors early, early 0:14:11.600 --> 0:14:14.199 in the right in the phase. It's typically when you 0:14:14.240 --> 0:14:16.720 don't even have anything to show yet, but you have 0:14:17.080 --> 0:14:20.560 a plan. You're able to articulate that plan, explain how 0:14:20.600 --> 0:14:23.120 you're going to carry out that plan, and you can 0:14:23.200 --> 0:14:27.920 usually get a small investment up front, and again relatively small. 0:14:28.240 --> 0:14:30.640 This These are amounts of money that I would consider 0:14:31.240 --> 0:14:34.760 enormous on a personal scale, but on a company scale, 0:14:35.120 --> 0:14:37.080 when you think about all the stuff that goes into 0:14:37.160 --> 0:14:40.440 running a company, it's not that much money in the 0:14:40.520 --> 0:14:45.200 grand scheme of things. So based upon interviews, it sounds 0:14:45.240 --> 0:14:49.120 like the first couple of rounds of seed funding gathered 0:14:49.160 --> 0:14:52.000 around a hundred fifty thousand euros in one round and 0:14:52.040 --> 0:14:55.000 two hundred fifty thousand euros in the second round. Again 0:14:55.240 --> 0:14:58.800 significant to an individual, but in the big scale, it's 0:14:58.920 --> 0:15:02.360 not much that gave SoundCloud the starting capital and needed 0:15:02.360 --> 0:15:05.720 to launch. In two thousand and eight, Leon would become 0:15:05.760 --> 0:15:08.360 the CEO of the company and wall Force would take 0:15:08.400 --> 0:15:12.040 on the role of chief technology officer. The co founders 0:15:12.040 --> 0:15:14.200 were able to get the project running on that amount, 0:15:14.240 --> 0:15:17.200 but they realized they would need to scale up, and 0:15:17.240 --> 0:15:19.080 they would need more money in order to do so. 0:15:19.400 --> 0:15:23.360 If they wanted to be a truly global entity, right 0:15:23.440 --> 0:15:26.160 and to offer more services to users and to have 0:15:26.320 --> 0:15:28.360 all the space they would need to hold all the 0:15:28.400 --> 0:15:31.280 files people were uploading, they're gonna need more money than 0:15:31.360 --> 0:15:34.600 just that seed funding round. So they had the decision 0:15:34.640 --> 0:15:38.160 to make do you concentrate on generating a revenue model, 0:15:38.360 --> 0:15:40.200 so a business plan where you're actually going to be 0:15:40.240 --> 0:15:43.479 making money so that you can make your business profitable, 0:15:43.960 --> 0:15:47.560 or do you first worry about scaling up and getting 0:15:47.640 --> 0:15:50.680 enough users so that when you do develop your business plan, 0:15:51.200 --> 0:15:55.040 you're really in good business and you've created something that 0:15:55.120 --> 0:15:57.720 works at the scale you are at, as opposed to 0:15:57.800 --> 0:16:00.880 making something when you're small and then having to adjust 0:16:00.960 --> 0:16:04.320 that as you grow. So they weighed these options. They said, well, 0:16:04.360 --> 0:16:06.320 do we want to make money now or do we 0:16:06.400 --> 0:16:08.960 want to get really big and then figure out how 0:16:09.000 --> 0:16:11.520 we're gonna make money. They decided to go with option 0:16:11.640 --> 0:16:13.880 number two, which would mean that they would need to 0:16:13.920 --> 0:16:17.000 hold a major round of investment funding to get enough 0:16:17.040 --> 0:16:20.280 to scale at the business. In April two thousand nine, 0:16:20.640 --> 0:16:24.640 SoundCloud would hold a series a round of investment funding. 0:16:24.920 --> 0:16:27.520 So what the heck does that mean? Well, I'll tell you, 0:16:28.360 --> 0:16:31.960 but not right now. First, let's take a quick break 0:16:32.280 --> 0:16:41.240 to thank our sponsor. All Right, I promised you guys 0:16:41.280 --> 0:16:44.160 to tell you what Series A funding means. And this 0:16:44.240 --> 0:16:47.560 does tie into technology. It's it's beyond technology because this 0:16:47.640 --> 0:16:49.840 is for any sort of company. But there are a 0:16:49.880 --> 0:16:53.320 lot of technology companies out there, startups that have gone 0:16:53.320 --> 0:16:56.160 through multiple rounds of funding, and I think it's useful 0:16:56.200 --> 0:16:58.960 to understand what is going on so that when you 0:16:59.040 --> 0:17:02.600 hear about these different companies and you hear about how 0:17:02.640 --> 0:17:05.280 many rounds they've been through, you can start asking some 0:17:05.359 --> 0:17:08.440 tough questions such as does this company actually have the 0:17:08.480 --> 0:17:11.679 potential to become an entity that will pay back on 0:17:11.800 --> 0:17:15.639 that investment. So Series A rounds are typically the first 0:17:15.840 --> 0:17:19.840 significant round of venture capital financing. This is beyond those 0:17:20.160 --> 0:17:23.199 seed finance rounds, which were really just to get the 0:17:23.320 --> 0:17:29.240 business started. Series A and future rounds are more about 0:17:29.760 --> 0:17:32.560 growing a company so that it can scale up to 0:17:32.600 --> 0:17:38.920 a certain level. So in return, the investors get a 0:17:39.000 --> 0:17:43.040 type of steak in the company they're investing in. You know, 0:17:43.119 --> 0:17:46.720 usually it's a top of preferred stock called Series A stock. 