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Insider: August 30, 2019

Acast has received €25 million in financing from the European Investment Bank as part of an unusual “quasi-equity” deal. Wait, what? Also: Ximalaya, plus Spotify-Anchor integration

Following the EU Money. Acast has received €25 million in financing from the European Investment Bank as part of an unusual “quasi-equity” deal. The Swedish podcast company, which both hosts and monetises shows and operates in 10 different countries, has said it will be spending the cash on expanding “R&D in its audio content and advertising distribution platform” as well as moving into new territories. A reminder before I go any further in trying to untangle this: Acast raised $35 million in a Series C less than a year ago, at the start of December 2018. What’s this all about?

Hold onto your hats, it’s about to get very wonky in here.

First, a quick catch up on what the European Investment Bank (EIB), the entity that just handed Acast this money, even is. It describes itself as “the lending arm of the European Union” and “the biggest multilateral financial institution in the world”. Technically, it’s publicly owned, too, since the shareholders are the 28 EU member states. For context, the EIB’s balance sheet is twice the size of the World Bank’s, and according to this excellent Financial Times investigation from July, it issues more bonds than JPMorgan. It’s actually a pretty venerable institution by EU standards, having been founded in 1958 and created by the Treaty of Rome. It’s based in Luxembourg.

This announcement of the Acast funding deal took me completely by surprise, not least because the last time I thought about the EIB was when taking the public policy exam element of my journalism degree, and even though that was a decade ago, I was pretty sure I remembered that the major mission of the bank was to fund projects that the market couldn’t support. A quick refresher and a few calls to financial correspondents of my acquaintance confirmed this very much to be the case. The EIB’s founding purpose was to lend in the public interest, especially in cases where private finance was unavailable, and it does largely do that, focusing in recent years in particular on climate related projects as the EU attempts to transition to renewable energy (20% of energy from renewable sources in 2020 is a major goal).

I was therefore a bit of a loss as to why the EIB would fund Acast, a company that (no offence) doesn’t have an obvious public policy mission — ie it’s not producing tangible infrastructure, it has nothing to do with climate change, and it’s not scaling to the point where it creates thousands of European jobs — and also demonstrably can raise private money, as it demonstrated with that Series C round less than a year ago. But, since I’m not a European finance expert, I reached out to several former colleagues and acquaintances who are, and received the same reply across the board, which can broadly be summed up as: “Huh?”

That aforementioned FT investigation, by the way, does a very good job of outlining the problems with what the EIB does. Although it is supposed to be there for businesses the market isn’t prepared to take a risk on, the bank has itself become incredibly risk averse, only writing off a loan for the first time in 2006 after almost 50 years of lending. It also has no external regulator and receives relatively little scrutiny, given its central role in EU financial planning and its vast €455bn loan book. This piece puts it very well when it describes the EIB as “a huge, unsupervised leverage machine for Europe’s politicians that has comprehensively mastered the art of dodging risk”.

One clue as to why this Acast deal came about, then, can be found in the strategic framework that now underpins the EIB: the “Investment Plan for Europe”, first announced by European Commission President Jean-Claude Juncker in 2014 and thereafter known as the Juncker Plan. This framework was produced as a response to an investment slowdown in Europe in the years after the 2008 financial crisis and empowers the EIB to “mobilise private investment” as a way of stimulating economic recovery in the EU.

This is the mechanism that enables the “quasi-equity” component of the Acast deal: it operates in a very similar way to a classic equity deal (ie as a long-term loan repaid out of profits as the company grows) except that the EIB doesn’t actually receive any ownership stake as a result of its investment. According to the announcement, this mechanism (which is unique to the EIB) addresses “a market failure for non-dilutive growth capital for European businesses”. No, I don’t know how this squares with the aforementioned Series C either, but perhaps Acast’s existing success is what attracted the EIB’s conservative governors, since it’s a pretty low-risk investment.

A further hint as to the motivation behind this particular deal can be found in the response from EIB Vice-President Alexander Stubb. In amongst expressing his delight at the partnership with Acast, he said this: “Everyone loves a good podcast, but it can be hard to make a living off of this type of infotainment. I think it’s important that a European provider for this type of service exists.”

The EU is a political union first and foremost, and it’s an inflexible, unwieldy body that is trying to adapt to a new geopolitical reality in which a major partner is trying to leave and it can no longer rely on cordial, fact-based relations with the US President. At the same time, Chinese startups, especially in the clean energy space, are roaring ahead thanks to state-backed loans. In this context, the fact that the EU is now using public finance to help a European company compete in a commercial audio industry that has so far been dominated by US growth looks to me like just one tiny trickle down effect of a larger policy shift.

Climb that mountain. Ximalaya, the Chinese audio company that has a major stake in San Francisco-based podcasting startup Himalaya Media, has now racked up 500 million users, according to this report from the South China Morning Post. As of May 2019, four million of them were paying for content.

The nearest competitors in China, Lizhi FM and Dragonfly FM, have 34 million and 30 million users apiece. Another detail worth noting for any aspiring podcast player developers out there: the average user spends 150 minutes a day on the app, apparently. Refresh your memory of the Chinese podcasting space with this piece Nick put together earlier this year.

Integration Ahoy. In a move that will be surprising to no one, it looks like Spotify is starting to test out ways to integrate the different podcasting businesses it has purchased into its overall offering to listeners and subscribers. Tech researcher Jane Wong spotted a “create podcast” button option in the Spotify app that opens the Anchor app, if installed, or sends the user to a promo page for the podcast creation and hosting tool.

In a statement to The Verge, Spotify confirmed that it was testing the feature, but didn’t comment on whether it would end up with widespread distribution. Spotify, of course, is already trying to keep podcasting users within its own ecosystem — when I interviewed SoundTrap co-founder Per Emanuelsson back in May (another podcast creation tool acquired by Spotify), he explained that they were pushing their users towards hosting on Anchor.