Smule: The hottest, weirdest startup you may not know (Q&A)

Smule raised $16 million in its latest round, even though it didn’t need to raise funding at all. Another atypical step for the atypical startup, which originated when a 40-something went back to college instead of a 20-something dropping out.

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Smule

Smule -- the company behind social music apps like Magic Piano and Sing! Karaoke -- by some measures is the prototype of a successful startup.

Thursday, the company announced its latest round of funding, $16 million on top of about $26 million raised in previous years. On track to do more than $30 million in sales this year, with its revenue more than doubling in the latest quarter, Smule has 160 million installs of its apps and 18 million people using it every month.

Despite picture-perfect momentum, Smule didn't start up like a standard startup. Co-founder and Chief Executive Jeff Smith -- who has already sold one company to Novell, another to Google, and taken a third public -- needed a lot of test subjects for his Ph.D. research, essentially. But to really understand where Smule began, you need to look back 100 years to remote Transylvania.

Smith talked to CNET on Tuesday about Smule's growth, where the company is going, what musical interpretation tells you about culture -- and what our global culture is missing. The following is an edited Q&A.

Q: So you just raised a new round of funding?
Smith: We just raised $16.6 million, it literally closed five minutes ago. I was waiting on the last wire, somebody missed the wire deadline yesterday. And I was having lunch and I was checking my phone periodically, I was not trying to be rude, but I was waiting for the confirm that the last wire had come in.

How much was the last wire for?
Smith: A million.

So you were waiting for a million-dollar message.
Smith: Yeah. Yup.

You've previously raised about $26 million from investors like Bessemer Venture Partners, Granite Ventures, and Shasta Ventures. Are there new investors in this round?
Smith: Yeah, it was lead by the new venture group at Roth Capital, an investment bank that's really making a run at being the top tech bank. By going through this process, we open it up, brought in a lot of great new investors, but instead of having one anchor, it's like ten. And no change in board composition. Roth brought in a bunch of folks, a bunch of growth funds, and then a bunch of high net worth folks. And these are folks that basically were able to buy in directly. I think their thinking is maybe it's pre-IPO.

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Smule CEO Jeff Smith Smule

You've talked before about an IPO being not a goal, but somewhat of an eventuality for Smule.
Smith: We don't know what the market's going to look like, we don't know exactly what your business is going to look like a year from now. But to your question, yes, we would love to take this company [public] one day, and we're closer today than we were a year ago. If you look at things like Facebook and Twitter, they waited quite a long time. Our perspective is it doesn't make sense to wait until there are all of these expectations around having a mega IPO, those don't seem like they've worked so well. Do they seem like they've worked well to you? I mean, Facebook is doing great now, but their offering -- not great. Twitter, not great right now. Zynga, certainly not great. Our inclination is to go on the earlier side. We're not there yet -- I can give you our numbers -- but maybe we're a year away, maybe we're two years away, three years away. It's in that ZIP code.

We're not thinking of it as the goal, we're thinking of that as the next step along the way. Our overall goal is to bring music back to its roots as a creative medium. Smule exists to democratize music creation, distribution. To take the power out of the hands of a few and put it out to the hands of millions of people that are creating and consuming content. That's our goal, so I'm in this to get a couple billion people creating music together. That's what's interesting to me. But along the way, yeah, we'd like to take it public.

How is Smule growing?
Smith: We've had a good year. Our sales went from $12 million a year ago to $21 million last year. This year, in the first quarter, we did more than $8.5 million, 110 percent year-over-year growth on sales. We have over 200,000 paying subscribers now. Number of users in our applications is 18 million a month now, 160 million installs of our products. From a financial standpoint, things look pretty good -- sales Q1 up over 100 percent, cash flow got to breakeven, and the business model at 80 percent subscription, which put us in a position where we technically didn't need to raise capital. Which meant I think it was a great time to go raise capital.

How do you plan to invest?
Smith: The first area is product. We build great products. We want to build more of them and we want to go deeper on our platform, this network that connects our users together and allows them to create songs together or share songs. We call it Smule Nation. We opened that up to the community outside of our applications over the summer, so you can go to our Web site now and you could start streaming people who are singing songs.

