The recorded-music industry has returned to growth, but what impact is that having on external investors (from venture-capital firms to high-net-worth individuals) and their willingness to back companies in and around the industry?
A panel at Music Ally and Music Biz’s NY:LON Connect conference in London this week explored that question.
Speakers included Jeff Bronikowski, SVP of global digital business development at Warner Music Group; Vickie Nauman, consultant at 23 Capital; and John Acquaviva, managing partner at Plus Eight Equity Partners (but also a well-known DJ and artist). The moderator was Greg Pryor, partner and co-chair, Global Entertainment and Media Industry Group, at Reed Smith.
Nauman explained how a company like 23 Capital works, from providing financing for mergers and acquisitions to helping artists buy back their rights, or those who want to move from a label deal to an administration deal and need funding to replace what would have been an advance.
“It’s a different source of money than has traditionally been available in the music sector,” she said.
Pryor suggested that the kind of funding being drawn on by companies in and around music is shifting, too. “We’re seeing the re-emergence of debt as a viable means of financing your business, on reasonably good terms actually, and that can be good for companies that have good cashflow,” he said.
Bronikowski explained how Warner Music Group sees its role as an investor. That can involve full acquisitions (for example, in recent times deals to buy merch firm EMP and pop-culture site Uproxx).
“Then we’ll make smaller but significant minority investments in companies that we just want to understand a lot more about a space, maybe as a potential lead-in to an acquisition,” he said.
Meanwhile, WMG recently launched a seed-stage investment fund called Boost, which looks to invest “anywhere from $100k up to $1m, but typically in the $250k-$500k range” in startups that the label group finds interesting – and not necessarily purely in music.
“It’s typically in sectors we want to learn about. Yes we want a return on capital and to make money out of this, but it’s more about learning about sectors and adjacent areas,” he said. Often, these are startups WMG might not have encountered in the past, if they didn’t need to come seeking licensing deals.
The panel were asked what they look for when evaluating potential investments. Bronikowski said that the team is the first thing WMG looks at.
“Is this somebody that we want to invest in, and do we think they have some of the intangibles and other qualities to push it through?” he said. More strategically, WMG looks for startups that are aligned with its business – “Is this something we could see ourselves waning to own one day, or something we thinl is going to generate a lot of revenue for us?” – or which give it that visibility into adjacent markets.
He also mentioned defensibility – the ability of a startup to defend its technology and business against rivals. “Almost none of the companies that we see really have a moat. Almost everything is replicable,” he said.
“When you look at some of the technology that we see, things like AI for example, I can imagine what we see in AI today is going to be an eighth-grade computer-science project using Google AI Cloud in a few years time.”
He stressed that defensibility isn’t the only test: sometimes it’s important to “take a leap” on an innovative startup, even if there are questions about its future defensibility.
Acquiaviva agreed that people are crucial “It always started with people,” he said. “We’re looking for great people, ideally with something unique.”
Nauman: “I think in the early-stage companies I always really look for differentiation… What are you doing? How are you looking at needs in the marketplace? Right now the only companies that have music available are the most well-capitalised companies in the world, and they’re focused on scale. So there are gaps in the market.”
By that, she meant that it’s absolutely not game over for anyone trying to launch a streaming service, despite the scale of Spotify, Apple Music, Amazon Music and others. But anyone seeking investment for a streaming business needs to have a razor-sharp focus on a gap in the market.
Pryor noted that music itself is enjoying a new surge in its value in the eyes of investors: for example, catalogues of songs and/or recordings.
“Music is the new yacht. Lots of people, high-net-worth individuals want to play around in music. And on the artist side, this is not a time to sell your rights, this is a time to retain your rights!” suggested Nauman, to a look of mock-horror from Bronikowski that raised a laugh from the audience.
Acquiaviva agreed with Nauman: “I would never sell my children and I don’t advise anyone to do so,” he said, before grinning. “The businessman in me tells my friends not to get payday loans, but… if you do I’ll maybe match the street price!”
As catalogues become valuable, though, and more artists try to hold on to their rights, does that present a problem for labels? Bronikowski offered an honest take on the shifting sands.
“It is a little bit about leverage. If an artist has a lot of traction and a lot of popularity and evident streams and social media following etc, then they’re gonna probably be able to command different terms, whether that’s a different ownership structure or a different royalty rate, whatever,” he said.
“I still think a major label deal is a good deal for the right artist. Not every artist. But there are artists who want to be global superstars. There are a couple of artists who haven’t gone the major label route to get there, but most who have, have done so with major labels as partners.”
“Many artists do see a label as their partner along with their management company,” he continued, while stressing that “labels are going to have to continue to prove their value and prove their reason for being. As long as we continue to help artists establish their brands, establish their music and their identity as well… as long as we’re adding value, I think we’ll have as important a role to play as ever.”
Nauman said that when artists do retain their rights, it opens up questions about where they will take investment from. In the old days, they’d get an advance from their label, which would be used for various purposes: from paying their manager to funding the marketing budget.
