MBW Views is a series of exclusive op/eds from eminent music industry people… with something to say. The following op/ed comes from Vickie Nauman (pictured), founder and CEO of LA-based boutique music tech 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. Operating a music startup means even greater challenges, trudging through unfamiliar terrain filled with the twists and turns of the music industry. Building a successful product is already difficult, so why would one willingly add music?
Technologists flock to the music business because of the potential for platform adoption. Few mediums deliver the power and personal connection that artists and their music provide. However, to succeed in music tech, a startup needs to find more than product-market fit.
Product-market fit means that the product satisfies market demand, but also indicates that the fledgling company has accurately identified a problem/need, executed on product development, and successfully reached its target market. Once product-market fit has been achieved, a startup is at the validation phase, which readies it for investment to fuel growth.
So why isn’t this enough for music tech startups?
Music tech startups are operating with the biggest double-edge 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 a highly complex industry whose problems are often counterintuitive to solve and whose opportunities are expensive to pursue. The value chain of artists-labels-writers-publishers-PROs-CMOs-distributors-managers leaves newcomers’ heads spinning.
Entrepreneurs also often forget that in engaging with the music industry, you are leveraging someone else’s IP in the form of recordings and compositions, and this intellectual property is tightly held and valued. Music tech 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 the stakeholders involved want that problem solved; the company’s business model maps the cost of building the tech and/or licensing appropriately to the value of the opportunity; and the offering to customers is valued enough for them to give the company mindshare and wallet share.
This is not easy!
Industry-Market Fit is frequently missed. Here are some common music startup errors.
RIGHTS: Many startups trying to solve music rights issues suffer from needing an enormous and expensive tech stack to solve a problem that sometimes has no pot of gold. They often get lost in the labyrinth of rights issues, lose focus, and can’t track why they exist.
LICENSING: Companies seeking music rights often find a mismatch in how much and what music they need and the money they have to offer. They start a full-catalog service when bootstrapped or want a legendary rock band for a niche passion project. A relationship-driven industry with transactional licensing can also leave entrepreneurs thoroughly confused, even after 18-months spent in a good-faith effort.
ARTIST-TO-FAN: Startups pursuing the monetization of the artist-fan relationship can get caught chasing artist managers one-by-one, only to find they need sound recordings from publishers and labels, or they discover far too late that most artists want to be artists and don’t want to spend their free time in an app, nor direct their fans to any app. Pursuing demos or unreleased songs is also a dead end, as most artists resist putting unfinished work out into the world.
MUSIC MODELS: Audio-visual companies may want a catalog with every song ever created but don’t realize the enormity of this task, because audio DSPs and audio-visual implicate different rights structures and carry different risks. Startups propose revenue share not realizing advances are a hard requirement.
When a startup misses Industry-Market Fit, they also run up against Investor-Market Fit.
There is a long, difficult history of traditional investors not wanting to put capital 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 invested millions to promising music startups who then gave all that money to licensors and had nothing left to operate. Many music industry problems and opportunities are also just too small for investors to be interested in. And finally the use of third-party IP will indeed eat at your margins, so investors seeking 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, include Beatstars, LyricFind, YouTube, Beat Saber, Spotify, Empire, United Masters, Kobalt, CD Baby, Tunecore, beatBread, Epidemic Sound, SoundCloud, BandLab, Musiio, Yousicion, Soundtrack Your Brand, and many more than I could possibly list here. Has the road been easy for these companies – absolutely not! But they are all great examples of startups who achieved Product-Market Fit, Industry-Market Fit, and Investor-Market Fit.
Here are some tips for music-tech startups seeking to achieve all three:
Product-Market Fit: There is absolutely no success without this, and it is a tried and well-documented path. If you are operating in music, you need to simultaneously work on Industry-Market Fit rather than try to bolt on later.
Industry-Market Fit: Read industry news and observe the market, but have a music insider as an advisor who is current and can help you check your assumptions.
- Don’t go into music licensing alone; bring an expert.
- You should have a pretty solid idea of your offer and model before you talk to any labels or publishers. If you have an idea that “has never been done before,” you should investigate thoroughly because there’s likely a good reason it’s never been done, but it’s in your blind spot.
- Understand the complex value chain even though it makes your head hurt. You may need an advisor to help you understand each stakeholder’s main motivations and make sure you are offering something they value.
- Don’t tackle music rights-related problems lightly. There is 100+ years of history in these deep issues and some will need another 100 years to untangle.
- 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 more quickly.
- Network and meet people but use everyone’s time wisely.
Investor-Market Fit: Take the least amount of investment money you can, and retain ownership.
- For seed and pre-seed, identify friends, family, and individuals who believe in you and your vision. These are your champions and are most likely to help you in future rounds through follow-on investing and/or introductions.
- Concentrate on early-stage investors who are strategically aligned with music – they understand the industry and its problems.
- Be lean; venture investing is going to be tough for a while and so those with small nimble teams are at an advantage. Assume venture capital is only at growth stage – music-skittish 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 viable business models, and now one must have a demonstrable path to revenue.
- Think about your trajectory – is it an acquisition, growth at scale, or are you a niche business?
- Be aware of who you are talking to and your own goals to make sure you aren’t wasting time and effort in a mismatch. If you are in an adjacent sector such as gaming, AI, or data and you want to use music, you must have a strategy in place to de-risk the music business and include it in your investment deck.
- Investors seeking unicorns won’t buy into your product if your addressable market is only $20M. If the problem you are trying to solve is also too deep in industry nomenclature and niche specifics, chances are that investors will be confused and will simply pass because they can’t grasp the problem, much less your solution.
Music Business Worldwide
