Why Investors Aren't Piling Into Music

Everyone loves music. So why do investors, even ones who consider themselves musicians, run the other way when pitched by a music start-up?

"Music is one of those funny things," Tim Chang, an amateur musician and partner with the Mayfield Fund, told the audience at SF Music Tech on Tuesday. "We're deeply passionate about music. But the business models don't align with that."

Complex and costly music licensing, coupled with the requirement for most content business models to scale up to massive communities, keep investors away, Chang and other venture capitalists said in a panel entitled "Music Tech and Money." Companies that sell tools or services to artists are also problematic because "artists aren't the richest people," Chang said bluntly.

"Part of the reason I love investing in music is because everyone else avoids it," said Larry Marcus, a partner with Walden Ventures who invested in Pandora and BandPage. But even Marcus has his limits, staying away from business models that require direct licensing from labels and publishers, largely because consumers aren't paying for music in ways that would adequately compensate for the cost of the license.

"People believe in paying artists," Marcus said. "But they just haven't been given a good enough experience or product."

What will consumers pay for?

Chang said experiences and stories are two possible answers.

"Remember when 15-second ringtones were selling for $3.99 when the full song download was 99 cents?" Chang asked rhetorically. The big price difference, he posited, was because "ringtones were personal branding events" while song downloads were "just content."

Live events are another avenue that can be better exploited, said Hany Nada, a partner at GGV Capital, which invested in BandPage.

Recalling a backstage meet-and-greet with a local band called The Stone Foxes that he had purchased for $50, Nada said he would have gladly paid ten times the amount. "People are paying thousands of dollars to have virtual dinners over Skype with their favorite bands," said Nada, who thinks the industry can greatly expand if music is folded into fan-based experiences that allow fans to interact with artists.

Chang concurred, adding, "They're not buying music. They're buying a story they can tell to their friends. They're buying a lifetime memory."