How Pandora Became an Unlikely Hit

Pandora founder Tim Westergren

At least one thing is going right in the U.S. economy, and it mostly involves a handful of technology entrepreneurs striking it rich with public offerings reminiscent of the ill-fated dot-com boom of more than a decade ago. LinkedIn raised the curtain on a dot-com redux in May, when it went public and its shares spiked well above the offering price. Investors expect the boom to continue as hot companies like Facebook, Twitter, Groupon, Kayak, Yelp, and Zynga go public over the next year or two, at valuations far higher than some companies with a lot more revenue. Profits at some of those firms are scarce, but no worry: Wall Street is delighted to have some razzle-dazzle to be optimistic about.

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This exclusive club of hot IPOs has revived the fanciful idea of a killer app that leads to easy money. But Pandora, the online music service that just went public at a valuation of nearly $3 billion, is hardly an overnight successes. In fact, it's a better example of old-fashioned persistence in the face of daunting odds, a quality many Americans would be wise to rediscover at a time of scarce jobs and a shrinking middle class. Pandora was founded by a musician named Tim Westergren in 2000, at the peak of the first Internet bubble. It promptly ran out of money as the bubble burst and most dot-com startups folded. That was one of several near-death experiences for Pandora, which still warns that there are risks to its business model—such as rising expenses for music royalties—that could push profitability far into the future.

Last year, I interviewed Westergren for a book I'm writing, to be published in 2012, called Rebounders: How Winners Pivot From Setback To Success. Westergren described his early struggles at the company and the difficulty keeping his startup afloat. Here are some excerpts:

You did a lot of other things before starting Pandora, right? When I graduated college, I started a series of weird jobs. I was a nanny for awhile. I worked at a medical school in administration. I was in bands. I was a film composer.

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You spent a fairly long time as a professional musician. I had formal musical training. Piano was my principal instrument. I learned jazz but performed and composed as a rock musician. I took a pretty good shot at the indie band path. The band was called Yellowwood Junction. We signed with a record label, had 300 or 400 people at our shows. We tried to make a living out of that. But nobody was making any money. We all had part-time jobs. And it's a huge step to get from there to where we were making a living. In my own mind, I'm sure there were times when I thought we were going to become rock stars. When I look back, I don't think of myself as a very smart, strategic twentysomething.

What'd you do after that? I wrote film scores for four years. It's a tremendously competitive profession. Like being a surgeon. Actually harder. The odds are worse. Because every job that's available has literally hundreds of fully qualified candidates to do the work.

How did Pandora get started? My work with film scores was interrupted by the idea for Pandora. This idea popped into my head one day, and it wouldn't let go of me. I give a lot of credit to my wife. She really encouraged me to chase it. We were living in San Francisco near Silicon Valley at the time, and it was sort of like, what the hell, let's do it. Then I shared the idea with a college classmate of mine who had already started and sold a company. Jon Kraft. He had this total can-do attitude. As soon as he got thrown into the mix, it was all she wrote.

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You got some funding right before the dot-com crash began, then nearly ran out of money. What was that like? The intensity of that challenge at Pandora dwarfed anything I had ever experienced before. By far. Add zeroes to it. I owed a lot of people a lot of money. It was an absolutely grueling experience for a long time. For a year and a half, I was basically waking up at four in the morning every night in a cold sweat. That just about encapsulates the experience. It was emotional torture.

How much debt did you have? I maxed out 11 credit cards. I had well over $100,000 in debt just on credit cards, plus maybe quarter of a million dollars in personal debt, plus a million and a half in salary that I owed to employees. We were being sued by employees for back pay.

Were there moments when you wondered, how did I get into this mess? Moments? Months!

You had given up on other efforts, to be a musician and a film composer. Why did you hang on at Pandora? The honest answer is I had to. I can't look at myself in the mirror and say I was just tough. It's the classic virtue born of necessity. I felt an absolutely crushing obligation to everybody around me. There was just no way I was going to give up. I was going to go down with the ship. I really didn't have a choice. At least I felt that way.

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How did you get out of the woods? It was a very binary thing. We got a bunch of funding in 2004, which allowed me to pay everybody back.

Did the challenges get easier then? Sure. Once we got funding, the challenges were in completely different categories. Personnel. Strategy. Business-model issues. I was able to bring on a CEO. That was the best thing I ever did.

Looking back, what got you through? I think my greatest skill is the ability to convince people. Salesmanship, I guess. Enlisting other people into my passion. And I was able to do that. Pandora was such an unfundable company when we got that money. We were being sued by employees, we had huge debt, and no business model. We just had this idea.

That kind of entrepreneurship seems like something more people need to learn. Finding your own way, since people can no longer rely on big companies or the government the way they used to. I have a lot of thoughts about that. The adaptation that people are going to have to go through is getting comfortable with uncertainty but maybe more than that, optionality. You're going to be doing creative things, entrepreneurial things, that don't necessarily have a well-trod path. You're going to have to make things up for yourself, reinvent yourself. One of the things about entrepreneurship that makes it so great and yet so terrifying is that you don't have a road map. By definition, it's about starting something new. How you spend your time, measure success, develop a timeline, all that stuff is completely up to you. For a lot of people that's terribly unsettling. But it's a big adjustment people have to make in a world where you're not going to keep a job for 25 years anymore.

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What kind of advice do you give people thinking about starting something of their own? For young people, I often tell them, notice what excites you. You don't really get trained in general education to be an entrepreneur. To me, entrepreneurship is really about pursuing your passion, as opposed to pursuing what someone tells you to pursue. It's being proactive about your decision-making in life, not doing something because someone else is telling you to do it. Someone can be a doctor and it's an entrepreneurial decision for them. School, by definition, is almost a series of tracks, and you pick one. There's a very modest amount of interdisciplinary work in school. There's little novelty, where you can design your own kind of program. If you don't even notice what excites you, that makes it doubly hard to find it.

What about mid-life people? I spend about 90 percent of my management time trying to unstick people. The second piece of generic advice I give to somebody who's stuck is to try to lower the temperature on their frustration. The best thing you can do is make the best decision you can with the information you have at the time. Most entrepreneurial efforts end in failure, or at least they don't lead to the sustainable dream you might have had. They don't get you to the goal you might have had in mind. But I think it's very dangerous to tie your happiness to achieving that goal. Let yourself off the hook. If you need to start and try something else, don't view it as a failure. It's just the next chapter.

Twitter: @rickjnewman