The Accidental Investment

Mobile app maker Smule wasn't looking for more funding but saw the value when the right backers came knocking.
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This story appears in the April 2010 issue of Entrepreneur. Subscribe »

If it bothers you to read about a company landing venture capital even when its founders didn't want it, prepare to be annoyed. That's what happened to SonicMule, better known as Smule. The Palo Alto, Calif., application developer is best known for popular mobile apps such as "I am T-Pain," which alters users' voices, and "Ocarina," which allows the user to "play" the phone and create music that sounds as if it's from an ancient flute.

Despite Smule's success in bringing bankable creative music apps to mobile devices, CEO Jeff Smith and co-founder Ge Wang were reluctant to seek more funding last year. Earlier in the year, the company had closed a $3.9 million round of Series B funding, and Smith just didn't see the need for more.

"I don't like having a large balance sheet in general," he says. "It scares me. Management teams get lazy. They start hedging because they can. You start hiring people. You start buying the more expensive printers. You start wasting money."

So when Shasta Ventures of Menlo Park, Calif., contacted him last October, Smith was polite but not really interested. He agreed to meet with its team "to get to know them," but said flat out that he didn't have a lot of time and that his company wasn't seeking funding then. But after a two-hour meeting with Shasta's team, Smith changed his mind.

"Shasta doesn't have a brand like Bessemer [Venture Partners] or Kleiner [Perkins Caufield & Byers] or Sequoia [Capital], but I was really impressed with the partnership," he says. "Here are these guys going off, blazing their own trail."

In addition, with Smule an early-stage business, Smith says he wanted to send a message that the company will be a dominant player in the mobile app space. Having a strong balance sheet would send that message to competitors, he says, and eliminate the need to rely on banks for loans. In December, Smule closed on $8 million of Series C funding in a deal led by Shasta and included previous investors Bessemer Venture Partners and Granite Ventures.

Now Smule needs to face Smith's fears: How can the company maintain the nimble, nearly frenetic mind-set of a lean startup while sitting on such a cushion of cash? Smith says he and Wang struggle with questions about how much talent to bring on board now and at what levels. He worries about adding too many people, especially at senior levels, and not being able to recoup the investment in them.

Besides building its infrastructure, Smule has "three gigantic things in the hopper now"--presumably new apps, although Smith declined to say more. The company is also building Sonic Network, a cloud-based network of its application users. The network will allow users of the Smule virtual cigarette lighter app, for example, to see where others are using the same app all over the globe. Although the network is in its nascent stage and Smule is experimenting with how to use it, Smith suspects it ultimately will be a building block for the company because it will unite users.

For now, though, Smith says two words remain in the company's focus: iPhone and music. Smith and his team are serious about using Apple's platform to return music from the passive experience of listening to recordings to a social and interactive experience: "We're looking for more physical metaphors to help people connect to more concrete manifestations of what a social network might mean."

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