Inside Soundtrack’s Roll-Up Strategy: Building a Global Leader in Background Music with Ola Sars

25:50I invested privately into it and Spotify AB invested. But the governing structure was different than a joint venture. I actually controlled the company. They had levers, of course, and governing principles. But I was always clear with Daniel Martins, I want to build my own company. This is probably something big enough to be its own brand. But let's start off like this. It was a trade-off. They added the music back end. They did the initial licensing, which meant that the product had to be called Spotify Business initially. And I recruited the team, funded the project, and built the initial technology and product.

26:31That was the setup. Very quickly, we got Signal, meaning clearly we're able to sell subscriptions to business. I had a 3 to 5x on retail price and consumer. And then realizing that background music was everywhere worldwide, we took the decision to pivot into independence. And that took me three years because I had to do licensing and build infrastructure technology before we could kind of move away from the Spotify platform. You've raised over$100 million and closed over 13 ,000 licensing deal. What were some of the biggest operational or strategic hurdles in building a platform on that scale?

27:08Once again, back to the story of my life, which is a story of stepping stones. As you all know, preaching to the choir, it's hard to raise money. It's super difficult. People think that music streaming is quite easy. It's extremely complex technology to build. It's very front-loaded. you need to raise a bunch of money and it takes a long while before you see kind of monetization of the software. So the biggest challenge was to get investors to believe in the thesis and stay with me long enough to build this heavy front-loaded technology build. And the three years it took me to go fly around the world again and do licensing deals with the world's biggest music companies, meaning Universal Music, Warning Music, Sony Music, both on the label and the publishing side that takes time and getting to a point rolling out the first market and showing the first kind of monetization outside of the test markets here up in the nordics just summarizing the biggest challenge was funding the whole build based on the thesis that it would be big in five six years how'd you do that once again you appreciate how simple the idea is hey music streaming seems to be the next distribution model for music music streaming seems to be relevant both for consumer markets and B2B markets.

28:27I have built one of the leading technologies on the consumer markets before in the world. I'm now looking for this incremental opportunity to build a leading technology platform for the business markets and no one else is doing it. So I'm first out. I have a great team. I have a first iteration of a product. We have signal that it works, but it's going to take a bunch of money and it's going to take three, four years before we start seeing some return. but there are a couple of others like I've been able to build a company sell it to Apple I've been able to incorporate together with Spotify pretty clear signals that I had some proof points that I was legit in combination with a very big addressable market of course what all investors look for was M &A part of that plan at that point there was no M &A at that point I was just doing what I do best like operating product building technology and just building a team and just zooming in on a typical kind of ICP or typical customer building solution for that customer for her worldwide.

29:29So that was just like heads down product. Then by the way, we had a little interesting period with COVID, which I was just through funding stage. We were near death experience again. I was able to close around. This was in beginning of 2020. Literally looked up from my desk, closing the round. I had to reshuffle my board. I looked down on the street and it's like, what's going on? It's empty. We had two years of COVID where basically my whole market shut down because it's restaurants and hospitality. That was a nice little extra twist to the challenge. But coming out of that, getting the organic growth model going, which leads us to the subject of today, which is at least what you want to address is like when you've built scalable, functioning, organic business.

30:19We're doing really well right now on the organic, but the growth trajectory of the organic plan that we see right now doesn't capture as meaningful part of the addressable market as I would want it to do in the timeframe. That's when I started thinking, are there inorganic options to accelerate growth in terms of market share. And in our specific market and instance is the fact that I did not invent background music. 95 % of businesses use music, but they're using legacy platforms like CD, radio, or clunky streaming services that are linear streaming services. So there's a massive global legacy market background music.

31:08I am the digital new platform provider. The thesis of my inorganic M &A driven path here is adding incremental growth to the platform, meaning acquiring legacy providers in mass and moving them to my platform. I view it as a incremental growth engine to becoming the global leader in background music. It sounds like more messy integration. No, because this time I control the process and I'm in no rush. I have a profitable, nicely growing market leader in a massive market and I have just closed a significant funding round. So I have time on my side and patience so I can really architect what this would look like in terms of target mapping, target identification, evaluation, and then applying the programmatic, meaning the same process every time, which is pay you a premium for your business when that business is migrated or transitioned onto our platform.

