Pandora’s VC Box


For the vast majority of its history (as captured in this 2007 article), music service Pandora was on the brink of shutting its doors.  Sheer perseverance, a tapdance in business models, the easing of regulatory and litigation risk, and the surprising success of its iPhone app – credited with doubling the number of new customers — and the company is now viewed as a revolutionary market leader and widely celebrated as an all-too-rare digital music success story.  It also (and aptly) displays the best and worst of venture capital.

Pandora first raised venture funds – all of $1.5M — in 2000. A decade later, after their fifth and final raise in June of 2010, the company had taken in over $56M (which does not count an undisclosed Series E round last year). Pandora filed to go public in February of 2011, which prompted a number of publications to both look at their prospects and dive more deeply into the company’s S-1 to see who would profit from the IPO.

The S-1 lists the equity holders. The total equity owned by institutional equity funds (with at least 5% ownership) prior to the IPO is about 76%, or over three-fourths of the company.  In sharp contrast, Pandora founder and current Chief Strategy Officer Tim Westergren owns 2.4%, and is not listed as one of the current five highest-paid executives.

Tim is, by all accounts, the main reason Pandora survived its long and fractured beginning.  At critical points along the decade of Pandora’s evolution, he virtually bankrupted himself to keep the company afloat.  At the same time, it is clear without the multiple infusions of capital along the way, Pandora would not have made it at all, and that the advice and counsel of many of these firms played a prominent role in its eventual success (as did the $56M+ they put at risk).  It’s a good story, and as many of the 80 million users (myself among them) will testify, a wonderful service.

But the influx of a lot of venture money over a long period of time created a box that entrapped the company founder.  An IPO that details institutional equity holdings at 30X that of the company founder is not an enticement for increased entrepreneurial activity.  So the success of Pandora is also a cautionary reminder that even the best VC’s are not your friends – they have a fiduciary responsibility to their limited partners, and if that comes at the expense of the company founder, well, so be it.

In the eponymous myth, all the evils of the world escape Pandora’s box, leaving inside only hope.  At Pandora’s IPO, many institutional funds will convert a substantial portion of their holdings, and eventually exit the firm altogether.  If hope remains, it is that Tim will eventually receive more of the value he so diligently founded and sustained well before the spoils were there to be divided.