Spotify’s Financing Is Said to Lift Value to $4 Billion

David Paul Morris/Bloomberg News

Spotify is in the process of raising a new round of financing that would value the popular online music service at up to $4 billion, according to people with knowledge of the matter, in the latest eye-popping Internet company valuation.

Spotify so far is on track to raise about $220 million. Goldman Sachs is to lead the round with about $100 million, or about half of the round, two of these people added. The people asked for anonymity because they said they would lose their jobs if their identities were known. The company, which is still in discussions with several major venture capital firms, may change the size of the financing round, depending on demand.

It is the latest soaring valuation for a new generation of Web ventures with a big social networking component to their businesses. Pinterest, a young photo-sharing site, recently raised a $100 million investment round led by the Japanese retailer Rakuten and a number of elite venture capital firms. The financing reportedly valued the site at $1.5 billion.

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Last month, Facebook bought Instagram, an extremely popular photo-sharing app, for $1 billion in stock and cash.

Such high values have been occurring in the wake of Facebook’s eagerly awaited initial public offering, which raised $16 billion on Thursday.

Among the elements that these companies share is a reliance on Facebook and its vast platform to help fuel their explosive growth. Spotify allows users to post their playlists on the social network, potentially drawing in new customers.

The $4 billion valuation of Spotify, which became available in the United States only last year, underscores how fast the online music start-up has grown. Founded in Sweden in 2006, Spotify has operated in Europe for years; however, its debut in America was held up by protracted negotiations with record labels.

Since its international expansion, however, Spotify has boomed. It currently has roughly 19.9 million monthly active users, according to AppData, a data service that tracks the popularity of Facebook applications.

Traditional services like Apple’s iTunes allows customers to buy music by the song. But Spotify and its rivals provide a subscription service based on a so-called freemium model, in which an ad-supported version gives limited access to users at no charge, while increasingly expensive levels of pricing allow access on mobile devices and an ad-free experience.

In an interview last month with the Swedish newspaper Dagens Industri, Spotify’s chief executive, Daniel Ek, said that the company could record $889 million in revenue this year.

The value of these companies has grown by leaps and bounds within months. Last February, Spotify raised about $100 million, in a financing round led by the venture capital firm Kleiner Perkins Caufield & Byers and DST Global, the Russian investment firm, in a deal that valued the company at $1 billion.

Pinterest raised money in October at a $200 million valuation.

One question that critics have repeatedly raised, however, is the potentially unsustainable business models underpinning these companies — namely, a lack of profits. Spotify is likely to report a loss, as it spends money to finance its continued international expansion. Last year, the company lost about $60 million.

And Instagram notably does not charge for its app or include advertising in its users’ photo feeds, leading many to wonder how the company could build up a profitable business in the future.

Correction: May 19, 2012
An article on Friday about a new round of financing for the online music service Spotify misstated, in some editions, the number of its current users. Since its international expansion, Spotify has roughly 19.9 million monthly active users, not 19.9.