The $400 million sale to Apple: how Chris started, ran and sold Shazam
Chris Barton is a founder and ex-CEO of Shazam, one of the most iconic and loved apps that has ever been built. Shazam amassed over a billion downloads and was acquired by Apple in 2017 for $400 million.
On this episode of the Startup Exits Podcast, we chat with Chris about:
- Is it bad to start a business with friends?
- Should founders be secretive about their idea?
- Fundraising strategies for startups
- Running a startup in a financial crisis
- Entrepreneurial perseverance
- Tech predictions for the next decade
- How Apple acquired Shazam
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ANDREW VASYLYK: A lot of people think that Shazam was created around the time when Steve Jobs announced the iPhone in 2008. But the reality is you guys got started 10 years prior. You had the idea for Shazam in 1999, you put together your original founding team of Philip, Avery and Dhiraj. Philip and Dhiraj you knew very well before you get started with Shazam – they were your friends.
There are some people out there that would say that getting into business with friends and family is not a good idea. So, my first question to you – what are some of the positive and negative things about being in business with friends?
CHRIS BARTON: I definitely don’t think that rule of “don’t get into business with friends” necessarily applies. I think, sometimes a friend is someone that you really know so much better than just a social contact or a business contact that can give you a lot of advantages in terms of being able to evaluate whether they would be a good co-founder.
Because when you’re evaluating who your co-founder should be or could be it’s much more than just simply skill-set because you’re creating a company together. It’s almost like getting married and you’re going to basically not only make decisions together but you want to know how well you work together, how well you handle disagreements, and what really drives you as a person, what’s important to you. Things like integrity is a big one for me in terms of quality, extremely important, and you can have a better sense for someone’s integrity when they’re a close friend than when you just have had business interactions with them, for example.
So, I actually think that if a friend has the right skill set, that can mean complementary skills or strengths, they can be a great co-founder. So yeah, that’s how I thought through selecting friends as co-founders.
Should founders be secretive?
VASYLYK: I could definitely see how being prior friends with your co – founders could help, especially at some of the low points in the company. I’d imagine, it would also strengthen your friendship with them as well.
There was a point, very early on in Shazam’s history where you guys had a business meeting, and during that meeting you guys were quite secretive about revealing all the information about the Shazam idea that you guys had at that time. I feel like there’s some founders out there that have a similar approach or are secretive about the idea. In your opinion, do you think that secrecy is a good thing? And if not, what would you say to founders to help them overcome this need for secrecy?
BARTON: Well, I think, being secretive is not extremely harmful. But if you’re overly secretive it can actually hold you back in really gathering the right input and insights for your business. So, I think there’s a balance. I think, the opposite of being secretive would be putting up a website saying: “here’s what my business is going to do” and maybe even getting some press and so on. And then your concept is much more widely available or broadcasted to the world.
Whereas, I think, a nice balance is to be somewhat open about, at least, big parts of your idea with the people that you think might give you some meaningful feedback. And this could [represent] a lot of people. It’s not just a very small number that are under, maybe, an NDA with you, but it could be friends or people that you know well in the industry or even people you don’t know well, but they are experts in the industry and you can get some quite valuable feedback and insights from those people. And if you’re trying to be super secretive you may not be able to get to the point of getting that feedback or getting those insights because you’re reticent to share the idea.
So, my view is – there’s a balance. Definitely being overly secretive, I think, can hold you back in terms of getting the learnings that you need in those early days.
So, we were actually quite secretive with the Shazam idea because we thought it was pretty novel and we wanted to get through a head start and trying to conquer the technological hurdles to support this concept. But we did share obviously with the people; we were out meeting with PhDs in audio signal processing asking if they could invent a technology like this and obviously with those people we had to share the idea, and essentially that means we’re sharing the idea with the exact people that have the talents to invent it. But we didn’t think it made sense to literally enter into NDAs with each one and really be overly protective.
VASYLYK: So, you spoke about some of the tech hurdles that you guys had to overcome. When you guys were getting started there was nothing out there that could identify a song based on audio that was playing. So, you guys had to literally invent the technology, which is incredible, and once you guys did invent the technology, you went on to raise your Angel round, and you raised the round by cold emailing investors.
And I wanna say that’s a bit of a non-traditional way of raising capital, most people nowadays try to get intros, try to go to their network etc… Do you feel like cold emailing investors is still a viable way of raising capital in 2019?
BARTON: It would be hard for me to assess which method is most effective just because I’ve only had one experience. But, I guess, I have my own built-in philosophy of how I wanted to raise capital for Shazam.
