Getting Funded as a Music Startup
The following post highlights our process of attracting investors for our music startup Record Bird — a free online-service notifying music fans worldwide about new releases by their favourite artists.
In February 2016 we closed our first investment round, raising a mid-six figure investment from angel investors Niko Alm (VICE CEE, Super-Fi), the business angel network startup300 and a group of investors from the latter network, including Klaus Hofbauer (Karriere.at), Lukas Scherzenlehner & Erwin Stricker (both Cleen Energy). Here are some of our insights:
Starting a startup is hard and music startups are no different. Getting your venture funded is even harder, and again, music startups are no different. There is a lot of valuable advice and best practice examples on how to get funding readily available: on streamlining the funding process and getting the necessary influx of cash faster, cheaper and more efficiently. Most of which applies to any startup — whether consumer or business focused, whether you revolutionise transportation, booking cleaners or notifying music fans about new records.
Still, raising money as a music startup follows its own set of principles, which go beyond the basic advice available. Through our own experience we’ve identified 7 aspects which we’ve encountered as crucial in driving conversations with investors to the next level, and having dialogues at eye level. This is not about impressing potential investors. This is about understanding your business better, understanding your market better, enhancing the likelihood of success while minimising the risk of failure, and therefore — in the process — making your venture an interesting opportunity for investors.
Music Startups are different. Running a startup often feels like running through a dark room. There is little room for intuition, the only thing that will guide you are your vision (see the irony?), hard facts, metrics and numbers. Like tables, chairs and walls in a dark room, they help guiding you through the murk — and eventually, you’ll see the light. Each startup has it’s very own set of hurdles and obstacles hidden in the dark. That’s why there’s no guarantee for success or a pre-defined roadmap which you can adhere to.
All startups are hard. They all struggle. And surely, it is not harder to build a successful startup within the music industry than in any other industry. I believe the reason why so many music startup go back to where they came from, is because music involves an unproportional amount of emotion — and emotion trumps vision, objectivity and clarity.
Consequently, it requires an incredible amount of strength and a constant struggle to get yourself beyond the sphere of emotions, to step back and try to get a grasp of what could work in a shifting market and what couldn’t. You need to do this, even if all goes smooth in the moment. Tomorrow can be different.
You need to understand dynamics, interests, numbers, trends — and most of all: egos. We’re talking about the creative industry after all. All successful entrepreneurs need to perfect this hardest of all skills. What makes music startups different, is my believe that for them it’s not only the hardest of all skills, but the most important one. Even if you master this craft, there’s no guarantee for success. Highly successful people failed at building a music startup, so you’d be in good company!
This advice is for founders already running a music startup who struggle to get funded. It’s for courageous people thinking about starting a music venture who will rely on external capital to build their company. Finally, this is for people trying to understand why so many music startup fail.
Now, you won’t need to look hard to find people more experienced in running a company than I am. People who have raised more money than we did for Record Bird. So please, take this advice for what it is: Me sharing our experiences with Record Bird in the process of attracting investors and getting funded to build our company. Some of this advice also applies to startups operating beyond the realms of the music or other creative industries, some doesn’t.
When we set out to start this company we had frustrating first talks with investors. It seemed impossible to attract capital. We now have incredibly valuable dialogues, where it’s more about trying to find the perfect fit than convincing and arguing why this could be a great company. We managed to get from A to B. If you’re a founder of a music startup and and feel you’re at A; if you tried to get to B but couldn’t find your way; if you understand that this advice is not a to-do list for getting funded but rather a set of milestones that helped us get there and therefore could imply some value for you as well, then listen up: It is you, who this advice is for!
1. Perseverance
Music startups are generally a bad idea. You’re in a market which few understand and many of those who do are scared, because they know they don’t. If you start a music company, doubt will be your constant companion. If we would have received 1€ for every time someone told us to stop pursuing our vision, we would have gotten funded 6 months earlier. Even later on, the doubters will not stop. Soundcloud has doubters. Spotify does. Apple Music does. They all do. People will doubt you privately, and in public — and that’s okay. It’s not personal. It’s their subjective opinion, nothing more. You can get over it!
