Update: Pandora began trading at $20 per share this morning, which gave the company an implied market cap of $3.19 billion. It briefly spiked to $24.99 per share, before settling into a trading grove of between $20 and $21 per share.

Pandora, the Oakland-based Internet radio station, tonight raised nearly $235 million in an IPO that far exceeded expectations. And, arguably, common sense.

The company priced 14.7 million shares at $16 per share, which gives it an initial market cap of nearly $2.56 billion. Pandora (P) originally planned to price the shares at between $7 and $9 per share, and later increased the range to between $10 and $12 per share. Not even underwriters Morgan Stanley, J.P. Morgan or Citi apparently believed that investors would go as high as $16.

How come? Here’s how Fortune contributor Dan Mitchell explained it earlier this week:

The trouble is the music royalties Pandora has to pay to music labels every time it streams a song. Those rates are higher than the advertising revenue Pandora collects. Every transaction is a money-loser. In its IPO filing, the company says it will continue to lose money through “at least” fiscal 2012…

Mitchell adds that Pandora’s current royalty agreements end in 2015, without much reason to believe it will be able to negotiate better rates. Moreover, revenue growth has slowed and the move toward mobile could exacerbate the decline (since mobile ads typically cost less than Web ads).

In fact, Pandora reminds me a bit of those late 1990’s companies that people blamed for the dotcom boom:

• Raised lots of venture capital? Check. (Pandora raised around $56 million)
• Generate revenue? Check (Pandora booked $43 million in Q1 2011)
• Unprofitable? Check ($6.7 million net loss in Q1 2011)
• Popular service? Check (80 million users and counting)
• More volume=Larger losses? Check (see above)
• VCs make lots of money on IPO? Check (including those like Hearst who cashed out at $16 per share)

To be sure, I’d love to see Pandora succeed. I’m a paying subscriber who is actually listening to it at this very moment (or at least at the moment when this was written). And it might make a great product for some larger strategic to acquire. Or perhaps someday will figure out how to eek out profits.

But this IPO at this price at this time is just another brick in the wall for bubble alarmists… And a very inconvenient truth for bubble deniers.