November 30, 2016:Daniel Ek: Spotify could have been six months from death in 2013

Spotify CEO Daniel Ek doesn’t do that many public interviews, so his appearance at the Slush conference in Helsinki today to talk about his company, the music industry and tech entrepreneurship was notable.

Ek took part in a panel titled ‘How we failed our way to success’ alongside Ilkka Paananen of mobile games giant Supercell and Niklas Zennström, the Skype co-founder turned investor.

Dressed in a black t-shirt with the slogan “SUITS SUCK” – a throwback to the tee he famously wore in 2011 to a party held by Spotify investor Sean Parker to celebrate the streaming service – Ek talked about the mistakes he’s made over the last decade.

Among them: how Spotify’s misjudgement about the importance of mobile could have driven it out of business in 2013; its dangerous undervaluing of human resources; thinking people with family lives were “losers”; and why spraying champagne around Stockholm bars doesn’t work in your 30s.

There was also some pointed advice for tech startups. Here are 10 of the key points from Ek’s part in the session.

Daniel Ek at Slush

MISJUDGING THE IMPORTANCE OF MOBILE ALMOST KILLED SPOTIFY

“For a very long time we disregarded the mobile impact on the world – which today seems kind of weird. We started in a period of time when desktop was obviously the main thing. We hadn’t even licensed a mobile product other than a premium product; that’s because we looked at the world as this duality where you would use the desktop and the smartphone at the same time. We figured it was a great idea to have the upsell to be the mobile product.

For a long period of time, that was great because whenever people wanted to use it on a mobile device they had to pay for the product. But since we are a freemium product, we are highly dependent on also having free users engage with the service and [dependent on] having an active community. As the world moved more and more towards mobile, obviously that free part of the funnel disappeared.

It was a pretty ironic situation where most of our investors saw our revenue numbers and conversation numbers spike and go through the roof, so everyone was super-excited about the company; but we were realising that – holy shit! – we had just made a strategic mistake three years back where we had to reinvent the entire company to fix it.

It looks us probably 18 months to fix it as we had to go back to the music industry and tell them, ‘No, actually, the thing we used to charge money for you now need to give us for free as well.’ That was not an easy sell. [We told them] we are going to figure out a new way for people to pay for this product again and it’s going to be a much better future.

It was like switching out the engines mid-flight. I remember the day we turned on this free service, had we probably gone on for about six more months, I think we might have died as a company. That was a defining moment and that was as late as 2013. I think every great company has at least three near-death experiences.”

YOU CAN BE WRONG ABOUT THE TACTICS BUT NEVER THE GOAL

“Many people talk about a willingness to have failures. I hate failures. I don’t think you should strike to make failures. I think it’s OK to make mistakes – but by the time they become real failures, you probably should have discovered them much earlier.

The way I think about this is that we constantly have to make bets where we could be wrong about the tactics, but hopefully we wouldn’t be wrong about the goal that was set out. If we are quick and agile, we can move faster to fix this. So we will make mistakes along the way but the whole project didn’t end up becoming a failure.”

Daniel Ek of Spotify

Daniel Ek (speaking at a previous Spotify event)

BET BIG ON A FEW THINGS, NOT SMALL ON HUNDREDS OF THINGS

“As you become bigger, one of the problems you are going to face is this: let’s say you are a startup, if you have an investor investing in you, they are usually investing with a hope of getting a 10x return on that investment which means you need to be growing at 100% or more for multiple years.

What is going to happen if you get any kind of traction is the law of gravity will start pulling you down. It gets harder and harder to do that. So actually you are going to make bigger and bigger bets in order to even have the remote chance of making that growth number.

Then you are in this place where you might start making lots of small bets in the hope that some of them turn out big or you just make substantially bigger bets in size but make fewer of them.

It is really interesting as there are certainly some companies that do a lot of small bets – and some of them play out – and then there are some, like Amazon, who say, ‘Hey, India is a big bet for us’ and then put in a couple of billion dollars and hope for the best in a couple of years’ time.

I think we are definitely trying to find our way, but we have never been much for doing 100 things and hope for the best. I can’t even come up with even 100 different goals, so I’d rather make a few strategic bets and make sure that we don’t fail on those.

That, I think, is a very important distinction that I don’t see startup entrepreneurs really getting. Failure is not something you should strive for. Making mistakes is OK – as long as you make them quick and cheap.”

UNDERSTAND  LOW-VARIANCE VERSUS HIGH-VARIANCE PROBLEMS

“I look at the choices that an entrepreneur has to make and I segment it into low-variance problems and high-variance problems. One of the mistakes that I think entrepreneurs make – and certainly that I do as well – is this: as a larger company, the easiest thing to invest in is the low-variance problems.

Low-variance problems are the ones which have little upside in being the best in the world at, but there is a tremendous amount of downside if you don’t do them well enough.

The perfect example I have is paying salaries. If you are the best in the world at paying salaries, the marginal good in being the best versus being OK is not that high for most people. They just expect to get paid on a certain date; but if you miss that date, then you are screwed. It is really, really bad and you have severe morale issue. That’s low-variance whereas high-variance is where you have not ups and downs.