When we started Record Bird, I sat down with my co-founders and we talked about which kind of company we wanted to build. What would be our fundamentals, our cornerstones, basic beliefs we all supported and could always go back to. One of the first things we wrote down was:
“Listen to everyone, decide for yourself.”
People may doubt you, because your new vision of the world conflicts so drastically with their own, that they have no other option than to resist with all force. If your company works out, their world would be shattered and fall apart. Remember all the Yo! or Snapchat doubters? I was one of them — how wrong we were.
Make sure though, that perseverance doesn’t equal stubbornness, especially if driven by your own, personal ego. Your business should be based on certain hypothesis that you believe to be true. Ideally, your beliefs are based on an insight few other people have. Always, always have those hypothesis in mind. When someone doubts you, take their feedback and re-elaborate on your beliefs. Re-consideration is not self-doubt, it’s about being open minded.
Consistency of thought isn’t a particularly positive trait. It’s perfectly healthy — encouraged, even — to have an idea tomorrow that contradicted your idea today.
- Jeff Bezos
It is this process, that will allow you to step back and see your business with someone else’s eyes. Ideally, you have an insight which they don’t. Eventually, they have insight which you don’t. Listening will help you gain new insights to test, re-consider and if necessary, alter your hypothesis, therefore increasing your chances of success.
2. Know Your Pain
The easiest and most reliable way of getting exclusive insight into an opportunity, is to live the life of your potential users and customers. Not by force, but by naturally experiencing their pain.
If you don’t love music, don’t do a music startup.
You are literally the only guarantee that a specific problem exists. If you experience a certain mismatch, there’s a good chance other people like you, do too. You’re not that unique.
This will also raise confidence in potential investors. If you know the problem yourself, they know that you have looked at all possible workarounds and current solutions in the market. Still, the question remains how many people like you are out there and whether you can build a fast-growing, sustainable business around this problem.
The problem and your solution have to be critical to your users. It has to center around a recurring pain. Create pain killers, not vitamins. Ideally you can find social proof for the broader existence of the problem. For Record Bird, we discovered that many music fans go online and share their frustration after missing a new release by their favourite bands.
If someone told us that the problem didn’t exist, we could simply point to Twitter and say: “Look for yourself!”. That’s a tough argument to counter. Later on we could refer to opening rates of our notifications. If 3 out of 4 people open our emails, that’s a good indicator that our information is relevant and helps them solve an existing problem important to them.
You can do this by building an early prototype, talking to potential customers or observing behaviour in the market. Ideally, you do all of the above. It will substantiate, validate and inform your beliefs and create a foundation for further discussion with your investors. It will also fuel your persistence.
Beware though, that markets change quickly. In music, the future is in streaming. So make sure that your problem will not only remain to exist in the future, but ideally that it becomes more prominent than ever.
3. Study the Market and its Dynamics
The music industry is a highly consolidated sphere, where 3 middlemen — the major labels — dominate the market and hold the rights for most products in it. 99% of artists struggle for most episodes of their career. A major label has the power to offer them for once financial stability and resources— even if just for a while. In return, they accumulate rights for their music. That’s the deal. Songkick’s Ian Hogarth had a beautiful analogy to this transference of rights:
“Unlike tech where you can be a talented engineer at a start-up that fails & still go get a great job at Google, if you’re a great musician that fails to make it you can’t just go join Radiohead.”
- Ian Hogarth, Songkick
So if you’re founding a music startup, know that you’re inevitably involved with the music labels — probably more than you’re with the artists. Frankly, you don’t want to piss them off. They are your allies, not your enemies!
Take your time to study how the money flows. If your business involves music, you’re instantly dealing with rights. Who owns these rights? The artists, labels, song writers? What do they want in return? Do you need to pay advances? How much? How dependent does this make you and your business on certain entities?
Know, who’ll be knocking on your door when you’re successful!
If you don’t come from the music industry yourself, get someone aboard who has the necessary network and understands the dependencies and modus operandi of the market and its players. To stick with the picture of walking through a dark room, its like holding someone else’s hand who’s been there, done that. It will not only help you to navigate more effectively through the darkness, it will also raise your credibility with both, key players and investors.
