Shazam’s Saga: Scaling Up Has Its Perils And Its Rewards

Shazam, a London-based music discovery service with some 250 million users around the globe, has helped Europe become a category leader in audio over the Internet. It is one of Europe’s tech stars.But for Shazam scaling up has been anything but easy: getting where it is today required moving continents, replacing the founders, surviving a near-death experience, suffering through a down round and more than a few pivots. Its story holds some valuable lessons for European entrepreneurs.

Shazam’s founders, Chris Barton, Philip Inghelbrecht, Avery Wang and Dhiraj Mukherjee, set out to develop technology to solve the problem of music identification to answer the age-old question, “what’s that song” – and do it in real-world scenarios, such as when you’re out in a coffee shop or pub and hear a song you like, and made it work over mobile phone. They invented the technology in the U.S. but in 2000 no U.S. venture capitalist saw the potential since at that time, due to the fragmentation and poor quality of U.S. cellular networks, it was more common to listen to the recipient of a call shout “can you hear me now,” than to listen to music.

So, Shazam’s founders moved to London, where mobile networks actually worked. It was a case of Silicon Valley Coming to the UK – and staying put.

While the investment market was more open in Europe than the U.S., the founders still went to more than a hundred meetings before they found their first set of investors. They made their decision to locate the company in London for several reasons: access to initial funding ( the first round was from a group of individual investors, with the subsequent round from venture capital firms); the mobile industry was more advanced in 2000 than in the U.S.; and the UK is a major nexus for the music industry.

The first few years were tough: the company had trouble figuring out the right business model and was losing money. Two of its investors bailed, the founders were removed from day-to-day management roles, and Shazam was forced to accept a “down round.” It had a pre-money valuation of half a million euros in its Series C round. It was at that point that London venture firm DN Capital invested into the company, says Nenad Marovac, a managing partner at DN Capital. Marovac says he was wowed by the technology when founder Barton demoed it in the back of a cab.

“It has definitely been a really rocky road but a very interesting one and lot of fun,” says Marovac, adding that he fully expects Shazam to become a billion-dollar company and eventually go public.

The lesson for other entrepreneurs is “be really scrappy” and do what it takes to get ahead, says Marovac. When he invested in Shazam the company was bringing in one or two million dollars in revenues from a B2B vendor-managed inventory business centered around monitoring radio stations. IDG, one of the original investors in Shazam, arranged for the sale of that side of the business for $25 million and the proceeds were then used to fund the consumer side of its business.

IDG brought in the company’s current CEO, Andrew Fisher and DN Capital helped with Shazam’s  first U.S. hire, a saleswoman who closed a deal with AT&T and Verizon to embed the Shazam app into phones. At the time, the app was white-labeled; Shazam agreed to license the technology in order to pay the bills and build up enough revenues to start building its own brand.

A deal with Apple’s iTunes in 2008 proved to be a game changer: the U.S. company featured Shazam as one of the top 10 apps in its store and spent millions in the U.S. on ads teaching people how to use Shazam. “It really took us to the next level,” says Marovac.

Today Shazam is available on all major mobile phone platforms and used by more than 275 million users in over 200 countries in 33 languages. Its technology now goes beyond creating an acoustic fingerprint of a song, but also of any other media. Shazam can match the audio against its database, then provide the user with the name of the artist, song, television show, or ad and a host of other information.

In 2012 it started applying its technology to making television ads and shows “Shazamble.” All nationwide television shows in the United States have now been Shazam-enabled, says David Jones, Shazam’s executive vice-president of marketing.

The company is tapping into a trend. A January 2011 study conducted by Nielsen and Yahoo! found that 86% of mobile Internet users (and 92% of 13-24-year-olds) are using their mobile devices simultaneously with TV. A quarter of them say they are browsing content related to what they are watching. Some 45% of the study’s respondents said they use wireless devices while watching TV to do time-sensitive research, while 41% use it for impulse buys.

That’s music to both the ears of advertisers and the producers of television shows, says Jones. Brand advertising on TV has never been really interactive. Thanks to Shazam, now it is. By making the ads more engaging, Shazam gets a slice of the TV ad market, which is worth $70 billion in the U.S. and $170 billion globally. The lure for broadcasters to add Shazam to programming is that integrating Shazam promises to drive engagement and ratings, turning viewers into fans, says Jones.

The company achieved visability with its two-screen app during the 2012 Super Bowl and the 2012 Olympic games in London. During the 2012 Super Bowl , spectators who had downloaded Shazam’s app onto their phones or tablets could enter sweepstakes for major prizes; access real-time statistics to keep track of all the key plays and players; take part in polls; share the experience with their friends on Facebook and Twitter; download a remix of a new single from half-time performer Madonna; and purchase merchandise including hats and jerseys from Shazam’s mobile store. This year users of the service could do all that and more: 16 of the Super Bowl ads were Shazamble.

Shazam also provided customized applications for the Grammys in 2012 and 2013, for American Idol and for the Brit awards in February.

Shazam’s users can not only tag TV ads and contents, they can now automatically share those tags on Facebook. Some 85% of Shazam users now use the app with a TV ad or a TV show. When using the app with a TV show users can — with the click of a single button — call up a programming guide, and show and cast information, as well as music from a show, celebrity buzz, tweets, and trivia and share it all on Facebook.

Shazam has already partnered with 10 networks, including the big four in the U.S., and has launched more than 200 ad campaigns with big brands in 10 countries. “We have moved from being a music discovery company to a media engagement company,” says Jones. The television business has become “a major revenue stream in fairly short order and will soon be our primary revenue stream,” he says, an example that demonstrates that even after scaling and becoming successful, a start-up has to be ready to pivot and keep evolving.