Last.fm received funding Monday from Index Ventures, a European venture capital firm with a record of backing such Internet companies as Betfair and Skype.

The online company operates as a social network, suggesting new music to subscribers based on other visitors’ preferences.

It offers two pieces of free software: one that rides alongside a media player and takes note of what songs are played, and another that streams Internet radio generated by user input.

For $3 per month, subscribers can make better use of the social features of the service, so they can see what their friends are listening to in real time and avoid the ads.

The London-based company has 40 million tracks in its system. It had a million users as of last October, when it received angel investment, but is not disclosing its current enrollment numbers.

Last.fm said it has relationships with more than 7,200 independent artists and many music labels, including the majors.

The startup subsisted for two years before taking any outside money, with some of its team literally pitching tents on the office roof, said founder Martin Stiksel last week.

Angel investment came in October from entrepreneurs Joi Ito of Six Apart, Technorati, Creative Commons, and ICANN; Reid Hoffman of LinkedIn and PayPal; and Stefan Glaenzer of 20six Weblog Services AG.

Index Ventures was the sole investor in this week’s funding round, but didn't disclose the size of its investment. Index has also taken stakes in Betfair, FON, and Skype (now owned by eBay).

Making Connections

The investment won’t change the company’s goals, according to Mr. Stiksel. “The mission is still the same, connecting music to the right people,” he said. “But we haven’t really exploited the potential of the data that is coming in.”

Last.fm makes money from premium subscriptions, affiliate relationships with Amazon.com and other online stores, and advertising. Mr. Stiksel said the company isn't profitable, though it had been before its recent expansion.

The company is exploring promotions for labels as well as partnerships with other online businesses and communities, according to Neil Rimer, a general partner at Index Ventures. He has joined the Last.fm board along with his brother and colleague Danny Rimer.

Neil Rimer said his firm had been in search of a music discovery investment before settling on Last.fm. “Basically the music industry stops marketing to you as soon as you leave college,” he said. “Most of the businesses out there are fulfillment mechanisms.”

Mr. Rimer said Last.fm’s biggest asset is its simplicity. “It doesn’t ask you to invest a huge amount of time and energy into telling the site what you like,” he explained.

You Tell Me

In contrast to many sites and services with the objective of helping customers find new music, Last.fm does not use editorial content. Due to “the sheer amount of people” using the service, Last.fm’s music data is “far superior to the amount of knowledge that any music journalist could come up with,” claimed Mr. Stiksel. He used to be a music writer and DJ himself.

Other streaming radio services as well as discovery-minded music stores invest in content. For instance, Pandora has spent years developing what it calls the Music Genome Project, reducing songs to a set of 400 musical elements, and eMusic pays more than 100 writers to rhapsodize about indie music for its subscribers.

But others, such as Yahoo LAUNCHcast, Siren Systems, and MusicStrands, are taking the collaborative filtering route that Last.fm follows.

Raising venture capital is not unique to Last.fm. Siren Systems has raised $2.3 million for its Soundflavor Engine, Pandora has raised at least $12 million, and MusicStrands has raised $6 million.