32:11So we could run three or four PowerL processes here with four targets. We're not doing it. I'm just in theory that we're just like, okay, let's just say there's a player in Germany that has 10 ,000 subscriptions. We'll set a price for the 10 ,000 subscriptions based on the quality of the customer base, the financial quality, and the cohort quality of those customers. And then we would say, we would pay you X fully migrated. That team will start migrating. And when they've migrated 100%, they've received 100 % of the consideration. So it's kind of more of a customer acquisition M &A model rather than we don't buy any technology assets.

32:50We might acquire some of the team on the local market for customer success or sales, but no technology, only customers. Oh, wow. So this is actually really interesting because now you can make this repeatable playbook, even though the business model might be different, but you have a way to migrate them essentially to your platform. They have a hardware component. You're saying, hey, it's not part of the deal. That probably ends up getting sunset, I take it? Yes. And I'm very clear upfront. And this is also to the playbook, me being very clear on what I want and being humble about the fact that not all people want to sell to me according to my rules of engagement and being upfront with, I'm only looking at this asset based on the customers that you've achieved in your local market.

33:32You've done a great job. You have a sound business. I totally understand if you're not interested. But if you would choose to transact with us, you have the option of a premium. And there's not too many buyers in this market either. That's the upside. You would think that entrepreneur is thinking, okay, here comes the big technology platform. Probably they're going to build their own team in my market. If I sell now, I'll get paid. If I wait three years, I risk losing it. There's a little bit of a carrot and a stick dynamic in me approaching them saying, look, I'm going to invest in Germany. You can be part of us or you can go against us.

34:06And I totally accept you doing that and respect that. But here's an option for you to join. And you can roll into cash, but you could also roll into a component equity, which also provides you with a future upside of supposedly global leader platform at this point. It's a good blend of opportunity for the potential seller. then it's a tough job to migrate the customers and only get paid for the customers migrate. Do you feel like you're convincing these people to sell? I'm just in the beginning of this process. I'm not going to call it a success yet, just to be clear. But I am getting strong signals.

34:40We're currently processing four of these at the same time to see if we can close in. We closed one so far. But no, I'm not forcing anyone to do anything. I'm presenting them with an opportunity and an option. You got the interesting narrative of, hey, here's this transformation. It goes back to your original thesis of the broad industry. And either you're going to be part of it or you're going to be against it. Hey, if you're part of it, you could take cash or come along for the ride and be part of the growth. That sounds like a good pitch. Right. The good news is it's my perception, of course, but I'm very transparent.

35:12I have no hidden agenda. That's what I'm telling them. You've done a great job. You've built an amazing customer base here. And probably you could do that for the next 5-10 years. But I don't really see an alternative exit market for these family-style businesses. So if you're interested in actually capturing an exit opportunity in this market, I'm probably the only option. I know how these companies are, a few companies that transact in this legacy market, how they're priced. So I can be competitive on pricing and kind of show them the comps on that. And then I offer them an opportunity to cash and equity or whatever you want, choose.

35:51And in some instances, I'm honest and saying, look, I really think your team is good. And I want to keep on a couple of people in this because you have local relevance. But I'm also very clear. I'm only interested in your customers and I'm willing to pay a premium for it. Interesting. And that's where I was referencing, like convincing isn't necessarily forced, but it's like, are you reaching out to companies that are just for sale? You happen to catch them at the right time. They've been thinking about selling versus you're giving them a proposition that gets them to think about selling. It's back to your whole, like this podcast thesis is being proactive.

36:24What does that encompass? I am by no means an M &A expert. On the contrary, I've been just accidentally ended up in a couple of M &As in my life. But this is truly trying to market the thesis to everyone. So I want everyone to know about my thesis and say, hey, I'm buying. I'm the buyer here. It's a pretty fair deal. You can choose how to do it according to your preferences, but the market will change. And I've invested$100 million to put behind that. And I've been around and I'm telling you, you're not going to be able to conduct business as smoothly as you're doing today in three to five years, because that's just the reality of it.

37:04It's going to be tougher to do licensing. We're just going to keep investing in our technology. And at the end of the day, that's how we're schooled up here in Sweden. We have no domestic market. We got to build product. and I will keep investing in product and we will delete the platform. Yeah, actually, I was really curious about these license deals that you mentioned. You think about just even everything in some form of sales at the end of the day. When you describe M &A, it's like literally a sales. You build a pipeline and you start qualifying folks and then you pitch them. I was almost curious about how'd your experience from doing license deals transfer over to M &A just because it sounded like it had that lockdown pitch because of that.

