The Music Venture Capital Business Model
This guest post is by Wesley Verhoeve (@wesleyverhoeve); he is an artist manager, producer, curator, and the founder of Family Records.
As the music business evolves and moves beyond the antiquated copyright exploitation model, it makes increasing amounts of sense to further explore the thoughts I've shared on the parallels between the future of our business and the current ways of the venture capital/tech start-up world. Every artist (the creative) and their manager (the business person, and together with the artist the product developer) should consider themselves creative entrepreneurs, not much different from the small team of Dave (the graphic designer/artist), Jason (the product developer) and Spencer (the business guy) at online portfolio start-up Carbonmade.
How It Works In The Current Tech Start-Up Business
In a simplified version of the start-up world the scenario goes as follows: a small team of creatives and business people create a product (an app, a web service, site, etc.) and bring it to market in a Beta form, while continuously improving and providing updates. They might initially be self-funded and bootstrapping, or they could be funded with the help of one or more Angel Investors. If the product catches on with a small group of passionate early adopters, and there is potential for a much wider base of users, the team might seek out additional investors to be able to shoot for this larger market. These second level investors could be Venture Capitalists (VCs) , who differ from Angels mostly in the scale of finances they can provide (bigger), the additional knowledge they can share to help speed up growth, and the support network they can provide.
The original start-up shares ownership in the company with both rounds of investors. The investors are either looking for an exit (a sale of the start-up to a large company like Google), or sustained profits over time.
How It Could Work In The Future Music Business
When we translate this to the music industry we can draw some parallels. An artist and their manager start developing products together. They record demos/singles/EPs, produce a stage show and play small concerts, create artwork for branding and marketing, build a website (each of which are products!), and release them to friends/family/early adopters. This could be self-funded, or in part funded with smaller amounts of money from wonderfully nice family members, friends or through a service like Kickstarter or Pledge Music. In exchange the investors become small stake-holders in the career of the start-up team of artist and manager. (Note the difference from typical Kickstarter campaigns which are more like fancy pre-sales for the future product.)
With each product release, like a single, we build our customer base (or we could say fan base, but that's so 2001), and as we learn from their feedback we adjust. Please note that I am not suggesting to change the art to fit an audience, but rather that we adapt the business elements (how do we offer the products, at which price point, through which channels, etc.).
As the start-up team bootstraps their way to an increased customer base, we add more members to the team to facilitate more growth and increased revenue. A booking agent can help us improve distribution of our live show product, visual artists can help us create more effective branding and marketing materials, an attorney can help us secure better deals, etc. These are contractors for the most part, and won't take ownership.
An indie label or marketing firm might come on board in a second round of investments, and those could be considered bigger Angels, or even VCs depending on the level of investment/commitment. In exchange for a share of the profit they add value through additional manpower/skills, an increased network of supporters, additional funding, and services (royalty accounting, legal, distribution, synch pitching).
If the music is of a certain popular mass-appeal nature, an artist/music start-up can engage in a third round of investments. This time it would involve major investors (major labels). In exchange for a more substantial amount of money than a previous investor they acquire an additional chunk of equity (a co-release with the indie), or they can buy the angel's piece of equity (upstream deal, master ownership). They can also offer additional services as part of the deal including radio support, mainstream media pr, etc.
The original start-up team won't be looking for an exit, but a continuous stream of profits based on the different revenues streams that are developed. Angels could look for an exit in subsequent investment rounds (uncle Bob wants his money back and has no ambition to permanently operate in the music business!), and our version of VCs will look for partial ownership and continuous profit streams through catalog.
The Benefits
The benefits of this model over the current ways of the industry are obvious and plentiful.
- Artists maintain creative control and (partial) ownership of their creations.
- Investors gain ownership in all profit streams, but only in exchange for quantifiable contributions to the process.
- Early investors (including managers who put in sweat equity) who have stood the most risk and exhibited the most vision, stand to benefit at greater rates than those who jump on the bandwagon later. This will stimulate a new wave of artist development, rather than the current wave of lazy "wait-and-see" A&R behavior.
- The financial aspects of an artists career would gain incredible amounts of transparency, and accounting would be simplified.
- The quality of music would arguably benefit from the increased artistic influence of artists and their trusted advisors (producers, indies), the decreased artistic influence of suits, and greater diversity.
