SoundCloud Running “Dangerously Low on Cash,” Sources Report…

Streaming mega-giant SoundCloud is now close to exhausting its available financing, according to three individuals close to the organization. SoundCloud, whose valuation recently soared past $700 million on an estimated $123.3 million in cumulative funding, is not only “dangerously low on cash,” but also faces significant obstacles finalizing its next round, according to details expressed in confidence to Digital Music News.

A separate source explained that SoundCloud is at risk of exhausting readily-available funds and will likely require an ’emergency bridge,’ either from existing investors like Union Square Ventures, or alternatively, a bank, by the end of this year. On timetable, sources couldn’t specify the exact ‘runway,’ or exact time remaining under static financial conditions and no additional funding. But two sources agreed that the situation could become quite serious if additional funds aren’t secured by the end of this year, ie, within 4-5 months.

“The issue is definitely with the [major] labels.”

The news closely follows rumors of intensifying licensing demands from the major labels, and imminent legal action. Last year, Soundcloud closed an important round with Warner Music Group, though that is now being viewed as a ‘one-off’ brokered by crony ex-WMG-turned-SoundCloud exec Stephen Bryant. The WMG deal involved a percentage stake in SoundCloud of up to 5 percent, according to sources, as well as a publishing pact with Warner/Chappell Music Publishing and consideration for all-important ‘derivative works,’ which refer to samples and snippets of copyrighted works that are frequently threaded into DJ mixes.

Of course, DJs and EDM are a critically-important component of SoundCloud, which makes derivatives an equally important consideration. Currently, startups like Dubset Media Holdings are pushing to broker a derivative works exchange, a multi-billion marketplace that often involves dozens, if not hundreds of samples within one DJ mix. Right now, derivative licensing solutions are somewhat crude, making it difficult for mega-streamers like Spotify to license mixes and DJ sets. Currently, Spotify has 30 million tracks, all of them fully licensed, while SoundCloud boasts more than 100 million, with few properly licensed.

All of which makes the majors less than enthusiastic about their non-existent cut. The cash component on the Warner deal was unclear, though neither the percentage or cash considerations afforded to WMG seem sufficient for the other majors. Since WMG inked, remaining majors Universal Music Group and Sony Music Entertainment have yet to finalize deals, and are reportedly demanding far larger upfront payments and percentage shares in the mega-valued SoundCloud.

More importantly, UMG and Sony are also threatening to sue SoundCloud if talks don’t progress at a faster pace, according to earlier sources. And that, more than anything, is choking SoundCloud’s access to cash. “Investors want to see what happens [with the majors] before they put more money into it,” one source told Digital Music News.

“They want to be building a company, not paying for lawyers. It’s not a game anyone wants to play.”

So, how much to feed this beast? A separate source pointed to a recent, $32 $35 million-plus advance payment demand by Sony Music in separate negotiations with TIDAL. That demand was subsequently eased, though it demonstrates the ball park that SoundCloud is probably dealing with.

Meanwhile, SoundCloud is plowing forward with a subscription-based service, though details remain incredibly vague. Just this morning. SoundCloud co-founder and Chief Technology Officer Eric Wahlforss pointed the Wall Street Journal to top-level subscription plans, but left out components like price, launch timetable, and premium products. Earlier, fellow SoundCloud co-founder Alex Ljung noted that free access will always be a cornerstone of the SoundCloud service. “There are 3 billion people online, you’re never going to all get those into subscription, it’s just not going happen,” Ljung flatly told a group of industry executives at Midem.

+ Will SoundCloud’s Subscription Service Flop? Yes, It Will, and Here’s Why…

Then there’s the issue of cash-burn. Just recently, SoundCloud finalized a lavish, multi-year rental agreement on a upgraded, 40,000 square foot Manhattan office space (pictured above), one that aptly complements their dazzling Berlin headquarters. That level of spending is likely to be dialed down if another substantial round fails to materialize.

Image by ‘Captain Smurf,’ licensed under Creative Commons 2.0 Attribution Generic (CC by 2.0). Written while listening to Emma Louise, Wankelmut, Getter, Claptone, and araabMUZIK on Spotify and SoundCloud, using Plantronics’ Backbeat Pros.