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VCs Get Dead Air In Listen.com’s Sale

When RealNetworks announced last Monday that it had bought Listen.com for $36 million, Sean Ryan, Listen.com’s chief executive, breathed a deep sigh of relief.

In the last year, Ryan had been scrambling for capital. He had already burned through $73 million and he had raised $37 million at a valuation that was so low that if he sold any more equity, he would be forced to cede control of the company to a group of investors who were threatening to turn off the spigot. If he could not line up a buyer or a strategic investor, five years of work and $110 million in venture capital that financed the development of Listen.com’s signature online jukebox would have gone up in smoke.

RealNetworks walked in with an answer in February. Although the two had been working together since November 1999, when the Seattle-based media company began syndicating Listen.com’s online music directory, RealNetworks had never invested in Listen.com. In February it ponied up enough capital – the exact amount remains undisclosed – to take a minority position in the company.

RealNetworks’ investment, however, still wasn’t enough for Listen.com to keep going on its own. Then, just this month, the company raised $30 million in three separate investment tranches, according to documents it filed with the Securities and Exchange Commission. Again, that money wasn’t enough to keep Listen.com in business and it was forced into a sale.

RealNetworks and its subscribers are the only winners in Listen.com’s sale. The venture capitalists got burned. At $36 million, Listen.com sold for an undisclosed multiple of its revenue, but at a fraction of the $550 million valuation investors had tagged onto the company after it closed its last formal round of venture funding of $70 million in March 2000.

By the time the sale was closed, Listen.com had whittled its list of venture backers from at least 25 to just three – Altos Ventures, August Capital and Austin Ventures.

Back in the day

When the company was formed in 1998, Listen.com was the hot ticket to online entertainment. Madonna, Sony Music Entertainment and technology industry personalities like Halsey Minor, founder of CNET Networks, all invested in the company. But the music industry never controlled more than 2% of the company, which really depended on the venture industry for its capital. Its investors once included The Barksdale Group, Index Ventures Management, JPMorgan Partners, among others. Once the company’s valuation dropped in step with the rest of the Internet industry, its backers demanded more equity for their investment.

Listen.com opted instead to reorganize its capital structure. Last year, it bought out most of its investors at a price the company would not disclose. Altos Ventures, August Capital and Austin Ventures remained shareholders and continued to pour capital into the company.

Still, four years of product development and $110 million of venture capital never added up to profitability. The company was a sitting duck for RealNetworks.

“The opportunity for us to add Listen.com’s Rhapsody, the best music subscription service, into our family of services was just too compelling to pass up,” crowed Rob Glaser, CEO of RealNetworks.

Listen.com CEO Ryan declined to say how many paid subscribers the company has, other than “tens of thousands.” Each user pays a $9.95 monthly fee for the service. RealNetworks will add those customers to an estimated 900,000 subscribers who pay for its RealOne service. It will also take home 15 strategic partnerships Listen.com has in place with broadband distributors like AT&T Broadband and Comcast.

RealNetworks’ part cash and part stock deal is still pending regulatory approval from the state of California. Ryan will stay on with RealNetworks as vice president of music services. Listen.com’s founder, Rob Reid, will join RealNetworks as vice president of strategic development.

The fate of Listen.com’s remaining 51 San Francisco-based employees is still unknown. For now, Listen.com and Real Networks continue to operate as separate companies and market their services separately.