Last week in Los Angeles, I took part in a conversation that likely would have been impossible to hold a decade ago.
Both recorded and live music have been experiencing sustained financial growth in recent years, allowing a two-fold trend to emerge when it comes to investment. Firstly, artists themselves are investing more in tech companies, increasingly opting to partner with brands through equity stakes rather than with one-off sponsorships. For instance, Jay-Z launched his own venture fund Marcy Venture Partners last year; Legacy Entertainment Ventures is aiming to formalize the process of fund management for entertainment and sports professionals at large; and celebrities are taking up more space on the cap tables of startups like Sandbox VR.
Secondly, a growing number of entertainment execs and institutional investors are launching new venture-capital firms focusing specifically on music-tech. Recent examples of such firms include Raised in Space, which features artist-management magnate Scooter Braun on the board; Plus Eight Equity, which features veteran DJ John Acquaviva as co-managing partner and fellow DJs Richie Hawtin and Pete Tong as advisory board members; and DBTH Capital Ventures, which focuses on rights-tech for music and entertainment and is co-founded by Virginie Berger, former CEO of pan-European digital-licensing hub Armonia Online.
In terms of industry expertise, these firms offers a niche complement to the contributions already being made to the music-tech ecosystem by more generalist firms like Upfront Ventures (Stem, Wave) and Union Square Ventures (Sofar Sounds, Splice, SoundCloud, YouNow), plus a more sector-agnostic approach compared to the content-driven investments that major labels are making.
To view “music-tech” as a sector worthy of an entire standalone investment thesis would have seen laughable in the mid-2000s, during which the music business was struggling to get back up on its feet in the wake of piracy. But now that streaming has restored outside confidence in the music industry’s future — not to mention the industry’s confidence in itself — there’s an unprecedented level of diversity in where music-tech founders can look for financial support. (I haven’t even gotten into equity crowdfunding yet — but that’s for another newsletter.)
I got to unpack this newfound landscape of music-tech investment during a panel I moderated at the inaugural Music Tectonics conference on October 29. The other featured speakers included some of the ecosystem’s most active and well-known participants, including Zach Katz (CEO, Raised in Space), Rishi Patel (managing partner, Plus Eight Equity), Larry Marcus (co-founder and managing director, Marcy Venture Partners) and the aforementioned Virginie Berger (founder, DBTH Capital Ventures).
Importantly, the professional experience represented on the panel reinforces how the category of “music-tech” is well beyond emergent as an investment category. In the green room before our panel, Marcus and Berger told me that they made their first music-tech investments in the mid-1990s and early 2000s, respectively.
But the formalized ecosystem of vertical-specific investment firms for music has only taken proper shape over the past five years; Plus Eight Equity was founded in 2014, while Raised in Space was founded in January 2019.
Hence this conversation felt super fresh to me, and I’m excited to share my key takeaways from the experience with you.
It’s worth noting that the audience of this panel consisted mostly of tech founders and entrepreneurs, with only a handful of investors and only one (self-reported) person coming from outside of the music industry. Please remember that the speakers’ perspectives you’re about to read were offered with that specific audience in mind.
But first: A reality check on music's market size
Unless you have musical anhedonia, I think you will agree that music is one of the most universally appreciated art forms in human society.
But there’s a flip side to that statement: as Union Square Ventures managing partner Andy Weissman once tweeted to me, “‘music has historically been a culturally more important art form than it has been a big business.”
Let’s do some back-of-the-napkin math to contextualize this. Music trade body IFPI sized the global recorded-music market at $19.1 billion in 2018, and the market’s growth rate has been accelerating over the past five years. Hence it’s optimistic, but not ridiculous, to project that recorded-music revenues will surpass $30 billion by 2022. Meanwhile, the latest Global Entertainment and Media Outlook from Pricewaterhouse Coopers (PwC) projects that the global live-music industry, encompassing both ticket sales and sponsorship, will also exceed $30 billion by 2022.
Add up those two figures, and we can ambitiously estimate that the global music industry (recorded plus live) will be generating at least $60 billion in annual revenue in three years’ time.
That might sound like a lot of money — but in reality, it’s a small fraction of the market sizes that the wider tech/VC world is used to dealing with.
In fact, music continues to fall behind other forms of entertainment. Global film/TV revenue (box-office plus streaming) is projected to surpass $78 billion by 2022, eclipsing global music revenue projections by nearly 30%. And gaming revenue in the U.S. alone is expected to reach $230 billion by 2022, outpacing global music revenue almost 4x.
Beyond entertainment, the fintech industry is already generating over $250 billion annually, while the beauty industry is currently worth between $300 billion and $500 billion depending on whom you ask. Compared to these collective figures, music is actually a relatively tiny niche for investors, despite its widespread cultural appeal.