I mean, definitely a much more standard way is what you’re describing especially in places where there’s a lot of seed level investors or angel investors, for example. And so, that way it’s almost like a shotgun approach. You just going out there, trying to find really anyone that’s interested in making early stage investments and you are out pitching your idea to them and to get in front of them,obviously, referrals are very helpful because that’s how a lot of them screen -basically they only want to meet with the companies that are referred by someone they trust. We were in the UK, we started Shazam in London, and definitely the UK does not have the extensive angel network out there that you find in Silicon Valley. So, that was one thing. There weren’t just things like AngelList and there were no people known as super angels, and it just wasn’t a common concept, concept of angel investing. That was one factor that played into our decision on our approach.
But more importantly I just felt that there’s a bunch of reasons why I would like to raise money from very specifically targeted individuals and those individuals were basically people that had very strong expertise or background related to what my startup was in. And since Shazam was basically music and mobile phones and technology essentially it was about people that had either strong backgrounds in music, technology or mobile technology. And so, I just thought that if we had targeted those types of people that would be the best types of investors for several reasons: if they invested it would provide validation on the business and actually that turned out to be very important. In fact, my Series A venture capitalist even said that one of the most compelling things about our pitch deck was the fact that the angel investors we had were pretty high profile individuals in the music industry.
And then, secondly, you’re resonating with them because when an angel investor makes an investment, there’s two big reasons they want to make that investment, and one of them is their passion for the area. [It makes sense to target] big music industry experts, as they can resonate with the Shazam concept because it’s something that they understand and [which represents] their passion about music. The second thing is that, I think, they want to have almost an unfair advantage as an investor. And the unfair advantage comes from their deep expertise and knowledge. And so, if they invest in something that they know a lot about, they can steer the chances of your success and, therefore, have this unfair advantage in their investment, essentially steering the path of their investment. I guess, those there are the primary reasons. [Plus] we didn’t have directly or indirectly through our network contacts that were big senior executives in the music industry.
So, I just decided to basically cold email them and it turned out it worked. We got the former chairman and CEO of EMI, one of the major labels, the former chairman of BMG in the U.K., another one of the major labels, the founder of Liquid Audio, which was a public company in music technology at the time. Also the former chief technology officer of British Telecom who is, obviously, close to the whole telecom space. So, those are all angel investors in Shazam.
So, the method did work.
Running a startup during a financial crash has its advantages
VASYLYK: On the topic of raising capital you guys raised your Series A in 2001, which was in the middle of a huge global financial crisis – the dotcom crash. And there are some people out there that are speculating that we’re on the brink of another crisis, usually these things happen every 10 years or so and it’s been roughly 10 years since the last one.
What sort of advice would you give to founders that are running a startup either in the middle of a financial crisis or what can they do to prepare for one?
BARTON: Actually, we definitely started Shazam basically right before the crash, [which] made some things really difficult. So, there’s no doubt that raising capital was extremely hard to do. Most of the venture capitalists that we pitched to told us that they were not investing in anything that was B2C. They viewed B2C as much higher risk than B2B which, I think, it generally is. And we were definitely B2C and they were really fighting fires for their portfolio companies, trying to keep those companies alive, so not really making a lot of investments at all. It was a pretty challenging time.
On the other hand, there were advantages to running a startup in those difficult times. Obviously, assuming you do solve the problem of getting capital which we did through just simply perseverance, determination, a lot of other things become much better for you. Recruiting, obviously, can be better because there’s more talent on the market that’s available, which can be really frustrating in times when all the good talent gets vacuumed up by Google, Facebook, Amazon and so on. And then, other things were more affordable.
I remember we took over the office spaces of one of the imploded dot com and even bought all their chairs and tables and so on for pennies on the dollar. And so, that was helpful for us as a business that would have been tougher for us in boom times. And then, I would say, you can be less concerned about the competition both from other startups as well as large companies that are also having to prioritize their focus on the near-term revenue opportunities. And so, you can just hunker down and focus on building your startup. And I think that the time aspect of urgency has a little bit less pressure and the competitive aspect has less pressure because of how everyone is distracted by the tough times. So, that allows you more time to build your business in a thoughtful way because things do take time especially when you’re limited on capital. And so, having more time can be to your advantage.
So yeah, I guess, my main advice for entrepreneurs in difficult times is – just keep thinking outside the box on “how can you build your business with less capital?” and “how can you find early revenue, that includes doing things in a less expensive way, that includes doing less or taking more time to do things.” But just constantly thinking about that capital efficiency will give you your biggest advantage in difficult times.
