Imeem’s Recap Round Doesn’t Include Sequoia

imeem_logoImeem lost a key backer when the social music site raised its last round of financing this spring: Sequoia Capital. The stalwart VC firm, which invested in Imeem’s Series A round and followed on at least one other time, has apparently lost confidence in the startup’s ability to reap profits from free ad-supported music streams, and was largely washed out in the recapitalization round. Existing shareholders Morgenthaler Ventures and Warner Music Group (s WMG) provided money in the round, worth about $6 million, which first came to light in May.

The new investors valued Imeem somewhere below $10 million prior to the recent capital injection. (A TechCrunch report this morning pegs the valuation at $6 million.) Warner Music, which in May wrote off a $16 million charge on a prior Imeem investment, provided some of the new money, essentially forgiving future payments for streaming royalties in exchange for more equity.

Imeem has scratched and clawed to stay alive over the past year, taking Sequoia’s advice to downsize to some 50 employees from nearly 100, renegotiating royalty rates with record labels and arranging new funding to keep from going under. And it’s the latest digital music company to be valued at a small fraction of what it used to be worth: It was valued above $200 million at the time of a DAG Ventures investment in the summer of 2008. The company was also said to have retained investment bank Montgomery & Co. in search of a sale last fall, but no deal was reached.

The reduced valuation mirrors the fate of iLike, another social music startup that sold itself to MySpace for less than $20 million in August. The sale barely paid back its investors, who had valued iLike above $50 million in a 2006 round of funding with the hope of a much stronger return.

Amid humbled expectations, though, Imeem can survive, and may even reach profitability in 2010. For one thing, Warner Music’s acceptance of an enlarged equity stake represents a vote of confidence in Imeem’s survival. However, Imeem will likely face increased competition when Spotify lands on U.S. shores in the coming months, further crowding a free streaming space that also includes joint venture MySpace Music.