“We all really love music a lot, and I’ve certainly done a bunch in music, and we’re open to it — but music deals really have to compete against all the other deals that we’re doing,” Marcus said during our panel. “And the key signals aren’t really about the technology … I’m interested in seeing that the product is really working, that it has very happy users … I personally don’t have a lot of interest in the ideas of why things are going to be great. I’m only interested in that once you can demonstrate the core experience is really working.”
Part of why there’s still such a significant gap in market sizing between music and other entertainment industries may be a matter of consumer choice.
On our panel, Katz claimed that the typical Gen-Z teenager today spends $2,500 a year as a gaming superfan, but only $250 a year as a music superfan. While I wasn’t able to verify those exact numbers by the time of publishing this newsletter, they’re directionally in line with third-party research estimates — which peg average spending on games for U.S. millennial and Gen-Z consumers at over $100 a month, and average spending on music for U.S. consumers at $156 a year.
Gaming companies have mastered what investors refer to as “multimodal business models” — i.e. models for consumer-facing media that venture beyond just subscriptions, upfront transactions and advertising. Players can also buy skins and other features in several games, or tip livestreamers and pay for monthly artist-direct memberships via platforms like Twitch and YouNow.
In contrast — across Spotify, Apple Music, Amazon Music, YouTube, Deezer, Tidal and SoundCloud — subscriptions and advertising are still the two main business models for the entire music-streaming landscape in Western markets. MIDiA Research’s Mark Mulligan framed it in a particularly amusing and harrowing way during his own keynote at Music Tectonics: under the dominant streaming paradigm, “everyone is essentially forced to buy a Lexus, and the only choice they have is the color of the car.”
Artists’ careers have historically been subject to a similar level of homogenization. “The artist has just three things to offer in their mind to the fan: buy my music, buy my ticket to watch me perform and buy my T-shirt,” said Katz. “Or the best-case scenario if you’re a big artist is, buy my tequila.”
Redefining the "music-tech" company
What role could music-tech investment firms play in encouraging more business-model diversity for both artists and startups? Part of the potential solution is rethinking what a “music company” even means — not just in terms of business models, but also in terms of target customers and use cases.
“As an outside investor, you might think a 'music company' has to make a business out of licensing large catalogs from rights holders,” Bob Moczydlowsky, managing director of Techstars Music, told me last year for Billboard. “But that’s a challenging model where only the largest players on the planet can currently compete, and that's not the sum total of music. There are so many other use cases across live events and ticketing, artist-fan engagement, brand interaction and creative collaboration, where the people engaging in these activities number in the hundreds of millions. That scale is a really great test of what makes a good venture investment.”
The speakers on our investment panel echoed similar sentiments. “We think a lot about convergence, and about how ‘Music 2.0’ can be more than just music and converge with film, theater, health and wellness, gaming and esports and so forth,” said Patel.
For instance, Plus Eight’s first-ever exit — just announced this week — comes not from a traditional, content-driven music startup, but rather from an esports production company (Next Generation Esports) that potentially carries adjacent applications for music. Plus Eight has also invested in startups specializing in geolocation (Lynq) and holograms (VNTANA), in addition to well-known music-focused startups like Splice, Merchbar and LANDR.
In part because music metadata has been a thorn in the industry’s side for years — and a problem that, let’s admit it, no single company is going to solve on its own — Berger also encouraged the founders in the audience to have a more expansive view on rights-tech for music, especially as a wider variety of brands are looking to get into the record-label and music-licensing businesses.
For example, as on-demand video streaming has dramatically increased opportunities for songs to find new audiences, said video platforms could benefit immensely from improvements in their own in-house rights-tech. In fact, Netflix is currently hiring a Manager, Music, Innovation and Solutions to help with a wide range of music-rights projects at the company — including systems for cue-sheet and contract management, soundtrack administration, royalty payments, “music licensing analysis” and general “workflow optimization” — that could partner with the kinds of startups Berger will be backing.
How much should artists get involved in building a music startup?
One debate that I did not expect to come to the forefront of our panel was whether artists should get involved in startup development in the first place, as investors and/or customers.
Plus Eight and Marcy Venture Partners both have artists involved as board members. Aside from the cultural cachet that comes with celebrity partnerships, Patel argued that collaborating with the likes of Acquaviva, Hawtin and Tong offers “real-time insight into the mentality, pain points and challenges of being an artist,” which could help vet potential portfolio companies that claim to have artists as their target customers.
Marcus said that the benefits of having someone like Jay-Z on board include not only the “incredible instincts and access to deals and people” that come with being a major celebrity, but also a history of “taking creative IP, and turning it into business IP.” He separately cited Rihanna and her multifaceted fashion empire as an example of someone who took a thriving music career, and used it as a catalyst for wider cultural impact — adding that "you have to invest into where things are actually going, and I think the sensibility of being tuned into a mass-market cultural phenomenon such as music is really helpful."
But Katz took the stance that many music startups lean too much on artist involvement for their own good.
