Pandora Tunes Into $35 Million

Online radio network Pandora has raised $35 million in new VC funding, according to multiple sources familiar with the deal.

No word yet on who’s leading the round, or which existing shareholders re-upped. Pandora had previously raised around $29 million, from firms like Crosslink Capital, DBL Investors, Hearst Corp., Labrador Ventures, Selby Venture Partners and WaldenVC.

[Update: The company has emailed to say Greylock is leading the round, with partner David Sze joining the Pandora board of directors. Pandora declined to comment on the round’s size or valuation]

What’s particularly interesting here is that the new financing was signed while Pandora’s very existence was in jeopardy. The company had been operating under a royalty structure that caused it to shell out nearly 70% of its revenue to record labels, and which was expected to increase by nearly 33% next year. Pandora founder Tim Westergren referred to it as a “crisis,” and TechCrunch wrote that the company may need to be “sacrificed before artists and labels to realize just how absurd their position is.”

All of that changed earlier this week, when Pandora and other webcasters reached a new agreement with the recording industry. Under terms of the new deal, large players like Pandora will pay out either 25% of revenue or a per song fee that will increase each year (whichever is higher). Still sounds onerous compared to terrestrial radio – which pays zilch – but is still considered a big win for Pandora.

Pandora also will begin charging a nominal fee to those who use its service more than 40 hours per month.

I’ve got to assume that investors believed this revised royalty agreement was a done deal, although my best bet is that some sort of contingencies were attached to the $35 million (like if the royalty thing fell through, so did the financing). Otherwise, it would have been a hell of a risk to take…

Hopefully we’ll learn more soon. I’ve put in calls to Westergren and Pandora CEO Joe Kennedy, but am not terribly hopeful that I’ll hear back on a Friday afternoon…