So you're interested in investing in this convergence of the different elements of Smule, letting people be able to use Piano and singing, and bring it all together in one place?
Smith: But there are other things. Right now if you buy a subscription to Smule, it's through one of our applications. We want that subscription to be across all categories. There's a lot of tools we want to give our power users so they can remaster some of their audio. When we're recommending a song to you or a friend to you, we can be a lot smarter about that.

The second area is international. We want to build a beachhead in Korea and Japan.

Well, I mean, karaoke.
Smith: That's right. We're already seeing some traction in those markets. Our friends at Google and Apple tell us that it's a great time for us to invest in those markets. Google Play has done extremely well in Korea. It's a market that for us could be potentially as big as the United States.

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Instruments in Smule's office Smule

Can you explain how social is as much part of your mission as music is?
Smith: We like to say that music was the original social network. So much of social networking has been built around photos and videos or maybe resumes today, what about music? Most of the networks that are around music today are professional content, but if you want to build a community, it's user generated content. That's the network we're building, but we're building it on music. It's different than what YouTube has done, YouTube is a place that lets you store and distribute. Smule also allows you to create.

Recently Facebook, with WhatsApp and Oculus Rift...
Smith: I guess Facebook likes where their currency is right now and they're using it.

Right, exactly. Their currency being their stock price.
Smith: Right. But maybe they're just really smart.

Well, that's the question -- are they smart enough to buy Smule?
Smith: It's not an aspirational goal. If Mark called up and offered $16 billion, then I'd probably need to have that conversation with my board.

Who knows how it all evolves, but we don't have a "For Sale" sign up right now. And I've been doing this for 21 years, I sold a company to Google, I sold a company to Novell, I took a company public, and then I went back to school to get a Ph.D. in music. This company was an accident.

Can you talk a little about how Smule grew out of your interest in how the world interprets music and behaves with it?
Smith: So I'm a pianist. I've played piano since I was four years old. I play piano everyday. For our children, we're not one of those Tiger families that makes the children do this, that, or the other, it's their choice: If they want to eat, they'll practice. And if they don't want to eat, then they don't have to practice. But it's entirely up to them.

It's kind of like saying, if you would like oxygen, if you would like to breathe, you should be practicing some scales. Arpeggios, please.
Smith: Yeah. One of the things that motivated me with this company, is music has kind of lost its way since the invention of the recording. This is Edison's fault 130 years ago. We invent the recording and all of a sudden people aren't performing any more. They're just listening. It's almost now intimidating because you only hear the very best of the best, so it's like, do you even dare try? If you listen to old recordings of a pianist 100 years ago, there were mistakes. And then you fast forward, now we've erased all the mistakes. I want to break through that.

So I was at Stanford, I needed a startup like a hole in my head. But I was hoping to identify culture through how people interpreted music. Do the people in Northern Scotland play "Amazon Grace" differently than the people in St. Louis, Miss. This experiment was done by Bela Bartok 100 years ago, where they ventured off into these remote Transylvanian villages and recorded people with a phonograph, because they wanted to capture the folk music at its source because these people were isolated. We can't do that now. I'm repeating their experiment, but instead of taking their approach I'm inverting it. I'm dropping these musical materials into a region and then comparing and contrasting the difference.

The hope was that there are differences, that we haven't all gravitated to some global meme of how we interpret music.

What's an example of something you found?
Smith: Could you look at, say, the continent of Australia and try to figure out where people came from based on how they play music? So we took 20 Christmas songs, and we found this remote village in Northern Scotland that had a strong internal affinity of how they interpreted music, and then we took those, say, 100 performances and we statistically compared them to a couple million performances across the whole continent of Australia, and then we graphed how similar each region in Australia was to the "source," Northern Scotland. And sure enough, you saw immigration trends of the past century. You saw Brisbane, much stronger affinity back into Scotland, you saw Melbourne, much weaker affinity because Melbourne has had significantly more Asian immigration.

I think most people look at the research and they wonder if it matters.

Well, you could say that about a lot of research. Asking questions always matters. And finding answers.
Smith: Obviously, I'm into it.

We're opening up this side of our society that has been underfunded and undervalued but is really important. We're just doing it, we're building a business. And it's an absolutely crazy, insane experiment, and we don't care.

 

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