SAN FRANCISCO - Larry Marcus and Peter Gotcher's early bet on Pandora Media Inc. appeared to be a bust three years ago when the business was buried in music-royalty fees. Now they're preparing for its debut as a public company.
To survive, Pandora negotiated better terms with the music industry, narrowed its losses and attracted more than 80 million users. Its plan for an initial public offering, announced earlier this month, would make it unique among Internet-music companies: None has gone public since Napster went bankrupt in 2002.
Marcus and Gotcher, venture capitalists who both play the drums, stuck with Pandora founder Tim Westergren through the company's evolution from a music-recommendation site into a full-fledged radio service. Westergren, a musician, composer and producer, spent years creating the technology while maxing out his credit cards.
"We could tell he was somebody who was just not going to fail and he managed to stay alive through tremendous adversity," said Marcus, a partner at Walden Venture Capital. "We made a bit of a contrarian bet."
In mid-2008, Pandora introduced an application for Apple Inc.'s iPhone and within five months had 2 million downloads. The number of users has jumped more than 50 percent to 80 million since the middle of last year, and advertisers have followed. Revenue almost tripled to $90.1 million in the first nine months of last year. Of the 50 top Web advertisers, 45 are using Pandora, Westergren said in an October interview.
While Pandora's popularity was building, so was uncertainty around its future. A 2007 ruling by the Copyright Royalty Board increased song royalty rates -- a cost the company struggled to absorb. Westergren lobbied the government to allow the rates to be renegotiated, saying Pandora would go out of business without the change. Online-radio companies agreed to pay a per-song royalty or 25 percent of revenue, whichever is greater, for music they stream.
"It was a very frightening time," Marcus said. "We needed to raise money, but we had this huge overhang from a royalty system that could have broken the company."
Even now, Pandora is no sure bet. The company lost $328,000 in the first three quarters of last year and expects to rack up more operating losses until at least 2012. Pandora also faces increased competition as more music moves online.
