Music Pushes to Innovate Beyond Streaming, But Investors Play It Safe: Analysis
Taking a look at the gap between music accelerators and venture capitalists in 2017.
If you're confused about how exactly music tech is doing in 2017, I don't blame you.
On one hand, some previously dominant music-tech stars are falling prey to money troubles, suggesting financial success in the sector is tough. Jawbone, the award-winning consumer hardware firm once valued at $3 billion that is known for its speakers and bluetooth headsets, is officially going out of business. SoundCloud, which was reportedly mulling a $1 billion sale almost exactly a year ago, laid off over 40 percent of its staff last week, just days before its employees were supposed to celebrate the company's 10th anniversary. Pandora has witnessed unprecedented turnover in its executive ranks, and spent most of the first half of 2017 scrambling to close a sale.
On the other hand, major streaming services are driving the music industry's growth while tech showcases and accelerators such as the SXSW Music Startup Spotlight, the Midemlab Accelerator and Techstars Music are fueling innovation. In 2017, 54 music startups from over two dozen cities around the world -- including more than 20 startups from New York, Los Angeles and London alone -- participated in these three programs, bringing to the table a diverse range of ideas from live music activations and automated messaging to analytics tools for labels and artists. With the exception of Live Nation, Balderton Capital and Evolution Media, the vast majority of firms investing in music startups so far in 2017 have never backed a music company before, based on investments listed on their websites, even though few music-tech outfits to date have delivered the 30 percent return on investment that most venture capitalists seek. Usher, David Guetta, will.i.am and Nas have put their money on the table this year, joining the likes of veteran artist investors Justin Bieber, Beyoncé and Elton John.
"We take a long-view approach to growing the ecosystem, and we're seeing VCs investing in the same types of companies," says Bob Moczydlowsky, who oversees Techstars Music and counted more than 100 VCs at his group's "demo day" this spring.
But out of the nearly $900 million in music-tech funding during the first half of 2017, 75 percent went to streaming services, and 82 percent was concentrated in the top four companies, according to an analysis of publicly available investment information for the first half of the year. There remains a stark disconnect between the causes to which music accelerators primarily lend their mentorship (hardware, virtual reality, chatbots, label tools) and the problems VC firms are more focused on streaming, social media, brands) -- potentially stifling innovation in the wider music industry.
So far this year, music accelerators have successfully given a platform and resources to a variety of sectors often overlooked in the VC world, as shown below:
Streaming services account only for around 4 percent of cohort membership, while automated messaging and AI-generated music -- categories that would have been nearly unthinkable to see at music accelerators even just five years ago -- now comprise a total of 15 percent of membership. This growth in new categories mirrors wider tech investment and hiring trends. Major labels are bullish on the future of virtual digital assistants (VDAs), which include chatbots and voice-enabled devices such as Amazon’s Alexa. Spotify just poached François Pachet, the Director of the Sony Computer Science Laboratory in Paris who helped trained an AI to write a song in the style of The Beatles, to help develop creator tools for the streaming service.
Yet, this egalitarian focus on wide-ranging problems doesn’t seem to translate into the wider investing landscape, in which streaming services have gobbled up more than 75 percent of music-tech funding. Social music platforms, catalog management solutions and music-brand initiatives came in second, third and fourth respectively, while every other music sector combined accounted for only 2.2 percent of the total funding pie:
This distribution resembles that of 2016, during which the top three rounds were also all for streaming companies ($1 billion for Spotify, $109 million for Deezer and $70 million for SoundCloud). Many consumer-oriented VCs and corporations simply see streaming as the safest model available in music and entertainment at the moment, one without which the music industry could no longer survive. That's a contrast to other industries such as real estate, where investors are about twice as confident as entrepreneurs about the market. But sectors such as healthcare share music's plight.
Considering that the huge checks streaming services receive skew the general investment picture, a breakdown of the number of rounds, rather than the number of dollars, paints a slightly more egalitarian landscape:
In this modified pie, catalog management solutions actually come out on top, with companies like Kobalt Music, Stem and Dubset raising 25 percent of rounds so far. Interestingly, catalog management, social music platforms and live music are the only sectors that perform relatively well both for accelerator membership and for number of total rounds raised.
In contrast, more tech-intensive, futuristic ventures such as hardware and VR are popular with accelerators and conference audiences, but under-index for overall VC funding. Despite the fact that music hardware had the second largest presence among accelerators, the sector raised fewer than 10 percent of music-tech rounds this year (UK-based Mogees and Hong Kong-based Soundbrenner raised a total of $2.6 million in January and May, respectively). Similarly, while companies from Live Nation and Universal Music Group to Citi and Microsoft have announced strategic moves in music VR over the last six months, VC funding in the space is still relatively soft, with MelodyVR being the only such startup to raise money to date in 2017.
Even more striking is how artist and label tools such as influencer discovery platforms like Instrumental or playlist and chart monitoring tools like Soundcharts haven’t raised any rounds, despite unmatched attention from accelerators. Perhaps the market for these tools isn’t big enough to attract many traditional investors.
There remains a more ingrained, cultural obstacle: while several music celebrities regularly invest in startups, few VC firms proper are run by people with experience in the music industry, so are likely unfamiliar with the pain points of those working behind the scenes. Some firms such as Plus Eight Equity Partners, an outgrowth of veteran DJ Richie Hawtin’s dance label, are dedicated to bridging this ideological and motivational gap, but they are few and far between.
This analysis does not take into account the growing number of startups like 8tracks and Chew that are experimenting with crowdfunding to attract a wider pool of enthusiastic, more unconventional investors. Nonetheless, the combination of a gap in music-industry knowledge and a penchant for safety and convenience in venture capital means that the path from accelerator to investment remains unclear for some of music’s most forward-thinking and most urgently-needed startups.