37:44Yeah, I mean, now when I think about it, every day, I'm on some call at night with some right soldier negotiating five days a week. Maybe that's trained my mind to think about game theory approach to these things. systematically. Like what's a win-win and when are we getting to the lose-lose and kind of how do you walk away or how do you turn a lose-lose into win-win because deal making is, in my world at least, finding synergy in the win-win. Probably. Because I'm so clear on what I can take when I walk in, what I'm going to accept and not accept. I think so. You might be early in the M &A journey, but the pitch sound very mature.

38:22And I was like, it's got to be from that experience. Negotiating from zero leverage, which is my reality. You're a small DSP, there's a service provider negotiating with the world's biggest music companies who basically tell you to bug off. That's been quite challenging. But at the end of the day, even they look for incremental revenue and I'm incremental revenue for them on an IP asset that they're sitting on anyway. So why not monetize? Free money. How do you determine if a company is a good fit to be acquired versus not? The playbook is pretty simple. we sell background music subscriptions.

38:59So the target needs to have an interesting amount of background music subscriptions. And some of these companies have background music subscriptions, and they have a bunch of other ancillary services. And God knows what they're doing. They're selling TV screens for cafes and digital signage and things like that. That's not a clean buy for me because I'm only interested in the background. So a clean background music subscription customer base is the starting point. There could be some white noise with some additional services, but truly what I'm looking for is the background music customer base.

39:33Second step is what's the quality of that customer base? And that quality is obviously based on an analysis, but shortly put, what price have they been able to extract on a subscription basis? That kind of proves how good they are in providing a service. So if the price is$20 per subscription versus somebody who's been able to extract 40 bucks, that translates into better margin for me down the line. So the customer base with$40 per subscription is more valuable to me. We operate on a subscription base cross margin. So that's the second step. And then the third step is technology migration feasibility.

40:12So some of them have clunky, really weird technology. Some Some of them have more digital platforms that they built themselves. The latter is easier to migrate. So if the migration project will be easy, we're willing to pay a bit more for it because it's faster. We can just move it over to our platform. Then there might be some assets in terms of competence that we could price also a sales team or a good customer success team. That's an easy exercise. But it does start with what's the quality of the customer base? And would you be willing to engage through my model? No other model. That's so interesting.

40:50And then you have your own hardware. We have hardware and software, like we're platform agnostic. So we can swap out hardware. We can integrate software on their current hardware. If they have a hardware player, if they're running on software, that's easy. But the US, for example, you guys have satellite technology and some distribution platforms like SiriusXM, for example. that is a tougher migration path. If it's a satellite receiver, that's not IP-based. That's probably a no-go for us. A long time ago, I used to own a salon. And I remember that we had this like DMX box. I'm looking at this ProFusion.

41:24They used to like send you a CV every month or so. And you had to like update it that way. You've been there. I was trying to source leads for you. I'm going to... For that transition, as using that as an example, you're basically coming in, you acknowledge that, hey, they've got X amount of salons or whatever businesses that's a customer base. That's where most of your diligence on is knowing what's the quality of customers. Does this fit into our thesis of where we're trying to grow? And then the actual plan, you're just upfront. This is what we're going to do is we're accelerating this digital transformation for these customer experience.

41:57And then working with that team, they would essentially move that product out. They would work with those customers, tell them like, hey, we're now part of something bigger. With that, we're going to be changing and updating your equipment. and then you work with our CS team, if that makes sense to transition all that out. Exactly. And be very open about it. And some people want to exit. Some people want to join in, be part of our growth story. And that's also an option if it's the right team. We're having that discussion with one European market where we have no presence and it's a great team.

42:25So people absorb the whole team. Another interesting perspective to it is how do we price that? For me, it's more of customer acquisition relative pricing exercise, where I know where my CAC is on my organic business. And what would I pay then for a subscription in my inorganic road path, meaning acquiring customer bases? I'm never going to get to the same low level or efficient level or CAC that I get from my organic business when I'm buying because there's a premium of the security of acquiring an actual customer and contract. Or it's roughly like we would be paying XX on our CAC. That's how we view it for velocity to revenue.

43:08All right, I'm growing at 35 % of my organic business. If I buy this business, I'm going to come out of this year at 50%. The arbitrage on that on my enterprise value of moving my growth from 30 to 50 is significant. So I justify the premium on customer acquisition costs on the arbitrage that I take home on the enterprise value effect on my business growing faster. That's how I think about the incremental opportunity from acquiring growth alongside my organic path. This is interesting because when we were talking to this, I was in my head, I'm the software business. And some of these companies I look at are legacy providers, been around 20 years, outdated software.

