SoundCloud co-founder Eric Wahlforss: “How we built SoundCloud”

Update 24/04/2013: today, the office of Vice President of the European Commission Neelie Kroes announced that Eric Wahlforss and Alexander Ljung won the ‘European Web Entrepreneur of the Year’ award. 

In some ways, SoundCloud has become a byword for the ambitious (but immature) startup scene that is Berlin. It’s cool and hip and hard to categorize.

Started as a way for semi professional artists to grow their own community, bypassing record labels, today it has become the YouTube for audio. You can find just about any genre of soundtrack, interview recording, avant gardist poetry reading or just plain weird noise on SoundCloud today.

And the audience loves it. SoundCloud says it reaches 180 million people every month, although this should be read as the total number of people that come into contact with any piece of SoundCloud audio (which can be embedded on any website and a lot of social networks), rather than paying customers.

Ironically for a startup that now functions as a poster boy for Berlin startup chic, it was also started in Stockholm by two Swedes, Alexander Ljung and Eric Wahlforss. Wahlforss has, over time, developed the perfect answer to this seeming paradox, as he demonstrated when we interviewed him: “Stockholm is a great city, but I’ve always been in love with Berlin – ever since I came here for the first time in ‘97. I think that maybe a reason people mention us is that the DNA of SoundCloud is so compatible with the DNA in Berlin. Berlin, as a city, feels a bit like a startup. It’s a melting pot of art, tech, creators. There’s a ton of artists here, and a ton of tech people.”

And then he adds something that only a startup founder circa 2013 can say: “That’s a very interesting platform to run a company on.”

Here’s 9 lessons that you can take away from the SoundCloud story:

1. Scratch your own itch

Eric Wahlforss: “To make a long story relatively short, SoundCloud was born out of a need that both Alex (Ljung, ed.) and I felt. We were doing engineering studies in Stockholm, and we were both involved in music production. Alex was doing music scores for movies, and I had produced some electronic music and released an album.”

“But we both felt that there was a clear deficiency in the tools that were available – a gap in the market for getting a piece of audio from point A to point B to any number of recipients. That was the embryonic idea, let’s say. We went from that kind of niche market to a more generic audio infrastructure for the web.”

2. You don’t have to be “the YouTube of X” from the first day (Flickr is big too)

In many startup’s pitches, you can hear things like “we’ll be the Airbnb of this”, or “the YouTube of that”. SoundCloud is, today, actually the YouTube of music, I say – something Wahlforss corrects immediately. “The YouTube of audio. We serve a very broad range of audio creators, from the White House to Grammy Award winning orchestras.”

“We did start out more, I guess, like the Flickr for music. Flickr was a really niche thing for photo enthusiasts and people who took photos. Even when it was sold to Yahoo it was still relatively small. I think they had something like 300 000 users when it was sold. So our perspective wasn’t to become a service that would be used by hundreds of millions of users, which is arguably the case today. It was more: if we can get to a 100 000 users, we’ll have a huge success.”

“So we started as some kind of Flickr, but today I guess we really are more like YouTube, in that we’re looking at additional revenue streams. For instance, we’re now working with brands too.”

3. Target a niche, but go global from day 1

In a recent interview with Whiteboard, UX specialist Ian Collingwood said that “if you solve a niche problem really well, it’s almost inevitable that you will grow, because the chances are that you’ll solve other people’s problems too”. SoundCloud seems like a great example of that, moving from semiprofessional artists to the above mentioned White House.

“Yes, somehow we’ve always aimed at a unique business niche, but always with a global focus,” says Wahlforss. “In that respect we differ from a lot of startups who focus on copying a business model and apply it to a local market. Which isn’t to say that everything about our business model was unique, we’ve always borrowed heavily from social media in the way we reached our market. It’s a different approach, I guess.”

4. It’s not because SoundCloud is huge, that it relied on size – it had a monetization model from day one

From the outside SoundCloud might look like one of those startups who blow up to a huge size and then go looking for a business model: on the consumer side, everything is free. But SoundCloud is no Twitter or Facebook: it had a monetization scheme from the day it was publicly released. “We launched in October 2008 with the revenue model built in. We had and still have a model where we charge creators € 90 for the premium service and a very easy freemium model, and we’ve actually been able to grown nicely based on that revenue channel.”

5. When doing business on the internet, go for the landgrab

Saying that they’ve managed to grow on your revenue sounds a bit strange coming from a company that raised $ 63 million in venture capital (we should say reportedly – SoundCloud has never disclosed any figures). At what point did SoundCloud decide that it would need VC money?

Wahlforss: “That was really a gradual process – we just realised along the way what it takes to really scale a company. We did do a seed round of € 150 000, and then a secondary seed round of 250 000 – a small round at the start to get going. But we realised that we would need a real Series A round to take it to the next level. We realised it was better to focus on scale than try to turn into a profitable company early on – that would force us to spend resources in the wrong place. And it’s a landgrab situation on the web in general – there can only be one “YouTube of audio”, so when we saw the potential, we decided that scale was going to be the more important factor.”

What is the most expensive thing about scaling, I want to know – is it the development, the servers, the marketing? “Definitely product development. The people. Infrastructure costs are quite significant of course, given the enormous amount of data that we host – but that’s not the biggest cost.”

