Internet radio service Pandora valued at $3bn after float despite being unprofitable

The wave of Silicon Valley floats have continued, with internet radio service Pandora raising over $US290 million overnight in a listing on the New York Stock Exchange, valuing the company at over $US3 billion, despite the company turning over no profit.

The float comes just weeks after executive social network LinkedIn debuted successfully on the NYSE, with its shares doubling in value within just a few hours.

Along with listings from group buying giant Groupon, and hints from social networks Facebook and Zynga, growth-starved investors are becoming satisfied with how these new tech companies are performing fresh on the market.

However, like the other tech companies currently investigating floats, Pandora is making little money and is not even profitable, despite having tens of millions of users.

The service allows users to stream music over the web and smartphones, but has become popular for learning users’ preferences over time. It has been particularly popular among high school and university-aged users, who use the service to find new music.

The company raised $US235 million in the float yesterday, offering 14.7 million shares. While the opening price was set at $US16, shares reached $US26 during the day, giving the company a valuation of $US4 billion, although prices settled at $US17 by closing.

Pandora originally set its price per share at between $US7-9, but made a few amendments before yesterday’s listing before settling on $US16 as a starting point.

The biggest winners from the float are not the company’s founders, but three venture capital firms: Crosslink Capital, Walden Venture Capital and Greylock Partners, which counts LinkedIn co-founder Reid Hoffman as a partner.

These three companies control about 55% of the company, while some of the key executives have a much lower stake – chief executive Joseph Kennedy controls 2.71% of the company, now worth about $US70 million.

The biggest individual winners from the float are director James Feuille, who is associated with Crosslink Capital, and whose stock is now worth nearly $US600 million. Thomas Conrad, executive vice president of product, has stock worth nearly $US40 million.

But co-founder Tim Westergren only controls 2.39%, with his stake worth $US62 million. This is because when he originally launched the company during the late 1990s, the hunger for dotcom shares dissipated and Westergren was forced to beg venture capitalists for funding. His stake was diluted heavily as a result.

But just as it was when Westergren first launched his company – when tech companies were quickly losing their cool – investors are similarly concerned. Pandora makes no profit, and according to its S-1 filing lost over $300,000 in the first nine months of 2010 on revenue of $US90 million.

Prior to that, the company lost $US16.7 million based on revenue of $US55 million for the financial year ending January 2010. Its financial position has improved, but some analysts are still concerned.

The vast majority of Pandora’s revenue is based on advertising, while just over 10% comes from subscriptions, which allows users to access more songs per month and other features. Some believe the company’s financial position is precarious.

But Telsyte research director Foad Fadaghi says the situation in Silicon Valley is much different than it was 10 years ago, when Pandora was first founded.

“There is an increased appetite for investment, and it is similar to the period in the late 1990s when a lot of companies floated. However, a lot has changed, and the infrastructure for businesses to become profitable is now there.”

“What I’m referring to is broadband, technology, widespread prevalence of devices and the services underpinning them.”

Certainly Pandora’s popularity exploded after Apple launched the iPhone store, and in fact was featured as one of the first apps available. Tim Westergren has said before this was a key turning point for the business to expand, and essentially doubled the company’s growth – Pandora is consistently one of the most popular apps on the App Store.

“That is the major difference between then and now. Maybe the investment appetite is the same but the prospects are much better,” Fadaghi says.

Pandora is definitely targeting aggressive growth, eyeing cars, smartphones and other devices.

“Our growth is continued growth in the number of listeners we have,” Kennedy told Bloomberg overnight. “Expanding into the car, into the homes. 234 million Americans listen to broadcast AM and FM radio per week. We believe we can deliver a dramatically-better experience for them by continuing to grow the service, improve the service and make it available everywhere.”