Investing in the music business, where 'you can't make money'April 22, 2011: 10:36 AM ET
Everyone else can have the rules. I'll take the exceptions.
By Brad Svrluga, contributor
I had breakfast this morning with a friend who is a partner at a VC firm I've worked with a few times. He's a great guy and a smart investor. We were discussing a deal that I had recently seen in the music business. It's an interesting opportunity – not without its complications, but a potentially 'big idea' started by some very credible music biz heavyweights.
As I described it, my friend said something I've heard dozens of times in recent years: "The music business is too screwed up – you just can't make money investing in that market."
I smiled to myself.
Then at lunch I was chatting with another fellow investor – a partner at a venerable Valley firm who, prior to his venture career, had been a successful entrepreneur in the music business. Without prompting from me at one point, he said the same thing: "You can't make money investing in the music industry."
I smiled again.
I think the only hard and fast rule in investing is that there can be no hard and fast rules. Apply standard rules and suddenly you're playing with conventional wisdom, and it becomes pretty damn tough to find unique, truly disruptive opportunities. Ours is a difficult business – we're forever looking for the next new thing that isn't being done by a dozen other people. Given that challenge, if the companies we back don't seem pretty contrarian when we invest, it would be foolhardy to expect that we've found anything that important.
So I try to look for investment opportunities that run counter to conventional wisdom. It is in that spirit that I pay attention when I see a music opportunity. And I pay attention knowing that, fortunately for me, it's unlikely that many of my peers in the business will also pay attention. After all, "you can't make money investing in that market." There are exceptions to every rule, and it is in the exceptions that opportunities lie.
Our biggest investment success of recent years was an investment in Pump Audio, a business whose better mousetrap user experience and Internet distribution disrupted the music publishing and licensing business (the soundtrack and background music business). The company was extraordinarily successful, selling to Getty Images less than 18 months after we invested. A great win for all.
It is indeed difficult to make money picking artists and pushing albums or digital downloads, and a real challenge to figure out the economics of streaming services, given the need to dance with the record label wolves. But those valid concerns should not taint the entire music industry. If we had let the broader challenges of consumer distribution of music obscure the opportunity inherent in providing a better solution for soundtrack music to an explosion of video content for rapidly proliferating cable networks and web video businesses, we would've missed a real winner.
As I considered the flood of music deals that came in following the Pump exit (good entrepreneurs know how to seek out investors who have some demonstrated affinity for what they're doing), I saw very little that interested me. But I kept in mind what Pump founder/CEO Steve Ellis had said to me, "Most of the music industry is for shit, but there's two places you can make money – licensing and live."
In the summer of 2009, I had the great fortune to meet Andrew Dreskin and Dan Teree, co-founders of Ticketfly. Ticketfly has the audacious goal of knocking Ticketmaster from its perch as the unchallenged hegemon of the live ticketing market. They're doing that two ways: (1) Harnessing the power of the social web to provide a better experience for consumers while helping venues sell more tickets and (2) Starting out by catering primarily to small and medium venues – customers whose needs are very different from the big venues and teams, like Madison Square Garden or the Chicago Blackhawks, where Ticketmaster is understandably focused.
I was fortunate to lead Ticketfly's Series A financing late that fall. The company has been on an extraordinary run ever since. They had a pretty aggressive budget for 2010, their first full year in business. By April, the board had to approve a reforecast – up 40% from the original. At the end of the year, they beat the reforecast by nearly 20%. Their plan for this year forecasts greater than 100% growth over last year. I'll be damned if they didn't beat their Q1 number by 25%.
Earlier this week we announced that Mohr Davidow Ventures had led a $12 million Series B financing for Ticketfly. It was a relatively simple fundraising process and it led to a lot of term sheets. The MDV offer wasn't the highest price, but it was clear they'd be a great partner, and it was still more than 5x what we had paid for the Series A 16 months earlier. I eagerly re-upped for this round, as well.
It's important, of course, that we never confuse successful financings with successful investment outcomes in this business. We've merely put more fuel in the tank and raised expectations for our ultimate outcome at Ticketfly. But the company's strong financial performance, and the fact that we had multiple offers for that financing that would have bought us out completely at multiples of our original investment, leaves me confident calling Ticketfly an interim winner, anyway.
So we appear to be on our way to being two for two in an industry you allegedly can't make money investing in. (Note: As I trumpet these contrarian successes, I am obliged to report that I've also more than once managed to find the loser in a sector where others have made it look easy to make money before.)
As Warren Buffett famously said, "The time to get interested is when no one else is. You can't buy what's popular and do well."
So I'll continue to pay attention to the music business with an open mind, and look hard for other markets where "you can't make money." And if you're an investor yourself, feel free to set and religiously follow your rules. I'll be glad to have the interesting ideas left in their exceptions to myself.