0:17:47.720 --> 0:17:50.360 And while there are some variations in this, typically, if 0:17:50.400 --> 0:17:54.720 you were to buy Series A stock in a private company, 0:17:54.800 --> 0:17:58.200 should that private company ever hold an initial public offering 0:17:58.280 --> 0:18:01.600 and turn into a publicly traded company, your Series A 0:18:01.680 --> 0:18:06.240 stock would convert into common stock. So if you owned 0:18:06.280 --> 0:18:09.760 a certain percentage of the company because you had funded 0:18:09.800 --> 0:18:14.000 it in this round of venture capital funding, you would 0:18:14.000 --> 0:18:17.800 get that equivalent amount of ownership in common stock if 0:18:17.840 --> 0:18:21.240 that company went public, and then you could say, all right, well, 0:18:21.320 --> 0:18:23.840 I'm ready to walk away. Maybe you're making a profit 0:18:23.880 --> 0:18:26.560 now because the amount of investment you made versus the 0:18:26.560 --> 0:18:29.200 amount of value the company has once it goes through 0:18:29.240 --> 0:18:31.680 its I p O. You might have made a mint 0:18:32.359 --> 0:18:34.399 or maybe you lost money on it. It It all depends 0:18:34.400 --> 0:18:36.240 on how well the company is received when it goes 0:18:36.280 --> 0:18:38.720 through that I p O process. It's a moot point 0:18:38.720 --> 0:18:42.280 with SoundCloud, it stayed private. It's probably a good idea 0:18:42.320 --> 0:18:43.960 to take a little tangent here and talk about the 0:18:43.960 --> 0:18:47.280 realities of getting money in the startup space as a 0:18:47.320 --> 0:18:50.280 startup company, because there's so many tech companies these days 0:18:50.280 --> 0:18:53.280 that trace their roots back to being a startup. I mean, 0:18:53.320 --> 0:18:56.040 there are some big, monolithic companies that have been around 0:18:56.080 --> 0:18:58.320 for decades or even a century or more in the 0:18:58.359 --> 0:19:01.760 technology space. But so Cloud provides a good example of 0:19:01.800 --> 0:19:04.760 how this can work, though I'll explain how some details 0:19:04.760 --> 0:19:07.800 have changed over the years to make it more complicated today. 0:19:07.880 --> 0:19:10.159 So we begin with this round of seed funding. This 0:19:10.240 --> 0:19:13.399 is typically a relatively small amount of investment money in 0:19:13.440 --> 0:19:16.359 the grand scheme of things, and we're talking about a 0:19:16.359 --> 0:19:19.240 few hundred thousand dollars, typically enough to get a business 0:19:19.320 --> 0:19:23.119 up and running from basically nothing at all. Now, unless 0:19:23.119 --> 0:19:25.960 your new business has a killer way to generate significant 0:19:26.000 --> 0:19:28.719 revenue right out of the gate, you're probably not going 0:19:28.760 --> 0:19:31.440 to be profitable at least at first. You might need 0:19:31.480 --> 0:19:34.560 to scale up before you can put your business plan 0:19:34.680 --> 0:19:39.360 into play. So it's kind of like that that joke 0:19:39.440 --> 0:19:42.320 about making it up in volume. In this case, the 0:19:42.400 --> 0:19:44.600 volume you're talking about is not a volume of products, 0:19:44.600 --> 0:19:46.960 but the volume of customers. You may need a certain 0:19:47.040 --> 0:19:51.400 number of users before you can unveil your revenue generating 0:19:51.440 --> 0:19:55.199 plan to make it a profitable business. And until you 0:19:55.240 --> 0:19:57.560 get that number of users, you're going to be in 0:19:57.600 --> 0:20:01.680 a losing proposition. So you may want to scale your 0:20:01.680 --> 0:20:06.600 business up before you try and make generate revenue Uh. 0:20:06.680 --> 0:20:09.520 This obviously varies from business to business, and it absolutely 0:20:09.520 --> 0:20:12.920 depends upon that revenue strategy. So you might say, once 0:20:12.960 --> 0:20:15.320 we hit a million users, we will start to make 0:20:15.359 --> 0:20:17.640 more money than we spend, and that is a good thing. 0:20:18.480 --> 0:20:21.439 Only of course, your specific number of users could be 0:20:21.480 --> 0:20:24.080 different from that, and if you don't have any means 0:20:24.160 --> 0:20:27.720 of generating revenue, it doesn't work at all. So you 0:20:27.760 --> 0:20:31.560 would start burning through your cash reserves faster as more 0:20:31.560 --> 0:20:34.440 people start using your service, because you have to meet 0:20:34.480 --> 0:20:36.639 the demand of more users. And if you have no 0:20:36.680 --> 0:20:39.720 way of making money, you're burning through that cash at 0:20:39.760 --> 0:20:44.720 an increasingly faster rate. So it becomes a double edged sword. 0:20:44.760 --> 0:20:48.400 You're getting more popular, but you're not creating a way 0:20:48.440 --> 0:20:51.560 to make money based off that popularity. And meanwhile, that 0:20:51.600 --> 0:20:55.919 popularity is placing a greater demand on your resources. So 0:20:55.960 --> 0:20:58.040 you might keep your business going for a year or 0:20:58.080 --> 0:21:01.159 more on that seed funding alone, depending upon what you 0:21:01.240 --> 0:21:03.639 are doing and how wisely you are spending the money. 0:21:03.800 --> 0:21:06.399 After that, assuming you aren't yet profitable, which is a 0:21:06.400 --> 0:21:09.439 pretty safe assumption with many startups, you would hold that 0:21:09.560 --> 0:21:13.679 series A round of funding. Series A funding is typically 0:21:13.720 --> 0:21:16.639 on a much bigger scale than seed funding. Seed funding 0:21:16.680 --> 0:21:18.560 is on the order of a few hundred thousand dollars, 0:21:18.560 --> 0:21:21.600 whereas Series A can range between a couple of million 0:21:21.680 --> 0:21:26.960 to fifteen million dollars. That's the range of averages. SoundCloud 0:21:27.359 --> 0:21:30.520 had its Series A funding and netted the company about 0:21:30.560 --> 0:21:35.480 two and a half million euros, so roughly around three 0:21:35.520 --> 0:21:39.520 million dollars. That was not enough to or that was 0:21:39.640 --> 0:21:42.000 rather enough to not only keep the company in business, 0:21:42.080 --> 0:21:45.720 but also to allow it to grow at that time. Now, sometimes, 0:21:45.760 --> 0:21:48.200 such as with the case of SoundCloud, a company must 0:21:48.240 --> 0:21:50.960 hold further rounds of funding in order to stay in 0:21:51.040 --> 0:21:54.160 operation while it attempts to generate enough revenue to support 0:21:54.200 --> 0:21:58.639 itself and become profitable, or maneuver itself in such a 0:21:58.680 --> 0:22:02.399 way that someone else acquires the company. A lot of 0:22:02.440 --> 0:22:07.080 startups have begun with their goal not being to generate revenue, 0:22:07.320 --> 0:22:10.720 but to become so enticing that a larger entity comes 0:22:10.720 --> 0:22:14.399 along and says, hey, that's a nice business you got there, 0:22:14.720 --> 0:22:17.359 how about I scoop it up for you know, like 0:22:17.400 --> 0:22:20.600 a billion and a half dollars. How's that sound And you, 0:22:20.720 --> 0:22:23.360 as the founders at the startup, would say something like, yes, 0:22:23.440 --> 0:22:26.760 that sounds wonderful. Please cut me a check. So there 0:22:26.760 --> 0:22:31.560 are startup companies that, when they get going, the founders 0:22:31.760 --> 0:22:35.280 their plan is to get big enough so that someone 0:22:35.320 --> 0:22:37.600 else will come along and acquire them, and then they 0:22:37.600 --> 0:22:41.040 don't have to worry about making the business profitable because 0:22:41.080 --> 0:22:43.520 they will have made their money by being purchased by 0:22:43.560 --> 0:22:47.119 someone else. But there are plenty of other cases where 0:22:47.720 --> 0:22:49.879 the founders set out from the start to say, we 0:22:49.920 --> 0:22:51.760 want to own our own business, and we want to 0:22:51.800 --> 0:22:54.320 make sure we can make the business profitable. So you 0:22:54.400 --> 0:22:58.119 see all the different variations. It's not like everyone sets 0:22:58.119 --> 0:23:02.359 out just to get acquired. So SoundCloud is one of 0:23:02.400 --> 0:23:06.080 these companies that has held held multiple rounds of funding. 0:23:06.720 --> 0:23:10.000 And again, the more rounds of funding a company holds 0:23:10.000 --> 0:23:13.720 in order to stay solvent so that keeps doing business, 0:23:14.480 --> 0:23:18.960 the more challenging it can be to convince investors to 0:23:19.960 --> 0:23:22.959 hand over that kind of money, because if you've been 0:23:23.000 --> 0:23:26.000 around for in the case of SoundCloud, a decade, and 0:23:26.080 --> 0:23:30.119 you haven't turned a profit, there may eventually come a 0:23:30.200 --> 0:23:33.040 question of will you ever turn a profit? Will I 0:23:33.040 --> 0:23:35.399 ever get a return on this investment I am making? 0:23:35.800 --> 0:23:39.560