In fact, some of these investors are now taking charge at the upper echelons of said music companies. In Jan. 2018, longtime Google Ventures partner Avid Duggan joined Kobalt (a GV portfolio company) as executive vp and chief strategy & business officer. Downtown Music Publishing CFO Alan Goodstadt previously served as a partner at several VC firms and as a managing director at Merrill Lynch. Several execs at Cutting Edge Group, a film music and financing firm that recently brokered a sale worth up to $25 million to Concord Music Group, also previously worked in vp roles at Merrill Lynch.
On one hand, interest from VC and finance in music is nothing new. As early as 2007, boutique investment banks were experimenting with music as an alternative asset class. Perhaps the most notorious example was Ingenious Capital, which financed comeback albums for the likes of UB40 and Peter Gabriel and acted as the financial advisor for Robbie Williams' £80 million contract with EMI in 2002, the largest such deal in the history of U.K.’s music industry at the time (Ingenious has since sold most of its music assets). A handful of other financial firms like AGI Partners and BlackRock have also established their own funds for independent artists, but have not made much of a splash.
On the other hand, the fact that more and more VC and finance execs are transitioning directly to internal roles within music companies, instead of solely providing outside funds, represents a renewed sense of confidence in the future of the industry -- not to mention a steep learning curve for navigating a landscape that has not gotten any simpler since the early Napster days.
“Having been on Kobalt’s board at GV, I knew the music industry was complex, but I didn’t realize the actual level of complexity until I joined the company,” Duggan tells Billboard. “You think you’re about to get an answer that resolves your understanding of the topic, but then that leads to another question, and then another. It’s an endless pit of complexity, with just how many different types of rights and regulations there are, how that varies across regions -- and then all of that is compounded by the number of middlemen, from collection societies to agents, labels, publishers and sub-publishers. I’ve been trying to educate myself and am having meetings with all sorts of people at the company to try to understand not just Kobalt’s offering in this landscape, but also the customers we’re serving.”
Streaming has also ushered in a more positive form of complexity, in the form of expanding the potential for growth beyond recorded music alone. In the same way that the presence of a few successful startups has turned Silicon Valley into the hottest destination for tech entrepreneurs, Spotify's enduring success has encouraged founders to build a wider ecosystem of tech solutions for music -- whether in building secondary experiences atop Spotify’s API itself (Stationhead, Pacemaker), in making music more visual and social (Musical.ly, Dubsmash) or in serving the business needs of artists and their teams (Auddly, Sodatone).
A prime example of such an ecosystem in more institutional form is Techstars Music, whose entire portfolio is built on the assumption that much of music’s future growth lies in markets traditionally overlooked by the industry, such as biometrics (Blink Identity, Endel) and creative AI (Secondbrain).
“The music industry’s customer is no longer just professional artists and producers,” Kalam Ali, who works on venture partnerships at Native Instruments and co-founded the London-based music tech startup accelerator Marathon Artists Labs, tells Billboard. “The demand for music offerings extends into advertising, gaming, even fine art exhibitions. The landscape is necessarily interdisciplinary in nature.”
Not surprisingly, investors are comparing the growth of this wider ecosystem to the impact of big-tech corporations like Google, Apple, Amazon and eBay (all of which have their own vested interests in music, through either streaming or ticketing). Duggan, who previously worked as a product manager at eBay, compares the value proposition of Spotify, Kobalt and similar companies to what eBay contributed to brick-and-mortar retail at large.
“eBay created a new layer of middle class,” she says. “So many mom-and-pop shops were unable to survive financially, but eBay gave them a new global platform to distribute their goods and you saw some of these shops making a couple hundred thousand dollars a year, just off of eBay. To me, there are a lot of similarities with what’s happening in music: a platform comes in, allows for global distribution at much lower cost and enables creators to actually live from their art.”
Other music companies like Royalty Exchange have benefited from the "eBay for music" metaphor, in terms of opening up a new marketplace for investors who previously did not have access to certain types of music assets. Ali tells Billboard that Native Instruments has ambitions to build a creator ecosystem in a similar manner to what Apple has accomplished with its App Store. Even Spotify itself has analogous goals: in its SEC filing, the streaming service outlines a vision to "build a two-sided marketplace" that delivers value to both artists and fans.
Duggan sees a clear path to profitability for Spotify, if it can pull off that marketplace concept. “There’s still very little fragmentation today, in terms of the big majors holding a lot of the power and creating a tough dynamic for Spotify,” she says. “Once you lower costs through more data and transparency and enable new entrants to come in, you create more fragmentation in the market, which I think will change the dynamics of who the most powerful players really are and will help Spotify reach that profitability. The Spotify we know today is going to be very different from the Spotify we see in five or 10 years’ time.”
Nonetheless, Spotify still faces tough challenges ahead, including but not limited to competition from international streaming players and from big tech's deep pockets that can afford to leverage music as a marketing loss leader. As a result, some investors and financial firms are putting their money into live events as a more predictable, robust revenue source than recorded music alone. For instance, Edition Capital, a U.K.-based investment and advisory group focused on experiential content in media & entertainment, has invested in several niche event properties including Snowboxx, Incipio and Hotpod Yoga, with few IP- and platform-driven investments in sight.
"Our focus is largely upon the ability to drive a profit and investors very much like the fact that the cash flows for these businesses tend to be both positive and largely predictable,” Lisa Boden, partner at Edition Capital, tells Billboard. “The amount of money you need to initially invest into platform-based businesses such as streaming services before you can fully prove the business concept can be eye-watering -- but the returns can also be equally spectacular, if you are able to pick the winners. It’s a high-risk strategy, though, and we see our job as keeping investors on the right side of the risk curve. We also have a great belief in the independent sector and the ability of smaller, more niche investment opportunities to deliver incredibly impressive returns on investment."
Indeed, in addition to the ecosystem developing directly around Spotify and other streaming services, music also serves as a fruitful guinea pig for the frontiers of tech innovation. From smart speakers to virtual reality and blockchain, early tech adopters consistently turn to music as one of their first, and most rewarding, use cases -- which only further attracts investors' funds and attention.
“Music plays such an important role in our lives and in everything that we do,” says Duggan. “As technologies evolve, music will naturally be a part of that growth.”