- Roles would be delineated much more clearly and people would focus on their strengths. Stay in your lane.
- Major Labels get to remake themselves and focus on their strengths
- Indie labels and new style management/label hybrids are better positioned to take back their rightful place as quality gatekeepers and this benefits our customers by freeing them from the clutter that has is so rampant in the world of music discovery.
- The increased sphere of societal influence will belong to the creators, and not the financiers.
- Job creation would take place in the music business as entire Major Label departments would spin off into a cottage industry of providers for start-ups and investors.
- Opportunities for music industry people to act shady are reduced, and the opportunity for artists to waste a ton of money is as well. A fairness doctrine.
A Few Things We'll Need To Make This Happen
- An uncluttered way for Angels to find artist start-ups seeking investments (a curated myspace meets kickstarter?).
- A template legal and financial structure that protects investors and artists alike. And subsequently, music attorneys that can practice "real law", and not just weird mystery theater entertainment law.
- A set of proper and relevant business analytics and post-Soundscan metrics that matter, both for artists and Angels, and a dashboard in which we can clearly track them.
- A new perspective, vision and a willingness to let go of the broken system we operate under at the moment. This will be easy for new artists, but hard and scary for those artists still making money right now under the old system.
This post originally appeared on Wesley's great industry blog.
There are some really meaty ideas in this discussion. I like the recognition that people who jump in the fray are contractors initially, because it keeps the relationships clear early on. It’s an interesting idea that the first “label” shares in the profits, but here’s the clinch, the book-keeping has to change so that the “label” shares in the profits to make a reasonable return on their investment and should be limited in time frame to do so. Lawyers and large corps have tilted this in the wrong direction so long it feels like reality. Book-keeping has been so lax that recoupment has become an unfortunate joke in the “music industry.” There is starting to be some recognition of this as Bertlesman takes over entities like Cherry Lane Publishing with intent to act as collections enforcer for their libraries.
kind of a cool idea but I’m unclear about how it’s different from the traditional model since you draw comparisons between major labels and VCs, indies and angels etc.
If VCs had the music industry managerial experience and industry network, wouldn’t they essentially be a label?
What kind of cut do VCs take out of the profit?
I like the cottage industry idea too and I think artists can get more attention by hiring their own PR firm, stylist, graphic designer, rather than using these services provided by a major label.
A Capital investing Program for the Music Industry has been existed for over 25 years called:
FRONT PAGE NEWS ENTERTAINMENT GROUP WORLDWIDE
Ms. Demetra Mavis, President and Founder
Telephone Contact
(510) 952-2100
or (707) 758-7745
email: elevate200@yahoo.com
As president and founder of Front Page News Entertainment Group Worldwide since 1985 and the creator and the author of THE ENTERTAINMENT GROUP BLUEPRINT in 1985, Ms. Demetra Mavis offers a client list and represents Recording Artists, Producers, DJ’s, Labels, Investors, Recording Studios and Professional Athletes and their families. Ms. Mavis holds the longest running distribution and career development company for many artists and labels in the USA.
