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How Spotify Founder Daniel Ek Took His Startup to a $26 Billion Valuation

Spotify’s success story contains valuable lessons for all entrepreneurs.

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BY Sean Wise - 05 Apr 2018

How Spotify Founder Daniel Ek Took His Startup to a $26 Billion Valuation

PHOTO CREDIT: Getty Images

Yesterday, music streaming startup Spotify went public. When the dust settled, the 10-year-old Swedish startup was worth more $26 billion. With more than 150 million users, Spotify illustrates the trajectory of modern day startup unicorns.

There are many entrepreneurial lessons Daniel Ek, Spotify's founder and CEO, says can be learned from his experiences. Here are my top five:

1. Make it easy for people to use services legally.

In 2002, Napster was home to millions of pirates sharing music and media files. When it shut down, Ek saw a great opportunity: turn the pirates into customers. I imagine he asked himself, "If people would break the law to get music; would they also be willing to pay a small fee to get it legally, seamlessly, and on demand?"

Ek's idea was to convert a portion of the pirates from illegal music downloading to a legal service that compensated the music industry. His assumption--that some of the illegal downloaders would be happy to pay--proved true. Today, Ek's company has more than 70 million paying customers. Entrepreneurs can leverage this lesson by looking to other gray markets to discover other services and products that have such an inelastic demand that users use them illegally.

2. Disruption is a threat. Collaboration is the key.

During the Napster days, the music industry felt under siege. Labels saw digital file sharing as a threat to their revenue streams. For Ek, this fear of disruption was key. By showing the music industry that it could generate revenue in the same way it had been making money for years from radio, Ek was able to turn the music labels into collaborators, not threats.

Many startups look to leverage disruption as a selling feature (e.g. Netflix, Wikipedia, Skype) but in doing so may be overlooking key strategic partners. A great example of turning enemies into allies is Wealthsimple, a "robo-advisor" focused on the retirement savings business. Mike Katchen, Wealthsimple's founder, landed a big investment from a market-leading competitor, thus creating a strategic relationship to help his startup grow.

3. Put some skin in the game.

No one will fund your business until you are all in. This is what investors mean when they ask "what is your skin in the game?" Asking investors to put up money before you've put up your own cash is a non-starter in 2018.

It took Ek several years to get his first music deals in Sweden, and several more years to launch in the U.S. Ek and his partner invested largely their own money until they showed traction, and likely would have never been funded otherwise. There are two lessons here for entrepreneurs: don't ask others to commit before you have, and let your traction (sales, partnerships, growth) lead your investment request. Show, don't tell.

4. Nail it before you scale it.

Going big and going global is the dream of many entrepreneurs. But before you scale up, you need to ensure you have a repeatable, sustainable, and scalable business model. For most, that means holding off investing in growth until after nailing the initial beachhead market. Marc Andeerssen calls this inflection point "product market fit."

Product market fit is the moment that a startup has found a way to make lots of revenue while spending little on customer acquisition. A company can scale after reaching product market fit, knowing that each new customer not only leads to revenue but ideally to profit. Finding low-cost channels to acquire customers while at the same time finding ways to increase customers' lifetime value is the key to product market fit.

Spotify found its model in Sweden and only then expanded to the U.S. Premature scaling (for example, hiring a sales force before the product is ready to be sold) is the number one killer of startups, according to the Startup Genome Project. You want to grow your venture as quickly as possible, but doing so out of balance will not turn your company into the next Spotify.

5. Only the agile survive.

Darwin's famous theorem on the evolution of species is often misunderstood. Survival of the fittest does not mean the strongest will survive. It means the most agile entities--those that can survive changes in the ecosystem--are the ones that win

Spotify's core system was originally based on a peer-to-peer network, like Napster, but in 2014 (seven years after its start) Spotify shifted its online IT architecture to client/server, phasing out peer-to-peer. The technical benefits behind Ek's decision need not be fully grokked; the lesson here for founders is don't stop evolving, even if it means changing your core. So long as you deliver on your value proposition, users won't care.

Not all founders dream of billion-dollar IPOs, but all entrepreneurs can learn lots from reviewing Daniel Ek's decade long journey from startup zero to IPO hero.