How To Launch a Music Startup: Establishing Key Metrics
This post is part of the How To Launch a Music Startup series by Brenden Mulligan, which focuses on building a company that creates online products for musicians. Mulligan founded ArtistData, which was recently acquired by Sonicbids, and can be found on Twitter at @bmull.
Before starting this series off, I thought it'd be useful to lay out some fundamental truths I believe exist which have an enormous effect on the potential success of building a product to sell to artists. I wanted to bring this up immediately because I thought getting the conversation going in the comments now would influence how the rest of the series is laid out.
There are three metrics of a business's foundation/plan that investors like to know when looking at a potential return on investment: market size, willingness to pay, and exit potential. These are important to think about beforehand because they're generally tangible and based off of known numbers or historical performance. The quick overview:
- MARKET SIZE: How many musicians are there? Of these, which are relevant (potential customers?). This number is incredibly important to establish up front, because it shows you how big your customer base can be, which helps you make the decision of whether investing in building a product for them is worth it.
- WILLINGNESS TO PAY: What is the likelihood the market you are targeting is willing to open their wallets and hand you money. If they are willing to pay, how much? Are these $2/month customers or $200/month customers? If it varies, what percentage are willing to pay a lot vs. a little? This number is important because combined with the Market Size metric, it will show you how much revenue you can expect to generate if you do your job right.
- EXIT POTENTIAL: How will your shareholders get their money back? If you don't plan on getting investors, this means what's your end game? Are you going to build a business to run for the rest of your life and pay yourself a comfortable salary (investors wont give you money for this) or do you want to sell for hundreds of millions of dollars to Google? This is based on a number of factors, but one great place to look is historical exits from other companies in your market.
So that's the first part of this series. Regardless of your company, if you are building a product for bands to pay for, everyone's answers to these areas will be similar. As we unveil these answers, hopefully people who are interested in starting an artist focused business or raising money for one will have some research done for them.
“…but one great place to look is historical exits from other companies in your market.”
Great suggestion.
Brenden, what was the exit like for Artist Data? Purchase price? Return to your investors? What was the monthly revenue when you sold?
Thanks in advance for my first data point!
Great start to the series, Brenden.
How would you go about measuring the market size? I guess you would have to select a specific type of musician (niche musician) that is relevant to you.
Looking forward to the next post!
Cheers
Patrick
I believe your post is starting backwards. This is not the way one should go about launching their business. Just the mere mentioning of exit strategy can be taken in a wrong way. It translates to “bailout” to me. You want a successful company? Make money with it and increase ROI.
You never start with the metrics. You start with the product and the strategy. Willingness to pay is based on the value creation machine.
The main purpose of a business is to make money. Many people seem to forget this, especially all the Web 2.0 folks.
Profit = Revenue – Costs
Many people forget that.
1) Product (flexible and adaptable)
2) Identify why what you are offering will make a difference that matters
3) Identify your customer
4) Build your strategy
5) Have your tactics all aligned with your strategy
6) Create additional value
7) Increase willingness to pay
8) Adapt to market conditions and environment (competition)
9) Predict changes in the market
10) Re-align your company accordingly
The key metrics are aligned with your tactics. What is important about performance based indicators is that they help you reach a decision that will affect your strategy and decision making. Metrics and numbers do not mean anything unless they relate to decision making and enhancing the bottom line. Metrics and date is information that needs to be made sense of in order to execute your business strategy more effectively
Going into business for the mere purpose to sell (exit strategy) and just getting eyeballs is a dangerous proposition. Most people and entrepreneurs do not have VCs or equity groups. They fund things themselves. Just like artists. How do they get paid? They need an awesome product, a business plan and to sustain their competitive advantage.
Those are my 2c.
Thanks for the comment! I totally agree that building a product just to exit is a bad idea. At the same time, I think the thought that not taking the time to understand your market is crazy. You need to know what you are getting into. Then you can build an amazing product for the market.
I think I’ll uncover why I think this is important over the next few posts.
Brenden, not trying to get to far ahead here but wondering if you’re planning to discuss defensibility in your future posts. That’s a crucial element in developing a business that investors are willing to invest in. There is rarely a silver bullet. However, entrepreneurs need to be able to speak to how they plan to protect their market position, because there will be competition.
Question is who are you catering? Are you catering musicians, industry professionals or fans. Or all three?
Then the next question is who is the one paying you: the customer. The interesting point about music websites is they need music lovers to visit them, even though their consumption might be free. Look at Reverbnation. Their bread and butter is upselling to artists. But they do not have mass scale. Myspace was the only site that managed to reach the “giant” scale status.
Understanding the musician is not rocket science. They have a dream. They want to earn a living making music. Market size is debatable too. Depends on a lot of things, such as geography and the economics of payment processing. Can the market pay you? It is great to say that Myspace has 10+ million bands but who can actually use their credit card to facilitate a transaction? This is where globalization is tricky and why nearly 95% of musician business is made in the USA, UK, Germany, Australia, Canada and France. The language barrier is an issue as well as the monopoly of the Latin/ASCII script as the preferred format for most websites.
Another issue is the charge-back you get if you expand into new, emerging territories. Your credit card company will certainly close your account because of that.
This is why market size in musician’s terms is a tough proposition to unlock if you are interested in Internationalization.
I have a question. What is the market size of independent musicians who are interested in making a living using DIY and are willing to pay for it and CAN pay for it? Speaking of startups, does anyone have that number?
Great point. Let’s make sure that’s part of the discussion in the future of these posts.
C – This was in the first post: “This series is written to people who are starting music companies that plan to offer a service to musicians. It’s what ArtistData has done over the past few years. This particular series isn’t as relevant for people launching music startups aimed at music fans (for example, Pandora).”
We are examining building products for bands where the bands are paying. That’s what we’re exploring.