A partial list of her clients includes
Tech9ne, Ben B. Hard, Mannheim Steam Roller- Chip Davis- Visual Musik Company, Avatar Recording Studios in Malibu, Bootstrap/Rockfella-Jay-Z- Detroit For Life- Jay Z’s first project which was independent, Mistah Fab, Young and Company, Sylvester, AM/FM, Big Time, Mac Dre, Strictly Business, Young Black Brother, Khryee, E-40, Marselis Bass- On Point Entertainment- 100 Racks- Surface, Timbuktu Creations, JR Rider, Jason Kidd, Ronnie Lott, Keak Da Sneak, MoJack Daniels, Bob Whitfield -Patchwerks Recordings in Atlanta -turned into -Grand Hustle, THE NFL HALF TIME SHOW, Klever G, Big George, June Bug, Above The Law, The Streets of Compton, Sylvester, NFL CHILL, Andre-Dre Dog-Nickatina, South Central Cartel, Stretch and SicSide Entertainment with Bigtyme, JT The Bigga Figga, Sutra Records-New York City, The Fat Boys, The Cover Girls, Felton Pilate of ConFunkshun, Keith Sweat, Vincent Davis, Robin S., RasKass, Mean Green, The Blyndcyde- Greg King, “Twisted News” Television and “New World Music Videos” Television, Trevor Gale- Gale Warnings Productions- Stolen Kyss and (Spirit)- “Boyz in the Hood” theme song, U-Mynd, Lou Rawls, Records, Kenny Gamble and Leon Huff, Harry Coombs Management, Ron Celestine, Skrilla Gettaz, Seagram, K-Lou Studios, Kajammin, Ken Franklin, Tim McClure Recording Studios, Strictly For The Streets Compilation with The ICEM Company- Frank Satterwhite, Larry Thomas, Lance Spencer -The Family Tree Album, Ricky Watters- Running Watters Entertainment, Chidi Ahanotu- Dog House Entertainment, Macola Records, 3X Crazy, Teddy -Slip N’ Slide-MC Hammer, John Douglas-Personal Achievement Radio with Douglas Broadcasting (USA) and KSTS Television, Geto Boys, Cheryl Lynn, KRS One, KMEL Summer Jam, Lee Michaels (Chicago Radio to Program Director of KMEL), NWA, Ray Daniels, Fred McFarland, Allen George, Surface, Jonathon Rotem-Digital Platinum Recording…and so many more!
It doesn’t seem that Demetra Mavis or her company has any web presence whatsoever, and I find this partial client list highly suspect in the realm of “capital investing”, especially since I am familiar with a good amount of these artists.
Re: Matt
kind of a cool idea but I’m unclear about how it’s different from the traditional model since you draw comparisons between major labels and VCs, indies and angels etc. If VCs had the music industry managerial experience and industry network, wouldn’t they essentially be a label?
The difference is that artists and their managers are in control, and the ones that play the VC or Angel role fund the operation and provide additional knowledge and skills. The perspective is very different from the current model where the label owns 100% of the master, the label controls everything, etc.
What kind of cut do VCs take out of the profit?
This would be completely dependent on 1. amount invested, 2. leverage of the start up artist and what they’ve achieved already, 3. what the investor is offering in addition to money, and much more. Every case would be different.
When we gonna make some music? All this reading is draining my creativity ha ha ;-). I remember a PATCH MUSIC LTD based at ”Harley House South” in Esher, Surrey KT10 9AA. Wondered if you are the same Stuart Ongley? If so, sorry I lost touch, you know how it is!
Chris Thomas.
Maybe I’m missing something here, but surely the ‘investors’ won’t invest unless they have an expectation of future profits, and they won’t get future profits without the ‘antiquated copyright exploitation’ that the author derides. Make no mistake, if something is easily copied (which is the case with most digital information, from music to ebooks to computer software), then it has little commercial value without copyright protection.
While the VC model might be more fairly split with the entrepreneur compared to the traditional artist/label model of the music industry, let’s not forget that VC’s often use complex terms that end up screwing over the entrepreneur (not unlike a record label). VC’s should be upfront and clear about terms with their entrepreneurs. It’s important you find the RIGHT VC just like it would be ideal to have the right label.
Wesley-
First of all, amen. You’ve described quite clearly and cohesively the model that I have found to be most effective for my projects.
You are making one assumption, though, that I think is overly optimistic: availability of capital. Or maybe I guess you just make it sound so straightforward to get to what you refer to as second round capital.
First round capital in any venture always comes with high risk, but I think that to the average investor, even a sophisticated investor, a music-making venture likely seems to carry especially and extraordinarily high risk. In other words, its much harder to get someone to invest in the next Lady Gaga than it is to get them involved in the next Facebook. The investors that DO feel comfortable with that scenario are of course the traditional record labels (indie and major). So there is still this vast wasteland, littered with the corpses of the twenty “next” Lady Gagas, that artists and their start-up teams have to traverse.
One tactic I am starting to see more and more for weathering this phase is a strategic branding partnership – artist with an established or emerging consumer brand. Red Bull, Taco Bell, Pepsi, car companies, clothing companies, etc. all have essentially (and sometimes not too well publicized) artist development programs that offer limited tour support and licensing opportunities.
– Steve Sternschein, Esq.
Shinobi Ninja
http://smartbusinessinvesting.com/
Agreed Jonathan!