VASYLYK: You mentioned perseverance, and you guys essentially overcame a lot of hurdles – anything from inventing the technology to raising in a financial crisis, to launching. So, you persevered through a lot of difficult times in the company; you also speak in other interviews that perseverance is one of the most important skill sets for a founder to have and is one of the biggest things for entrepreneurs success.
But I feel like, on the other side of things, sometimes it’s equally important to know when to let go. So where do you draw the line? How do you know when is it worth it to keep on pushing through versus when is it better to just pretty much throw in the towel?
BARTON: That’s a really good question. I have to say, you could easily be so focused on being perseverant on something that you’re never gonna get and therefore, you’re just wasting months or years of time. I think, ultimately it’s just a judgment issue. It’s a judgment where you’re basically deciding: “Is your goal achievable?”, and also “is that goal mission critical for where you’re trying to go?”
If you look at the early days of Dropbox, one thing that they persevered on and, in fact, they continued to persevere on for many years after, was really conquering synchronization of documents between a device and the cloud. And they did that because they really believed that if they conquered it and made it incredibly reliable, they would create this seamless experience with the cloud that would be so much better than having to just upload and download things. And that was a really, really hard problem to tackle. They’ve had to prioritize it by putting most of their engineering talent on solving that one problem. But I think they recognize that they should not give up on that because that would be their kind of core to really breaking through and having something that was so much better than everyone else. So, I think, that’s an example of where you’re recognizing that a goal is so mission critical that you just don’t want to give up on it.
And that was true also for Shazam, for music recognition, for identifying a song in a noisy environment and just being laser focused on that. But, on the other hand, there could be other things that companies try to do that simply may not be so mission critical or you might recognize that this is just not going to work out, it’s not feasible, this is going to take too long. Sometimes those are things that involve reliance on partners, which can take years and be very uncertain. And on some of those things you sometimes have to throw in the towel and just realize that you’re never going to get there even if you keep on trying – it’s going to take years and you got to find another way. So, it really is all down to judgment.
As a startup, you want to be a little bit ahead of your time (but not too much)
VASYLYK: So another very critical thing for startups is timing. Some startups start too late, when they get into the market there’s already a lot of competition; some start too early, where the required infrastructure is not available yet. In the case of Shazam it seemed like you guys were way ahead of your time – you mentioned in one interview that if you guys started the company 5 years later, you would have had a much easier time.
How do you approach timing? How do you know when is it too late to enter a particular market? When is it too early or when is it just the right time?
BARTON: That’s a great question. I think, again, that it comes down to judgment. I mean, as a startup, you want to be just a little bit ahead of your time, because if you’re a little bit ahead of your time that means you’re getting started on solving something that’s going to be extremely relevant to the world. And you’re getting started on it before it is solved by either another startup or the incumbent large companies in the world. So, you do want to be a little bit ahead of your time, so that you can have that advantage, so that you have some technology or offering that is really relevant. At the time that the hockey stick of relevancy becomes applicable for the market that you’re going for and hopefully you’re right and that really will happen, that there will be the hockey stick of relevancy.
But if you’re too far ahead of your time, and actually it turned out that we were too far ahead of our time, and I’m talking about many years because we’re starting Shazam, as you mentioned the beginning of this podcast, a full eight years before the iPhone came out and seven to eight years, and eight to nine years ahead of the App Store coming out. And, I think, we didn’t realize that it wasn’t until the App store came that there would really be a big market for something like Shazam, and we were counting on the fact that mobile phones themselves, even without apps, would be a sufficient market for us which, turned out, was not the case.
So when you’re way too far ahead of your time obviously it’s just very hard to survive for that many years before you start to see traction. You really don’t have that much time in startups. Typically you have maybe one, two, three, four years depending on how good you are at capital preservation. So, I guess, it’s judgment and you’re essentially having to predict the future and say when this all going to happen. And we knew a lot of things were coming in mobile like 3G, and color phones, and the early versions of apps like Java and Brew and so on. But, I think, we didn’t quite understand how long it would take before there was a real breakthrough to the masses in terms of doing all these advanced things on mobile phones.
VASYLYK: I think, if you take a look at your initial vision for Shazam, which wanted to essentially make audio clickable, just as links to websites are clickable, and not just for music but as well as TV shows and movies, this sort of vision would not be possible on computers and it’s only possible for something that people carry with them everywhere they go such as smartphones.
