MBW Views is a series of exclusive op/eds from prominent people in the music industry… with something to say. The following report comes from Vickie Nauman (pictured), founder and CEO of Los Angeles-based music technology consulting and advisory firm CrossBorderworks.
Being an entrepreneur is never easy. Many first time founders don't know how steep the mountain is when they start out. Running a music startup means even greater challenges, navigating through uncharted territory filled with the ups and downs of the music industry. Building a successful product is already difficult, so why would anyone willingly add music?
Technologists flock to the music business because of platform adoption. Few media offer the power and personal connection that artists and their music provide. However, to succeed in music technology, a startup must find more than product-market fit.
Product-market fit means that the product meets market demand, but it also indicates that the startup has accurately identified a problem/need, executed product development, and successfully reached its target market. Once product-market fit is achieved, a startup enters the validation phase, which prepares it for investment to fuel growth.
So why isn't that enough for music tech startups?
Music tech startups operate with the biggest double-edged sword imaginable: the music industry. On one side of this sword is the benefit of artist-fan engagement, platform adoption and rich personal entertainment. The other side is an extremely complex industry, whose problems are often contradictory to solve and whose opportunities are costly. The value chain of artists-labels-writers-publishers-PROs-CMOs-distributors-managers leaves newcomers' heads spinning.
Entrepreneurs also often forget that when you're in the music business, you're exploiting someone else's IP in the form of recordings and compositions, and that intellectual property is strictly protected and valued. Music technology companies also need what I call Industry-Market Fit.
I define Industry-Market Fit as having three driving characteristics: the entrepreneur has accurately identified a music-related problem or opportunity AND that stakeholders want that problem solved. the company's business model matches the cost of manufacturing the technology and/or licensing appropriately to the value of the opportunity. and the offering to customers is valued enough to give the company public opinion and share of wallet.
This is not easy!
Industry-Market Fit is often lost. Here are some common music startup errors.
RIGHTS: Many startups trying to solve music rights issues suffer from needing a huge and expensive technology stack to solve a problem that sometimes has no pot of gold. They often get lost in the maze of rights issues, lose focus and can't identify why they exist.
LICENSE: Companies looking for music rights often find a mismatch between how much and what music they need and the money they have to offer. They start a full catalog service when they bootstrap, or they want a legendary rock band for a niche passion project. An industry based on trade licensing relationships can also leave entrepreneurs completely confused, even after 18 months spent in a good faith effort.
ARTIST-IN-IMAGINATOR: Startups seeking to monetize the artist-fan relationship can find themselves chasing down artist managers one by one, only to find they need record labels from publishers and labels, or discover too late that most artists want to be artists and don't. They don't want to spend their free time on an app, nor do they want to direct their fans to an app. Pursuing demos or unreleased songs is also a dead end, as most artists resist putting unfinished work out into the world.
MUSIC MODELS: Audiovisual companies may want a catalog of every song ever created, but they don't realize the enormity of this task because audio DSPs and audiovisuals involve different rights structures and involve different risks. Startups propose revenue share without realizing that upfronts are a difficult requirement.
When a startup loses Industry-Market Fit, it also faces Investor-Market Fit.
There is a long, difficult history of traditional investors not wanting to put money into music. Some investors don't understand the industry, so they don't ask the right questions and get burned. Other investors in the early days of digital poured millions into promising music startups, who then gave all that money to licensors and had nothing to work with. Many of the music industry's problems and opportunities are also too small for investors to care about. And finally, using third-party IP will benefit you, so investors looking for high-margin, low-complexity businesses will find music unappealing.
Is it possible to achieve product-market fit, industry-market fit and investor-market fit? Yes and examples of this include companies of all sizes and shapes that were once startups and have grown and thrived, such as Beatstars, LyricFind, YouTube, Beat Saber, Spotify, Empire, United Masters, Kobalt, CD Baby, Tunecore, beatBread, Epidemic Sound, SoundCloud, BandLab, Musiio, Yousicion, Soundtrack Your Brand and more than I could possibly list here. It was an easy road for these companies – absolutely not! But they are all great examples of startups that have achieved product-to-market fit, industry-to-market fit, and investor-to-market fit.
Here are some tips for music tech startups seeking to achieve all three:
Product-market fit: There is absolutely no success without it, and it is a tried and well-documented path. If you're in music, you need to work on Industry-Market Fit at the same time instead of trying to fit it in later.
Industry-market fit: Read industry news and observe the market, but consult with a music insider who is knowledgeable and can help you check your assumptions.
- Don't go it alone with music licensing. bring in an expert.
- You should have a pretty solid idea of your offering and model before you talk to any company or publisher. If you have an idea that has “never been done before,” you should investigate it thoroughly because there's likely a good reason it's never been done before, but it's in your blind spot.
- Understand the complex value chain, even if it hurts your head. You may need a consultant to help you understand each stakeholder's primary motivations and make sure you're offering something they value.
- Don't take music rights issues lightly. There are 100+ years of history in these deep issues and some will take another 100 years to unravel.
- Don't assume you need every song created. With the startups I advise, we work through a concept I call Minimum Viable Music to get to market and fit faster.
- Network and meet people, but use everyone's time wisely.
Investor-Market Adjustment: Take the least amount of investment money you can and keep the property.
- For seed and pre-seed, find friends, family and people who believe in you and your vision. These are your champions and are very likely to help you in future rounds through subsequent investments and/or introductions.
- Focus on early stage investors who are strategically aligned with music – they understand the industry and its issues.
- Be thin. Venture investing will be difficult for a while, so those with small agile teams have an advantage. Let's say venture capital is only at the development stage – music investors will only consider proven and fully licensed companies.
- Get to revenue as early as possible – a few years ago it was growth at all costs, then sustainable business models and now you need to have a proven path to revenue.
- Think about your path – is it acquisition, scale-up or are you a niche business?
- Be mindful of who you're talking to and your own goals to ensure you don't waste time and effort on a mismatch. If you are in an adjacent field like gaming, artificial intelligence or data and want to use music, you need to have a strategy to de-risk the music business and include it in your investment.
- Investors looking for unicorns won't buy your product if your addressable market is only $20 million. If the problem you're trying to solve is also too deep in industry nomenclature and niche specifics, chances are investors will get confused and simply pass because they can't understand the problem, much less your solution.
Music Business Worldwide