Also, understand the consumer side of the market: One huge entry barrier for Record Bird was, that we couldn’t simply get started with only a tiny fraction of the market. Informing about new music releases is pointless, if you only cover the Top 50 Austrian artists.
Taste is global, so is music and its consumption.
The more you understand about your market and the key players in it, how it will develop in the future and most importantly how the players are likely to react to such developments, the better you’re off.
4. Know Trends
Every business and industry is subject to certain trends and it’s a good thing. It drives incumbent companies out of the market and makes place for new, more innovative ones. It frees up resources and puts them to work more efficiently. It is very much the circle of life.
“Death is very likely the single best invention of life. It’s life’s change agent. It clears out the old to make way for the new.”
- Steve Jobs
Know trends and brutally take advantage of them. Exploit them. They are the current that takes you out to the line-up faster (not to the safe beach). How will a certain trend affect your business? Your growth strategy? Your product offering? You don’t want to start a company which is already on the downslope.
This highlights the importance of timing for building your venture. Make sure the timing is not only right for your solution but also for the middlemen in the market. Great innovations failed, because key players in the market were not equipped to adopt the innovation in time (think about the comparably slow adoption rate of electric cars). Only few companies have the brute force to bend the market to an extent that the middlemen have no other option but react and adapt. Napster did this, but it got them killed before they could ‘go legit’. Uber does this and so does AirBnB and Tesla. Are you the next Tesla?
The question about timing is also crucial to your investors. The words “Why now?” will top off most of your presentations to potential investors. At Record Bird we believe that music consumption is a function of 5 variables:
consumption
=
f (access(+), costs(-), time(+), motivation(+), information (+))
Online retailers boosted access to music, irrespective of where you lived. The digitisation of music brought the marginal costs of a new recording down to 0.99 cents, while streaming made them effectively zero. Mobile technology amassed the time we have available on a daily basis to listen to music. It brought our private collections on our smartphones and let us listen to it on-the-go and at work. Given a certain level of motivation — e.g. liking an artist — imperfect information flow remains the last remaining barrier for frictionless music consumption.
On top, as streaming and playlist models favour small and frequent releases, the problem of missing out on great new records is only about to prosper in the years to come. I know this. Our users know this. The music industry knows this. This is why now is a great time for Record Bird.
5. Do Something No One Else Did Before
Here comes the trickiest part but also the most effective argument for talks with potential investors and partners: With little to no resources you need to build something no one else could before, but everyone in the market cares about! No one will believe your vision, everyone wants to see. The power of sight will always trump pure imagination.
To us, this meant creating the most comprehensive database of new and upcoming music releases worldwide. Data will always be at the core of our product offering. If you’re not aware of your make-or-brake equivalent, you’re already in free fall.
I will always remember when we turned on Record Bird and saw it work for the first time. The moment we realised that we had better data than everyone else, we knew we had reached a critical milestone — far from our goal, but something we could build upon. We now track more than 4.000.000 artists and if any of them release a new song or record, our users will know first. That’s a start.
Getting there will never come easy. Few startups have the financial backing from the beginning to negotiate deals with key players in their industry without giving up all leverage upfront. You are David, and with pure strength you can’t tackle Goliath. You need to find you hack, your shortcut, your way into the market which in turn gives you a reason for existence. Find your slingshot.
6. Get the Players Aboard
I believe the CEO of a company has to super-important responsibilities above all else: You need to be the one with the grand vision and pursue it relentlessly, and you need to make important people care deeply about your project. This could be co-founders, employees, investors, suppliers, distributors and other middlemen in your market.
The concept of the ‘Luck-Surface Area’ postulates that “the amount of serendipity that will occur in your life is directly proportional to the degree to which you do something you’re passionate about combined with the total number of people to whom this is effectively communicated”.
When it comes to the music industry, this means that you have to work hard to tune the content and rights owners in favour of your company. Even more, you need their permission for what you set out to do. The amount of rights consolidation would otherwise make it impossible for young companies to transform incumbent industries.