I find that most entrepreneurs are pretty good in the high-variance bucket but it’s the low-variance part that we under-invest in. As an example in our case, until recently – and I didn’t pay much attention to this – we were running on an ERP system that stopped being supported by Microsoft in 2001. We are still running that thing even to this day.

We are probably 10 times bigger than anyone that has ever used that thing before so the cost now for us to try to switch that out while having all these processes built up as part of that means there are 200 people that are only working on that for a very, very long time.

What was a pretty trivial decision back then now turns into this multi-year thing where we have to migrate everyone over to this new system and keep the two systems in parallel.”

slush

UNDERESTIMATE HR AT YOUR PERIL

“Another issue for us has been HR. For a long time, I was the only HR person [at Spotify] and I didn’t really see the value with it – despite having hundreds of employees. So you under-invest in a lot of that stuff.

You can see on Glassdoor that our ratings as a company were pretty terrible until we started investing in HR to formalise some of those processes and get better at how we set salaries so that we are fair and just to people. That’s when our [Glassdoor] scores started increase; but that could be really expensive if you miss your window.”

A CEO HAS TO CHANGE ‘JOBS’ EVERY TWO YEARS

“There are different skill sets for every phase of a company. There is where you have just started the company, there is one where you are 50 people, there is one when you are 150 people, there is one where you are 1,000 people and one where you are 10,000 people

I usually tell people that I change jobs every two years. I started as the janitor, then I became the product guy, then I became the HR person, then I became the content person who negotiated all the deals.

There are many phases through a company’s existence where you, as the founder, have to wear many different hats – and it’s really hard. You have to be pretty versatile as a person to be able to do that. I think this is what people get wrong.

Society and everyone else will tell you it’s different, but in reality it’s sort of the same thing. You have to communicate in a different way and there are some other processes that have to be there that weren’t there [before].”

THE BEST BITS OF SPOTIFY HAVE COME FROM ACQUISITIONS

“We have to cut through all of that bullshit and just focus on what is important – which is creating the best possible product you can for your customers and creating the best possible value in solving whatever need they have. It is really that and building that team [to do it].

But I am coming at it from the other side; I acquire companies now. Part of my innovation – and part of the things you see that you probably love the most about Spotify – comes from companies we have acquired.

What I look for is a team – especially three or four people – who are really tight knit and have worked together before. What we find is that whatever projects we do, the best-performing projects inside of the company come from three or four people who really click. Ideally they have worked together before.”

YOUR FIRST FIVE EMPLOYEES ARE THE MOST IMPORTANT HIRES YOU’LL MAKE

“Early on in a startup, you typically hire people that you know are good. You don’t put it on a job board. If you are really careful about the first five or six hires, that’s the first ‘life or death’ of a company. That is the most important thing that we look for now when we acquire companies and pull them in. It’s just getting the right team.

The second thing is getting them the right mission. Mission would probably be translated in the startup world is being stubborn on the vision that you have and the problem you are trying to solve but being flexible on the details of how you are solving that problem. Those are the two most important things for us.”

spotify

FOR THE SAKE OF YOUR COMPANY YOU HAVE TO GROW UP

“You have to screen for factors like passion [when recruiting]. I am not saying necessarily that everyone in Spotify is hardcore into music. That’s not important. Sometimes the mission itself can be interpreted differently by individuals – so it could be a subset of the mission that is super-appealing to someone.

So if you are a data scientist, you may actually not care that much per se about music, but you care about how people interact with music, and that becomes the thing that latches you on and makes you feel that this is something you need to understand.

People talk a lot about the culture, and they talk about the culture when it changes or want the culture to remain like what was when it began. That is not the culture we have at Spotify.

I was 23 when I started Spotify; I am 33 now. I was single and 23 and spraying champagne on people in bars in downtown Stockholm. Today I am semi-boring. I have two kids at home, I go home and watch Homeland and do emails, fall asleep and start over again. The point being is that I am a different person. I think I roughly have the same values but I have grown and matured.

I used to think that people who went and picked up their kids from daycare were losers and were checking out too early. That’s the honest truth. Whereas today I have a totally different appreciation for how and why that is important and which a rich life/work balance is super-important. The company culture changes over time as you, as a founder or a CEO, also change with the company.

You will eventually realise that Silicon Valley has its priorities all wrong and the Nordics have theirs right.
The things that were necessarily important to Spotify at the beginning aren’t identically important to the company today. It is not important that we have people sleeping under their desks. In fact, we say that’s the culture we don’t want. People think better when they have a balance in their life.

That is a very big difference from where we were in the beginning as it was super-important then as we only had so many people that everyone put in 12-hour work days and we were inspired by things we saw in Silicon Valley.

What is different about the Nordics? It that sense of family, equality and the fact there is the safety net that exists in all of these companies that some would say prohibits entrepreneurship but which I say encourages entrepreneurship.”

Eamonn Forde
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