43:48And that's sometimes a thesis is that. It's like, hey, why don't we sunset their product, move the customers over? And that's the same lens that you're talking about. And I've always struggled on how do you evaluate that? because you're right. Here's what we know is our customer acquisition costs and in that perspective, but then you're never going to get it for that low. For them, they're always looking at the typical valuation metrics. They want to multiply. Everybody in software these days want multiplied revenue. If you were to walk through that, I wanted to try to get a better understanding of how would I take a business?

44:19Let's say we found a software business doing, I don't know, let's make a simple math, like 10 million revenue. But I would look at each individual acquisition cost of a customer, which let's say$150. But is it just off of that, of what the acquisition cost is and saying, hey, I'm just kind of... You're completely right. It's the same for us. The enterprise value of the company perceived by the entrepreneur based on what she or he is trying to understand from market to transactions that are in the market are usually a multiple of EBITDA in this market or multiple of revenue or ARR, depending on where you are.

44:54The good news for me, And then my CAC is times their subscription amount is obviously much, much lower as a starting point sum. But it's somewhere in between. We both find like a meeting point where we find like the compromise. Because in my case, this is a legacy market. There's really no one buying. So the multiple that they might have been able to extract somewhere, which, by the way, is very low in my market because it's legacy business and there's no transaction. So I'm starting from a good point in the perception or expectation on value. And I explain to them how I view it. I see it as a customer acquisition, but I'm willing to pay you a premium.

45:36And in my world, usually the delta is not massive. It's maybe 2x and we can meet one and a half in between that equation. So it really depends on industry. I would assume for you, it's completely different because you're in software where multiples are way more aggressive, even if it's legacy. And once again, the profile of the business are small family businesses that run P &L. They're probably never going to transact if they don't transact with me. So their option is, okay, I'm just going to grind another 10 years and I'll get a sailboat or I get the sailboat now and I'll take half off and I'll put half in, I'll join.

46:11So there's a flexibility premium of when I'm coming to the table as well for them that kind of will make them move their price expectation. They can also obviously invest in the future by rolling into the joint venture or into Soundtrack and be part of the next five years equity development of Soundtrack with half of the money and then take half off the table. You know, it's just like deal making and psychology. But it's exactly what you said. The value delta between operational CAC math and financial enterprise value math is significant. I just feel like I'm doing the bigger big ass spread than you are.

46:50Depends on who you're talking with. The good news is I'm so clear on what I'm willing to pay from day one that it's easy to flush out people who are ready for or not. And it's totally fine to know we're just going to keep going. And that's good for you. You know, the problem is I get the news every time any software company at all gets sold for 20x multiplier or something crazy. And it's a reference point for like every software company up there. Nobody reads about software companies going out of business. That's what I mean. I'm like, your revenues are going down. There's a huge difference here.

47:20But it's a really good point. Once again, I mean, it's like kind of fishing broad. You've got to get the message out. And then it's timing. It's sliding doors. One year, they sit in the room and it spends, do we really want to do this another three years? Like that guy, that weird Swedish guy who was here talking last year about acquiring our business. Shouldn't we just give him a call? And that's what I'm hoping out there marketing the opportunity right now. Maybe we'll get some fish. It is so true. True. I've had one point from... I think it was a person that had a ton of deals, but it's like an average around one year of relationship building.

47:53And then I've talked to folks that had it over 10 years where they finally got the deal. So you're right. You have to play long on it. Now that you're pursuing a buyer-led M &A strategy, how does this shift your mindset when approaching deals compared to the past? It's a shift because I am now approaching deals practically. It's a part of my business. I've I brought in someone who's better than I am on this and systemizing the process and operationalizing it as a workflow at Soundtrack. Out there talking to and expanding the list of potential targets, keeping them up to speed on where we are and how we're transacting, what the opportunity looks like over time.

48:29So it's really a systemized, operationalized M &A process. Very different to not having anything like being reactive. We have had multiple incoming inquiries of acquiring Soundtrack. So it's not like we haven't been in M &A discussions throughout this process. When you were running out of money and you were like close to death, of course, you need to look at options, which we've been through like every startup multiple times. So we've been discussing sale of the company many times and I've been able to just fight it off. A couple of times it was a cutthroat, but that's part of the game. That's always the case.

49:07I've never seen it not end up like that. Now I got money in the bank. I have additional funding from a potential revolver to do these things on top of what I have on my balance sheet. And I'm a profitable growing company. So I've set myself up for a long, organized, systematic approach. and if my thesis on the macros, like more and more pressure is going to come from rights holders, meaning music rights holders that they want to move all of this business onto the digital value chain. So I also have a macro moving in my favor. And maybe there's a couple of lawsuits to spice it up a little bit to players out there not complying to the rules of engagement.