“The broader point here is that the level of supply-side consolidation in your industry massively changes how you build your startup. If the industry is heavily consolidated you are more likely to have to partner with the supply-side middlemen.”
- Ian Hogarth, Songkick
To get there, you need to demonstrate massive and instant value to these companies. You need to understand how they work today. You need to understand how they think they work today. You need to understand how they could work in the future. Finally, you need to make them understand how you could help them get there. You need to think about value beyond the artist and the fan.
Again, this highlights the importance of timing: Your middlemen need to be ready for this step. If you’re small, they won’t make any big bets. Be aware of this. It has to be a win/win situation for them. If you fail, they can go after business as usual. If you succeed, the succeed with you. It’s you who will take all the risk, not them. They don’t have to. At least, so they think.
The bigger your company, the more you can push these inevitable developments to happen faster and also on a different scale. When Apple convinced all major music labels to sell their songs digitally on a per song basis, there was no way coming back from that. Then again, Napster paced the way for Apple. Without Napster, the music companies’ BATNA (Best Alternative To a Negotiation Agreement) would have been much, much better. That’s usually not the case.
If you have an incredible, financial war-chest already, you might get away with just taking the leap and improvising and cleaning up along the way. YouTube and Soundcloud initially did this, but they are all partnering with the middlemen now. They need their permission, too.
This doesn’t mean that you have to offer music labels free or underpriced shares in your company. They will come knocking at your door soon enough. For Record Bird it meant building a working prototype and presenting them to various major labels in our test markets. It meant making them understand the opportunity at hand and collecting written letters of intent. The backing of these dominant players in the music industry set the base for all future dialogues with potential investors. It helped us get to the next level.
7. Know Your Investors
Not everyone will invest in music and that’s a good thing. Don’t waste their time and don’t waste yours. Be highly selective when scouting for investors. Look at their portfolio, their investment profile and their personal background. Most investors out there I couldn’t sell on Record Bird. That’s fine. I don’t have to. Those who don’t understand music have a much harder time grasping the opportunity at hand.
Gladly, those who do are much more likely understand the potential and jump aboard. What’s more, they can ask the right questions — those that challenge your assumptions without purely dismissing them. They can help you build a network. A Company. They are your allies.
Then again, there’s always an exception to the rule. I have also learned to never close any doors purely based on a specific investment profile. Momentum goes a long way and if it is on your side, magic things will start to fall into place.
Know what you don’t. Know, that you do not only need investors who understand music but also company building. You don’t have to find all these qualities in a single investor but in your close circle of investors, advisors, mentors and supporters. Think of it as the perfect mix(tape).
By now, you will realise that none of the points above can ever be ticked off like groceries on a shopping list for getting funded. If you work them hard, you might have a chance at getting funded at some point. Even if you do, don’t take this a signal that you can now stop:
You now need to be more persistent than ever as doubt will come from bigger players with louder voices.
You now need to know your customer’s pain better than ever. Are you still building pain-killers or only vitamins?
You now need to understand your industry better than ever. Markets change, dynamics evolve, new trends come, old ones fade. Are you still on top of all developments?
You now need to innovate more than ever. The first copycat is already around the corner. What’s your USP, how can you protect it and how can it evolve eventually?
You now need to understand key players better than ever. Take advantage of the vast network and resources of the big middlemen in the market. Serve them well and get served. Understand that the more successful you are, the bigger the cut they demand. They will come. Be ready.
You now need to know you investors better than ever. Actually, you just got to know them. They are now part of your gang. Make sure you understand what each of them can bring to the table. Understand their interests and their roles. Then again, the next round of financing has just started. Make your contacts early.
Start today.
Credits for inspiring thoughts and insights go to Ian Hogarth (Songkick), Jason Roberts, SJ and Mr. Bezos;
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Andreas is the Founder & CEO of Record Bird. We notify music fans about new and upcoming records by their favourite bands and musicians.
In case you have any further thoughts or feedback, please get in touch via Twitter (@mahringer_a).
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