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  • Originals
  • 13 April 2021
  • 4 min read
  • Words: Pär-Jörgen Pärson

A Fika with: Martin Lorentzon, co-founder of Spotify

Northzone’s Pär-Jörgen Pärson and Spotify’s Martin Lorentzon discuss how to spot exceptional talent, guiding principles for success, and lessons learned from challenging periods.

PJ and Spotify co-founders, Martin Lorentzon and Daniel Ek, have known each other since the last dotcom boom. With their latest market capitalisation hitting approx. $65B, Spotify is now Europe’s biggest tech company. It’s a milestone we’re very proud of as early-stage investors. 

Spotify’s success story is both brilliant and hard-won. We never get tired of hearing it. It began in early 2007, leading into the first financing round in 2008, which PJ drove for Northzone. From the start, this journey with Spotify has been both a privilege and a roller coaster. PJ, Martin, and Daniel have regular check-ins, and today we turned one of them into a Fika with Martin Lorentzon. Dive into our conversation on spotting talent, sharing upsides and downsides, and learning by trial and error.

Pär-Jörgen Pärson: Martin, you exemplify the skill of finding and nurturing exceptional talent. Examples of this are the Tradedoubler clan including Jacob de Geer, Daniel Ek, Gustav Söderström, not to mention Ludde Strigeus, and many other superstars at Spotify. What specifics do you look for when recruiting people? What makes you not choose someone? And what if someone you like is hesitant; do you sell them the idea or move on to the next?

Martin Lorentzon: I never look at CVs; I basically just go for gut feeling. Is the person hungry? Curious? Loyal? Do they have interesting ideas? What do they do in their spare time? Do they play computer games? Sports? Are they interested in society? A business idea often tries to improve something in society. If you’re completely uninterested in society, it’s difficult to understand how this improvement should be implemented. If you’re completely uninterested in your surroundings and colleagues, it will probably be difficult to collaborate in a team. Ideally, I can find a person with both motivation and class. If I have to choose, I always choose motivation. If the feeling is not 100% there, I skip the person altogether. You also get what you pay for, so don’t be afraid to invest in your colleagues! I’ve always done that.

If there are two guiding lights that I associate with your style of business, they are 1) focus and focus again (“Put all the eggs in one basket and then guard the basket!”) and 2) simple is good; complicated is bad. Can you speak to why these concepts are so important to you and why it’s so difficult for most companies to follow them?

Most people are triggered by different business ideas. They also believe that the idea is the most important thing in a company. This then leads to people wanting to be part of as many different companies as possible at the same time. But since the business idea is only 3% of a company and the implementation is 97%, it is directly inappropriate to invest in several companies. It is much better to just invest in one business idea and do it really well! Furthermore, it is quite difficult to build a business. It takes tremendous effort and sacrifice to succeed. Complicated solutions will not solve the problem. KISS is my motto: Keep it simple, Steve!

When we invested in Spotify in 2008, you often brought up problematic experiences from your time as an owner of Tradedoubler. From an investment and control perspective, what did you want to achieve and avoid during Spotify’s first investment rounds? (God knows you were a tough negotiator!) What advice would you give to entrepreneurs raising their first funding rounds?

Control is not as important at the beginning. However, starting a company costs money, a lot of money, always a lot more money than you think. The focus must be on raising as much capital as you possibly can (or need). And one should not be afraid to dilute oneself. Be rather a small fish in a large pond than a large fish in a small pond. The share agreement must also be balanced and all shareholders should preferably sit in the same boat, i.e. everyone should have approximately the same downside as upside. Otherwise, you’ll run the company in different directions. Once the company is growing, founders can regain control because stock markets love entrepreneurial companies.

But since the business idea is only 3% of a company and the implementation is 97%, it is directly inappropriate to invest in several companies. It is much better to just invest in one business idea and do it really well!
Martin Lorentzon
Co-founder of Spotify

A little-known fact is that on several occasions, when Spotify was really on the edge, you and Daniel had to put your personal finances at stake, e.g. by personally guaranteeing the record companies’ demands towards Spotify. Honestly, how bad was it?

In fact, building a company is almost always a knife-to-the-throat situation. This is something that an entrepreneur must learn to live with. Tradedoubler found itself just hours from bankruptcy twice. Spotify also struggled several times; the first launch in Sweden, the launch in the US, the launch in Japan, and above all the shift from desktop to mobile phones. Just because you believe 100% in the company, it is not certain that investors will do the same.

You decided to completely change Spotify’s business model when mobile consumption took over, and new user influx would have stopped if you hadn’t done so. This is a classic dilemma where most companies fail: stay safe in a business that you can milk or risk everything to build for the future. Why did you succeed in this, especially considering record companies were against this change?

We had no choice. Mobile phone traffic exploded and we had no working application. We had to get record companies to agree to a mobile app, or our days were numbered, which would have been worse for all parties involved. We had to keep the desktop app alive, and develop a mobile app from scratch in parallel. We succeeded thanks to some of the world’s best programmers!

The board made some strategic decisions which did not work out as planned, and ended up costing a lot. What’s your view on these in retrospect? What did you learn?

We have always tried to be at the forefront, and in that position you must constantly test different things. It’s called trialing different technology curves (so-called S-curves). There is absolutely nothing wrong with “trial and error” as long as we learn from our mistakes. With Tradedoubler, we tried to market the product through radio advertising — which did not work at all — and then we knew. With Spotify, we tested everything from selling music via downloads to letting others build apps on top of our technology platform. None of it worked and again — then we knew.

There is absolutely nothing wrong with "trial and error" as long as we learn from our mistakes. (...) We tested everything from selling music via downloads to letting others build apps on top of our technology platform. None of it worked and again — then we knew.
Martin Lorentzon
Co-founder of Spotify

Spotify has been very active in acquiring other startups. What are your lessons from this? Were there any acquisitions you feel you missed out on?

We are super happy with most of the acquisitions we’ve made. My personal favourite is American Echonest, which was a world leader in music analysis and fantastic in making music recommendations. This fits perfectly with all the playlists we built and offered. I can’t think of any company that we have missed.

Amazing, thanks for this wonderful Fika, Martin! Congratulations again on claiming the lead of the European tech market. I look forward to our next catch-up.