49:46Yeah, a lot of interesting things ahead, which what's next for a soundtrack? How do you see M &A playing a role in your vision over the next few years? Once again, I want to be clear, I have not proven out this beautiful theoretical model I've outlined here. So most likely it's going to blow up somehow and my beautiful logic is going to prove not to work. We'll see. Or the opposite, like maybe the thesis is we can roll up 10, 20, 20 customer bases and build a very nice complementary growth stream to our organic. And that then obviously customer gets customers and volume and market kind of creates a network effect.

50:22And we probably have a better product in terms of expansion business. So once they're on our platform, we can probably extract more value on a cohort basis than we're paying for it. That's the thesis. But there is a next step. And that is, can I also play a big game? Can I do bigger deals? There are a couple of bigger companies out there that could potentially not just be part of a programmatic. It could be like a game-changing move. So I'm seeing if I can educate myself on those opportunities as well. But for an operator, a simple operator like myself, there's always this question at night, finishing a long day and excited about the theories that you've been discussing.

51:02And you're like, wait a minute, am I going to pay$100 million for this? What could I do with my organic business with$100 million? As an example, I'm just putting an example. That's not actually a discussion I'm having, but that's what we did at Beats. That's what I know a lot of tech companies do. We have an opportunity to acquire, but hey, why don't we just take half of that and just invest it in an organic business? Because it's more scalable. We'll out-compete them and we'll get them for 10 % of the price later down the line. That's a whole other conversation, my friend, of that balance between your organic and inorganic, which is something I ponder on too as an earlier stage business.

51:39It's opportunity investment or opportunity cost for investment or opportunity return or different organic versus inorganic. But that's what you as an operator learning to engage in M &A need to think about. We'll revisit this in three years. Yeah, we'll see. Let's see what happens with my amazing theory here. Oh, what's the craziest thing you've seen in M &A? I can tell you the story when I realized that we were going to sell to Apple late at night and I didn't know about it because I didn't think the deal was going to fall through and I actually just sold my equity at Mbeats. at a good price before the deal.

52:15I was two months away from transacting all the equity of my holding in Beats into the Apple transaction. That was an interesting dynamic situation. And it was me and another guy. And we were like, he just pinged me three o 'clock at night, middle of the night. So he's like, have you seen? He sent this like transaction closed, 3.2 billion. And he's got to see you at the bridge, which is a big bridge here in Stockholm where people jump. And we're like, let's go. But you know, it was more of a joke. That's my craziest experience of missing out. But I made good on that deal. So I'm fine. And I was able to reinvest in the right direction.

52:50I haven't seen any major crazy, but I have read some reports, which I was reading up a little bit when you reached out to me. Okay, I haven't thought about more than the stuff I'm doing. What's the updates on M &A? It doesn't seem to be like a lot of M &As come out with really impressive value creation. I was reading some McKinsey report and some year they write about how great it is and some year they write about how bad it is. But my perception, big M &A transactions, like maybe two out of 10 seem to come out with some true value creation. Yeah, that's what they say. But for me, it's always what is the definition of it being accretive versus not.

53:29The companies always miss the mark on the timeframe. And some of this stuff will pan out over time because it's just integration is always harder than they expect. But then you're right. There's like deals that you totally missed the mark on. Which tells you how hard it is. And your clients find it interesting. Like the buyer led makes so much more sense when you have a thought of how you want to do it and you have a process and you have all that planning that we were lacking at Beats, but that I now believe I have at Soundtrack. That's pretty crazy because that's how unpredictable M &A is. You never know.

54:01I appreciate taking this time for this conversation a lot. I've learned a lot. I really enjoyed listening to your story. You've helped me become a better M &A scientist. Great vibe. And thanks so much for listening to my stories from my little niche here in the music industry. Fellow M &A scientists, hopefully some music industry fans that are tuned in this far. You're a true M &A scientist. I really appreciate you taking the time. Always welcome connecting with folks in the industry. Probably best to connect with the LinkedIn. Give me feedback. Let me know what you think of this. Other people I should be talking to, topic ideas, criticism as usual.

54:35I'll take the criticism because that's how I get better at doing this. Until next time, here's to the deal.

55:05or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com, or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. that's where you can also subscribe to our newsletter. Again, that's mascience.com. Here's to the deal.

55:50Views and opinions expressed on M &A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational.