[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