“Anybody who believes that they’re going to build their business on the backs of, and with the active participation of artists should stop that thinking immediately,” said Katz. “Why is TikTok what it is? Because artists don’t have to show up in ways that they don’t normally do already. You have all these fans around the world that take artists’ existing content and create an entire industry out of it, with no further heavy lifting from the artist. Don’t expect artists to show up. That’s rule no. 1.”
I would personally push back on this argument, as it could be interpreted as perpetuating the stereotype that artists are bad at business, and/or don't care about it. In reality, more and more artists are proactively shaping their own careers, and are willing to spend just as much time on marketing and business matters as on creative. And there are already tech companies out there that have raised tens of millions of dollars off of the assumption that musicians and creative professionals will show up and do the work of growing their own fanbases (examples: Community, Patreon and Substack).
That said, Katz does have a point not just about the power of user-generated content, but also about the potential danger in blindly viewing the growth of the indie- and DIY-artist market alone as a market opportunity for a startup.
Even though the vast majority of artists working today are indeed indie/DIY, that means they’re also likely strapped for cash and already have packed schedules working gig-to-gig, check-to-check. And even though there’s less bureaucracy involved in collaborating with leaner, indie/DIY artist teams, said artists and their managers may have neither the time nor the energy to devote to more free-form experimentation, as they’re working to build a stable business from already-tight revenue streams. (For more context on this dilemma with respect to analytics, I recommend David Turner's recent Penny Fractions issue on the extent to which more data really matters for artists.)
In addition, relying on celebrity promotion as a user-acquisition strategy is almost guaranteed to fail for a startup, and guaranteed not to impress investors who are already used to dealing with the music industry on a daily basis.
“You’re actually turning us off by thinking we’re going to be like, ‘Wow, you have Nicki Minaj or Cardi B trying your new thing,’” said Katz. “It shows us how disconnected from reality you are. It has to be a real business.” (Ben Thompson of Stratechery has expressed similar sentiments on Twitter: “The more celebrities in your product announcement the more skeptical I am about the transformational nature of your announcement.”)
Tl;dr tactical advice: Please know your shit
When it came to specific advice that the panelists had for founders in the audience, the responses were somewhat generic, but still so, so important:
Know your competition and your landscape. Actually talk to your customers and demonstrate that you have a realistic understanding of their day-to-day lives and pain points, instead of making sweeping, unfounded generalizations. Have an actual plan for user acquisition that doesn’t rely on celebrities. Be aware of the fact that nailing a licensing or content deal with a streaming service or major label/publisher is going to take much longer than 30 days. (Side note: these are also some of the exact same pieces of advice I would give to startups on how to pitch members of the media.)
“I’ve had calls with people who explained to me that they wanted to ‘revolutionize’ the licensing or metadata industry, yet they didn’t know DDEX,” said Berger. “I remember a specific call where at the end I told the founder, ‘Yeah, but do you work with DDEX? Because they’re already doing exactly what you’re trying to do.’ And they told me no. It’s quite difficult to launch a business if you don’t know the people who are currently running the business.”
Geography can also skew founders’ understanding of their competition, especially in such a Hollywood-centric city like Los Angeles. “Every CEO out there thinks they have the solution that’s unique and differentiated, but sometimes I’m like, wait a minute — you’re doing the same thing that these guys in Berlin are doing, but since you’re based in L.A. your valuation’s 5x more, so no thanks,” said Patel, eliciting laughter from the audience that may have also been a bit nervous.
That said, oversaturation of a given market was not a dealbreaker for some investors on the panel.
I mentioned that there were certain areas of the music/tech startup world that I personally thought were too oversaturated for new entrants, including but not limited to music analytics, music discovery, event ticketing and virtual reality. Marcus responded with a different take, insisting that he tried to “have a clean slate and be open to everything” on a daily basis.
“If you look at all the high-value [tech] companies today, at the time they raised their initial rounds, they were actually in very bad, overdone spaces,” said Marcus. “Search was very crowded when Google started, and social also felt kind of crowded when Facebook started. Tons of streaming video companies were around when YouTube started. It’s easy to say, ‘oh you want to be X service, but that’s crowded so that’s bad.’ But sometimes it’s very subtle variations that help something break out.”
Overall, the panel conversation was quite optimistic with a healthy dose of realism. And music-tech founders can cultivate totally different relationships with these investors today compared to ten years back. On one hand, founders don't have to waste slides in their presentation trying to explain the complexities of copyright law to these investors, and can dive straight into more important conversations about product development and future roadmaps. On the other hand, because these investors have seen practically everything that has come and gone in the music-tech startup world, there's much less room for bullshit.
“Within three minutes, any of us on this stage can know exactly where the head of innovation at each music company stands on your deck, and how committed they are to your company,” said Katz. “Always assume we know more than you — not from a place of arrogance, but from a place of acknowledgment that we do nothing but this.”