App Maker Smule Raises $16.6M, Eyes Eventual IPO

Known for a series of music-generating apps including Magic Piano, AutoRap, I Am T-Pain, and Sing! Karaoke, San Francisco-based Smule is expanding its ambitions with $16.6 million in its latest round of venture funding. CEO Jeff Smith said the company is entertaining notions of an eventual IPO, depending on market conditions and the company’s long-term outlook.

The new money builds on about $26 million the company raised since it was founded in 2008, bringing total capitalization to $42 million. The cash infusion comes about six months after Smule launched its Web-based social network, Smule Nation, to host performances created via its apps. Many of its products allow people without traditional musical skills to create tuneful performances easily. AutoRap, for example, turns ordinary speech into rap tracks that can be used for battles, while I Am T-Pain uses an AutoTune-like effect to make singers sound like the popular rapper and producer’s works.

In an interview, Smith said Smule intends to continue creating new apps, investing in Smule Nation, and hiring designers and engineers, while also establishing a presence in Asia. Smith told Billboard.biz in January that the company was enjoying strong growth and didn’t need to raise additional cash, but was mulling another round to support technological and geographical growth. He said 18 million people use its apps each month, and regularly upload 600 gigabytes’ worth of performances to Smule Nation each day -- more than a terabyte every other day. That requires a complex network architecture, into which the company will invest further.

In the January interview, Smith said Smule has 150 million users across all its apps, representing about 2% of the world’s population. Those users have begun to coalesce into communities, on Smule Nation or other platforms such as Facebook, that create music together -- for example, using its Guitar! app along with Sing! Karaoke to unite instrumental and vocal performances, or engaging in rap battles using AutoRap. Smule intends to invest in domestic and international marketing as well, particularly in Japan and Korea, as well as elsewhere in Asia, Europe, Brazil and Russia.

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While Smule still sells some of its apps a la carte alongside several free offerings, the company derives 80% of its revenues from its 200,000 subscribers who enjoy enhanced product capabilities; most of the remainder of its income comes from advertising. Smule says it has a $30 million run rate, based on first-quarter sales that doubled year-over-year, and has reached cash-flow break-even.

For the new round, first-time investor Roth Capital joined existing backers Bessemer Venture Partners, Granite Ventures and Shasta Ventures. Smith said Roth helped diversify its investor base to include more institutional funds and high-net-worth individuals, some of whom might invest in a public offering as well.

Smith has already been through an IPO, as CEO of email security company Tumbleweed Communications Corp. in 1999. More recently, he earned a Ph.D. from Stanford’s Center for Computer Research in Music and Acoustics; he co-founded Smule with Stanford professor Ge Wang.

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