Now that SoundCloud reached that scale the company is looking more closely at monetization, says Wahlforss. “It all happened quite naturally, I think.”

6. When you’re big, it becomes harder to have much of an impact on your own product

The scale of SoundCloud today is impressive – SoundCloud says 10 hours of audio are uploaded every minute and 180 million users come into contact with SoundCloud audio every month. Of course, this includes anyone who bumps into an embedded SoundCloud file somewhere – which isn’t the same as the number of registered users, let alone even paying users. But still: SoundCloud can rightly be called a budding internet giant.

And the slightly surprising thing about scale, says Wahlforss, is that at some point, it becomes really hard for a company to have an impact on its own product. “That’s one of the things we didn’t realise. It becomes hard to really move the needle, unless you’re tweaking core features. As a startup, you have the tendency to throw a lot of features out there, to find new users and see how you can have them stay longer.”

“For instance: we always focused very hard on the creators. We still do. But eventually the marginal returns of improving things for creators goes down. Except for things that help them expand their reach among listeners. So product wise, I think we’re shifting more towards discovery than other product features.”

7. Reduce

“Also, it becomes clear at a point that instead of adding features, the real gains are to be found when you remove features – kill old features, throw things out, make things simpler, reduce the amount of navigation options. Reduce.”

So as a startup, you don’t have as much control over the product as you would like? Wahlforss hesitates to call it a lack of control. “We do believe in opiniated software. Software that does a couple of things right, instead of a lot of things almost right. Because what happens is that niche power users come back with a lot of different requests – and they’re very vocal, but at the end of the day they are really a loud minority. So we have to be opiniated and say “no” a lot. That’s a tendency: we’ve moved from a complex product with a high entry point to a really simple product.”

“Also, with that amount of audio uploaded every minute and the millions of people that we reach, anything we change has a huge impact.”

8. API’s are like vampires: they can make you immortal (or they can  suck the life right out of you)

One way to reduce rather than add and still keep small pools of specialised users happy is to open the API’s, and SoundCloud has done exactly that – as every big internet company eventually must. Today, SoundCloud integrates with a lot of the big social media players, like Facebook, Tumblr, Flipboard.

Says Wahlforss: “The benefit of an open API is that you see a lot of innovation very quickly in a distributed manner. So you get traction in the marketplace by getting support of other companies who integrate you into a value network, rather than a value chain. That really helps when you’re small. It can also serve as an indication of where to go with the product. Things that get very big on your API are probably things that are really lacking in your core product.”

One of the things that both moved the needle and grew quickly on API’s is music discovery, says Wahlforss. “We’ve essentially been able to bootstrap music discovery on SoundCloud through third party development, but we’re now at a point where our scale necessitates us to take that in house – it’s just not workable any more.”

On the other hand, there is a risk when opening up an API for the outside world: namely, that you’ll essentially be sucked in by a larger player. You don’t want to become just another Facebook app or a plugin. “Yes. It’s a risk we’ve consciously taken. We’ve been lucky to navigate that system. We used it to leverage our product, as opposed to being threatened by it.”

9. If you create a community, it’s hard to compete with you

At some point, I say, it will become inevitable that SoundCloud will bump into another player in the music industry. Most of them are concentrated in the streaming quadrant – an overpopulated area with big players like Spotify, Pandora, Deezer, Rdio and possible late entries by Apple and Twitter. Is that a raincloud threatening the parade? “YouTube and Pandora are the elephants in the room, they’re both really, really significant music and audio streaming platforms. And then there’s all the on demand services, which are trying to replace iTunes.”

“But the good thing is that we’re neither of all those. We are uniquely positioned in that spectrum of services. We rely on a community of audio creators, and that’s something that nobody else has. Nobody has so much unique content that nobody else has, and it’s used in so many different ways. It’s less about search and listen. SoundCloud is audio that reaches you in various ways.”

That said, says Wahlforss, he does realise that in the end, everybody’s fighting for the same rare earth metal: people’s attention. “But the good thing with audio is that you can do it in parallel. You can do other stuff while listening to music. And mobile is still a big growth area – we have 10 million downloads of our apps. We see that people listen on the go.”

Former artist Wahlforss and his co-founder Alexander Ljung are well on the road to fame and recognition, but not for the music they make. Does he miss the days of being an artist? “Not really. I mean, being an entrepreneur isn’t easy, of course. It’s a mixed bag of challenges and learnings all the time, and it’s sometimes rough. You have to hire and fire, find the best talent, build a unique culture.”

“But I actually think building a company is one of the most impactful ways to create a project at scale. For me, it has been one of the best ways to innovate, even when compared to art or music.”

[Photo credits: feature image by Eric Wahlforss (Flickr) & portrait courtesy SoundCloud]

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Raf Weverbergh

Editor of whiteboard. Raf Weverbergh was a magazine journalist whose work appeared in magazines like Rolling Stone, Playboy, Mail on Sunday, Publico and South China Morning Post. He is the co-founder of FINN, a corporate communications agency where he advises startups and multinationals on their PR and Mustr, the easiest media database for PR professionals. You can contact him on Twitter, Linkedin or Skype (rafweverbergh).

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