Why Investors Don’t Want to Back Your Music Startup

Investors and startup founders in the music industry have a business-minded group therapy session at the New Music Seminar Tech Summit.

Panelists at New Music Seminar Tech Summit.

The problem, as one philosophically-minded audience member pointed out, is that there are too many problems in the music industry. It certainly felt that way Tuesday afternoon at the New Music Seminar Tech Summit, “Nothing Ventured, Nothing Gained – A Look at the Digital Music Vertical.”

The discussion at the AMC Loews Theatre focused on the difficulty of acquiring investment as a music industry startup, the issues with music copyright laws, the free-downloading plague and innumerable other chinks in the business.

To bring an investors viewpoint into the mix, Chris Fralic, a partner at First Round Capital, explained why many financers are hesitant to back music-technology startups.

“You can not only lose money, you can end up in court for years and years,” he said, pointing to Napster as an example. “There’s a graveyard of companies that have failed in the music industry.”

But his speech wasn’t all blood and gore. He did note that the music industry was picking up now because startups can grow faster at a much lower cost. A good investment is a lot of “engagement and reach,” even if it doesn’t initially generate revenue, he said.

So what companies did Mr. Fralic miss the boat on? “Kickstarter,” he said, a company he had the opportunity to invest in twice but never quite took the bate. Mr. Fralic also passed up LyricFind, the brainchild of Darryl Ballantyne, who was one of the four other panelists.

“We couldn’t convince Chris to invest in us, or anyone else, except for my mother, and that was with a whole bunch of strings attached,” Mr. Ballantyne said. “It took us three years to get all the majors signed … We were either clairvoyant or stupid.” One of the problems Mr. Ballantyne faced was getting the licensing for the songs and their lyrics, and he certainly was not the only frustrated attendee.

Copyright laws and licensing were a hot-button issue at the discussion, something that inspired quite a few metaphors. It’s like charging the hungry to look at the menu, said the panel’s co-host Bill Wilson of digitalmusic.org. It’s like buying a car and having to pay separately for the engine, said audience member John Simpson.

In a nut shell: The music industry doesn’t like the current state of copyright laws, and no one in the audience could really come to a consensus on how to improve the problem.

Mr. Wilson’s fellow co-host, Ted Cohen, a managing partner of TAG Strategic, pointed to another problem in the music business in an interview after the panel with Betabeat. “Big companies have a tendency to assimilate things that are cool. There’s innovation, followed by real apprehension, followed by assimilation,” he said, a vicious cycle that he thinks sometimes kills the uniqueness of record labels and other music start-ups. “I don’t think that Def Jam Records at Universal is what Def Jam Records was when Russel Simmons and Rick Rubin ran it 20 years ago.” Hipsters, I think you have found a new spokesperson.

So, Mr. Cohen, as the expert on all things too-mainstream, what is the most overdone pitch-line in the music industry?

“‘We’re going to save the business,’” he said, noting that many so-called “cool” companies don’t have business models or a clear purpose, a problem echoed during the panel.

Of course, when those overachievers we love to hate send in 100-page pitches, “no one’s ever read one of those or ever funded one of those that came in,” Mr. Fralic said. According to him, the key is a 10 to 15-slide presentation. “Tell a story. Talk about why this got you excited and why you are willing to go.” And you probably shouldn’t put your potential investor to sleep.

J.J. Rosen, the CEO of Indaba, Benji Rogers, the founder and CEO of Pledge Music, and Olivier de Simone of Webdoc, also participated in the panel discussion, half of which they spent discussing the growth of their company and the other half of which they spent answering and discussing issues with the audience.

“I wish there were more wonderful sort of ‘think sessions’ like this, because I think that the technology sector has a lot of these sort of talks, but I feel like the music sector talking about technology doesn’t have enough yet … It would have been nice to have another two hours to hear even more ideas,” said attendee Neeta Ragoowansi, the vice president of business development of legal affairs for TuneSat LLC.

But possibly the highlight of the whole discussion occurred in the last five minutes, when Mr. Cohen dragged Mr. Fralic’s nephew from the audience, handed him a microphone and asked if he paid to listen to music. Well, of course, the kid replied. (Wink, wink.) Yeah, we pay for our music too.

Why Investors Don’t Want to Back Your Music Startup