New round could make Spotify sing for a $3.5B valuation

Nearly every aspect of music startup Spotify is growing, including its total active users, paying subscribers, its music library, and the number of international markets it reaches. So it seems reasonable that the company’s valuation should do the same.

The music service is rumored to be seeking a huge new round of funding that could push its total valuation up to a whopping $3.5 billion, according to a BusinessInsider report that cities multiple anonymous sources familiar with the matter. If true, that valuation would mean the company was $2.5 billion more valuable than its estimated worth after closing its previous $100 million round in June 2011.

Spotify is a streaming music service that’s built on a freemium business model, bringing in both advertising-based and subscription-based revenue. Because of its social features, which allow people to share playlists and listen and share tunes through Facebook, Spotify has been able to grow like a weed in the face of heavy competition from the likes of Pandora, Last.fm, Rdio, MOG, and others. The company attained 3 million paying subscribers back in January, with at least a million of those subscribers in the U.S. alone.

However, Spotify’s lack of ownership when it comes to the music it streams might be making potential investors nervous about participating in the high-valuation round.

Unlike the streaming video services, Spotify doesn’t have exclusive access to specific libraries of content, which means competitors can theoretically mimic everything Spotify is doing well while streaming nearly the same exact library of music to their own users. For companies like Hulu and Netflix, competitive advantage means developing their own exclusive video programming. For a music service, however, it might not be so easy.

The report indicates that both TCV and Andreessen-Horowitz have passed on the new round, which hasn’t stopped Spotify from seeking out other investors.

Founded in 2009, the Sweden-based startup has raised a total of $189 million to date.