So in some ways you guys predicted and were banking on mobile becoming huge. And again, this is 10 years before mobile did become huge. So, do you have any predictions for the next 10-20 years as far as what sort of industries and technologies do you expect to become huge?
BARTON: Yeah, I mean, I get asked that question a lot and I often think I’m not one of the best people to answer it, since I tend to be an entrepreneur, I tend to pick areas and then zoom in on those at the end rather than become a generalist like a venture capitalist who is looking at a lot of things and trends and seeing so many pitches and stories that can start to pick up on signals of what’s coming.
So, I wouldn’t say I’m the best person to give an answer but, I guess, I can give you my answer for what it’s worth, which is the area that I’m particularly fascinated by in terms of massive impact is artificial intelligence [and] machine learning, which is obviously one of the big trends.
But I do think that there’ll be one by one a lot of businesses that will be significantly impacted and even create opportunities for new products, new startups and so on, that solve problems really well through essentially employing artificial intelligence and machine learning. So, that’s definitely a category that I’m very excited about and I think we’ll create some significant change in the coming years.
Apple wasn’t the only one interested in buying Shazam
VASYLYK: I want to switch gears to Shazam’s acquisition. The company was acquired by Apple in 2017, it was $ 400 million deal. Can you share with us how it all went down?
BARTON: I think we were ready for an exit. As you mentioned, a lot of startups are seeking that exit and keep in mind that Shazam when it did exit was a good 18 years from when we started the company. We sometimes like to joke that we were always two years away from exit. And during that 18-year period we did start to engage, and as you can imagine I can only talk about so much with regards to this process, [but] we did engage in conversations with a variety of companies that we thought were complementary to Shazam around the world.
And, there are also very large technology companies. So, you can imagine some of those companies would be knowing that Shazam core businesses were music-related and advertising-related. That’s because advertising is how we made our money and we were doing some pretty innovative things in advertising in terms of interactions with advertisers as well as we were doing lots of great stuff in music, and we’re a significant influencer of music discovery. And those were two common themes for areas that were often of interest to these large prospective buyers of companies. And with the assistance of some talented advisors, we’ve engaged in a very thoughtful process of communicating our vision and our strategic advantages that we brought to the table that we can have the business which included a very large base of users that were very a big brand and users most importantly that, I think, were really delighted by Shazam.
Shazam would consistently get very high ratings in the App Store, even relative to some of the top apps that you can think of that are used today. So, we really focused heavily on delighting our users. And , I think, we built a big brand, as you mentioned, over a billion downloads of Shazam and consistently we’re getting more than 8 million new downloads, new users basically downloading Shazam every month. So, a nice consistent growth and so, bringing all those things together we are basically looking for the right partner that would find Shazam complementary to their business and one that we felt like we’d fit well into.
I’d say I couldn’t be happier with the outcome. I mean, obviously, Apple is a company that also focuses on delighting users and also as a brand is loved by a large number of people both in technology and in music. And they’re a major player in music, up there with Spotify and streaming, and they were definitely the global leader in digital music before the world of streaming, with iTunes. And, in general, very complementary to Shazam.
[The Apple acquisition] was a very lengthy process, significantly more than a year. But part of that is because of the lengthy regulatory process that we went through on the acquisition. Nowadays the European Union often and carefully scrutinizes acquisitions, particularly by large companies such as Google and Amazon, Facebook, Apple, and so on. That definitely drew things out a bit. But we had some great conversations during that process and really some significant deep dives with several prospective companies that it could have worked out with. But I definitely think that I couldn’t dream of a better outcome than Apple.
VASYLYK: So, you mentioned that, besides Apple, you guys, were in talks with a few other companies as well. What would you say to founders that are running a startup, they’re doing pretty well and they start getting approached by corporate development people with acquisition talks from larger companies? Are these meetings worth taking or are they a waste of time? Or do you gauge based on readiness level the startup to get acquired? What sort of advice would you give people in this position?
BARTON: I mean, I don’t think it’s a waste of time. I think it’s good for you as a founder to always know your market. And, even if you’re years away from where you think you want to exit and maybe you’re planning to go IPO one day, you really would be doing yourself a disservice if you didn’t always know the market for the asset that you control, your company. And the only way to keep your finger on the pulse of what that looks like is to maintain ongoing correspondence and interactions with the key players in the space as are often facilitated through to the corporate development folks, but not only they facilitated through that but to the extent that you have commercial relationships with these companies is another way of cozying them up. I mean, Shazam is an example – we obviously did a lot of things with Apple in the years leading up to the acquisition.
