Record Labels as Early-Stage Investors

Wavves recently raised $1.5M in seed funding from a group of angel investors including Ron Conway.

I’ve been thinking about the applicability of early stage investment as a model for the next generation of record labels.  Here’s a summary of my thoughts.

Similarities

Barriers To Entry

For business and music, the barriers to entry are now lower than ever.  The digital opportunity is that an artist can cheaply record an album and a start-up can cheaply build a product - the demo - to prove what they can do.  For most startup companies/bands - 50k-500k will allow for a solid first product/album/tour to get off the ground.

Product/Market Fit

When a start-up is focusing on building its product or service, it’s the same as a band writing songs and touring.  Once they have something to take to market, a start-up will iterate on that product according to the market’s response, just as a band will take a bunch of songs on tour.  A product/service without a market is a band with no fans.

Funding

What funding enables is growth that would not otherwise be possible.  Funding for servers, staff or hardware is the same as funding for live shows, touring management costs or recording equipment.  It speeds the process of bringing a higher quality product to market.

Access

Ideally, early stage investment is also about access.  Access to people who know people and things that the start-up doesn’t.   Connecting start-ups with business development contacts, legal and financial advice or new staff is the same as labels putting bands in touch with promoters, festival organisers, producers and managers.

People, not ideas.

Investors sometimes talk about investing in people, not ideas.  They admit that start-ups often change course as the product evolves.  @Ev making Twitter was the equivalent of Luke ‘Sleepy Jackson’ Steele writing ‘Walking On A Dream’.  It wasn’t in the plan, but it became much bigger than the original plan ever could have.

Differences

Funding Tied To Milestones

Providing funding relative to progress or milestones is a way to protect an investment and provide incentives for action.  This happens explicitly in early stage funding and less strictly in the current label model.

Multiple Funders

Funding rounds allow for new partners to be brought into the mix, adding new funds and skills.  There’s the potential for a future model where EMI invests in the band’s first funding round and Universal comes in as a partner on a second round after seeing tangible progress or potential.

The Board

A board gives feedback and advice.  It talks through problems and tilts projects in future directions.  This structure is clearly laid out in business and informally defined (if at all) for most bands.  I imagine many bands could benefit from a more formal advisory board.

Corporate Bodies

A company is an entity.  It’s a registrable, definable body.   Bands aren’t so much.  This poses a challenge as it increases risk for labels when the band breaks up.  There’s the same risk inherent in a business breaking up but the process for hiring and firing staff is well defined.  Dismantling and recreating a band is more difficult.

Products Vs Services

In some cases, start-ups will rely on selling services to get them through the early days.  Ultimately though, most startups prefer to build products because, if they sell at volume, they provide a greater return.  Touring and live shows are services.  The music is the product.  The difference is that bands can continue profitably doing both throughout their careers.

Questions

The Exit

Where does a label exit in the label as investor model?  Can they ever?  Or do they just take a percentage of profits ongoing?  Can labels on-sell a musical product to a multi-national?  Other labels could be future purchasers or components of the artist package - touring, publishing, back catalogue could be sold off to other entities wishing to exploit them.

Art Vs Commerce

The performance demanded of start-ups is high.  The start-up identity is associated with long hours, tireless commitment and down to the wire negotiations, launches and capital raisings.  The artist identity is associated with sitting in a dark room with a candle, strumming chords from the depths of the soul.  Can great art be made under the same intensity that’s found in start-ups?  Will long hours of practice, endless touring and repeated recording make for better music?

Stepping Away

The biggest step in the process of labels becoming early stage investors is the step away.  Early-stage investors typically don’t take an operational role with the businesses they invest in.  Conversely, labels take an operational role with the artists they invest in.  Taking labels out of artist operations and making their role purely strategic and financial could be a good thing.  New industries would emerge - label management would be eaten by an expanding concept of artist management, music marketing would become the role of outsourced agencies.  Managers would become COOs, label managers would be operational staff.  The band would be the founders, in charge of product, the heart and soul of the undertaking.  Pitchfork would become Techcrunch.  London and New York would become Boston and Silicon Valley.  Labels would shrink by 90%.  They’d just be small teams of A&R guys with some financial backup.

Funding Sources

Often the best early stage investors are those who have had their own success in business.  Could successful musicians prove to be the best source of early stage investment for new bands?  Surely Bono could have got a better return investing in young bands than he did from his investment into Elevation Partners?

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All this is a simplification.  But it’s worthwhile thinking about.  From some angles, labels as early stage investors might be a more efficient means of creating and profiting from great music.