“Take the advance away, and suddenly there’s capital needs based on this. How are they going to pay their manager, who’s going to spin out brand or sync deals?” she said.
“I don’t think retaining your rights and going at it alone is right for every artist. Some artists should go with a major label and some with an independent label. But there are choices now… and that’s creating some funding gaps in the industry.”
The conversation turned back to music/tech startups. What are the biggest mistakes they make when trying to raise funding? The three veterans of assessing startups had plenty of thoughts to share.
Nauman said it’s important to be aware that a lot of investors still don’t really understand the nuts and bolts of how the music industry works – so startups need to address that in their pitch decks.
“A lot of the decks that are floating around, to me they’re insider decks, they haven’t been written with the idea that there’s someone on the other side who doesn’t know the difference between a performance right, a sound-recording right, a mechanical right,” she said.
Bronikowski said that one of his red flags is jack-of-all-trades pitches. “If a company is trying to do 12 things, it’s just not going to work… This one glorious unified theory of everything. I haven’t seen one thing succeed like that, as opposed to solving a problem or taking an opportunity and just doing it really well.”
Acquaviva said he takes no prisoners when encountering startups who are arrogant about their capabilities. “Just because your mom told you you were special, and you got gold stars in kindergarten, don’t sell me an overpriced lottery ticket in a zero-revenue company!” was how he described his reaction.
The panel moved on to artists as investors in music/tech, with Bronikowski pointing to the activities of manager Scooter Braun and some of the artists he works with, while Pryor noted the investment career of Jay-Z – and the entrepreneurial nature of hip-hop more generally as a sector, where artists explore businesses outside their core music.
Nauman talked about artists’ ability to raise capital by using their catalogues, thanks to the predictability of streaming as a source of income. “We can see the past and do predictability about the future value of the royalties, and then it becomes this really nice self-sustaining cycle,” she said.
Bronikowski agreed: “One thing about the subscription model is it’s pretty steady. You have to be generating streams to be generating revenue of course, but compared to past sources, it’s steadier… That predictability is going to be really important in unlocking new [financial] models.”
The Q&A section of the panel saw the speakers asked about their interest in investing in African companies – a strand earlier in the day focused on that continent – with Nauman expressing optimism.
“If you look at the adoption of smartphones, the lack of infrastructure and legacy stakeholders: there’s an opportunity to build something completely new there around music,” she said.
“From a startup standpoint, as we’re seeing Africa split into six or seven really advanced countries that have all of the characteristics necessary to explode musically, with companies who understand the local culture, the telcos, the way everything works, I think there’s a huge opportunity there.”
Bronikowski: “We definitely have our eye on it for technology as well as repertoire… It’s something everyone int he company knows is going to be very important.”
The panel were also asked about skittishness in some parts of the investment community around startups that require licensing deals for their products or services. Bronikowski said this was one of the reasons WMG launched its Boost fund.
“There are early-stage companies that we think should exist in the music ecosystem, but maybe isn’t right for an early-stage financial investor,” he said, before suggesting that the perceived failure-rate for startups that need rights may be inaccurate.
“If you look at the companies that have done well… I would say that there’s at least as many music/tech successes that did license rights as there are that didn’t. And probably the bigger ones are the ones that had rights.”
Even so, Acquaviva said that when a startup comes to him looking for funding that needs licensing deals, he doesn’t let them off lightly.
“I probably beat people up more than anyone over rights. When you sell something with skeletons in your closet, someone smart’s going to find out about it, and at best you become an acqui-hire,” he said. “Sometimes you need to be creative when you’re breaking new ground, but you should be thoughtful about it.”
Nauman offered more advice for these kinds of startups. “Come up with a strategy that you feel really confident of, that reflects your understanding of copyright law in the territories you’re going to work in, and put a slide in your deck,” she said.
“‘This is our strategy and this is how we’re going to handle it’. If this is absent… it’s a huge red flag, that you’re not thinking your business through.”
The final question was a curveball: about whether startups exploring ‘user-centric’ licensing models – where the royalties generated from each individual subscriber to a streaming service are paid out only to the artists they listen to, rather than flowing into a service-wide pool divided by stream-share – are appealing to investors.
Bronikowski approached the question from a wider industry perspective. “I think it’s a good idea… I don’t think it makes that big a difference to us as a company, it probably makes a decent difference to certain of the artists,” he said. “But I can’t think of a good ‘fairness’ argument against it so it seems like a good way to go.”
“I think it makes an enormous difference for the fans of certain kinds of artists, who are very loyal to those artists, that their money is going to those artists,” said Nauman.
“To architect a service like that you have to start at that consumer level, and say ‘how are we going to be able to position this to consumers in a way that attracts those consumers?’. I don’t think the mass-market consumer will care… But the people that love those artists really, really love them, and I don’t think the economics of streaming reflect that.”
Acquiaviva agreed, lamenting the days when, as an independent artist, fans would pay for his songs. “At Beatport people would pay two dollars and 50 cents,” he said. “When I like a song [and buy it] it’s like buying a friend of mine a cup of coffee!”