We’re a big driver of iTunes affiliate sales and we did lots of stuff within the Apple App Store and premiering their new technologies and so on, things like the iPad and the Apple Watch, you name it. So, I think, as a founder, it’s good just to stay close and you might get some level of interest or even potential offers for your company and it doesn’t mean that you need to do a deep dive and take them seriously, but it’s good to be aware of them and only engage when you think that there’s one that it could be of interest.
I think the Instagram sale was basically Mark Zuckerberg really courting Kevin Systrom, from what I understand, just reading in the press, for quite a long time and led to a very significant acquisition. You just don’t know where those things you’re going to lead to and so, I think it’s worth it to be open.
Startups don’t control their exit
VASYLYK: Founders are always told to have an exit strategy, even in ridiculously early stages. Did you guys have an exit strategy? And if you did, was Apple ever in your sights?
BARTON: Yeah, I think, exit strategy is a funny thing to say because it sounds like you can control your exit and I think that people can misunderstand what that really means. In my mind there are really just two main things that you can do, and all [these things] are doing is really optimizing the opportunity for your exit. You don’t control your exit unless you go IPO and optimizing your opportunity for exit through M&A, which is, obviously, more common than IPO.
So, I think that all founders should be very aware of this form of exit. I think the two main things are to be building a great product, a great business and great relationships with your customers, and be very laser focused on that because that is one thing that ultimately makes you attractive to a prospective buyer. And then the second thing is, as I said, forming closer relationships with some of the companies that may one day be a buyer. Because it’s that close relationship it could be a core partnership of some type that is complementary to both parties, but often it’s those that allow you to get to know the people and allow the prospective buyer to get to know your company, and your product, and your technology well enough that it becomes of interest to them to potentially completely own that.
So, I think that thinking through the companies out there that are most likely to see value in owning you one day, and why would they see value in you, and then thinking through how can you get to know those companies really well today, is there something you can start doing with them today that would be mutually beneficial. Because you can only distract yourself so much. I think that’s probably the next best thing you can do after the first thing I mentioned, which is just continuing to build great products, great business and great relationships with your customers.
VASYLYK: So, my last question to you, Chris, is a bit of a funky one. You’re, of course, big in to music. Shazam is all about music and Apple, as you mentioned, is a big player in music. Is there any song or artist that you associate with Shazam? It could be in the early days of the company or maybe during the time you guys launched or around the acquisition or at any point of the company. Is there any particular song or artist that you associate with Shazam?
BARTON: I guess, as the first band name that comes to mind for some reason is the Pixies. And it’s not that it’s necessarily one of my favorite bands, I mean, they’re great, but some other bands would be my favorites.
There was just quite a funny story where their music threw us for a loop a little bit in our early days when we’re developing our technology for a commercial launch and it was leading to some false positives where we were getting in an issue, where for one of our investors, no matter what he Shazamed, it would come back and say it’s the Pixies. It became almost a joke because it really only happened to him, but it turned out that there was a certain feedback sound in one of their songs that matched the feedback sound you hear when you put your mobile phone right up next to a speaker and create a feedback loop, and that was creating this false positive. And this particular investor was doing that. He was so keen for it to work, leading up to the commercial launch that every time he shazamed the song, he would literally walk right up to the speaker and put his phone essentially right next to it, causing that feedback sound. We solved that problem later but, anyway, for that reason that band always is the one that comes to mind when I think of those early days at Shazam.
VASYLYK: So, as we’re getting ready to wrap up here, Chris, tell us what we have going on in your life now and if you have any plans of starting another startup in the future?
BARTON: Yeah, I actually did decide that this is a long bit of my dream. After working for many years, since Shazam, at Google and Dropbox, I really wanted to start another company. My goals are quite different than they were with Shazam. I’m not trying to build a huge company that raises lots of venture capital money and aims to be a billion dollar company. I do want it to be a little bit more mission driven or impact driven, but I’m excited to be working on it and have been for about nine months now and it’s very early stage.
It’s really just me at this stage, but I’m focused on computer vision as a technology enabling my startup, and so it’s sort of incubation stage, as to exactly how it’s going to play out. So, I won’t get into too much more detail, but it’s definitely exciting to be starting from the ground up and working towards creating something. I really enjoy that creative process.
VASYLYK: Well, let’s hope it’s another success, so we can have you back on the show. Thank you very much for coming on the show, Chris. It was a pleasure to have you on.
BARTON: Thank you, Andrew.