by : Business, Feb. '11

Venture Capitalists: Paying For The Muse

Venture Capitalists: Paying For The Muse

The rebirth of venture capital, originally fueled by the equity related collapses of the early 2000s, is in the air. Publications like Fortune and the Wall Street Journal seem fixated on the notion that large-scale venture investments are poised for a major take-off. But interest in independent music-related startup companies is not altogether evident yet.

According to the National Venture Capital Association, major venture capital is directly responsible for over a fifth of Gross Domestic Product. Moreover, every year, more than two million companies apply for VC funding, representing about a-tenth of businesses nationwide. Less than a thousand of them actually receive funding, and less than fifteen are in the business of music. It is estimated that about one out of every hundred dollars invested in music comes from venture capitalists—which is probably higher than the proportion of music-related revenues in US GDP. This, as well as a dearth of traditional funding for music, suggests there is much potential for VC activity.

The majority of companies that receive venture funding are technology-based businesses that have introduced new products that revolutionize the technological world. Skype, for example, received funding from Draper Fisher Jurvetson, a VC powerhouse out of Menlo Park, CA. Skype was started in 2003 by the same entrepreneurs behind Kazaaa and with the support of DFJ, grew to its partial sale in 2009 for $2.75 billion. Skype serves as a perfect model of what VC businesses typically chose to invest in. Skype was an Internet based business that was trendy, had a lot of consumer appeal, and did something that had never done before. Skype was a successful VC investment that proved to be well worth the risk. In fact, most music startups are web-based businesses attempting, like Skype, to turn a traditional industry on its head. Aderra, Eventric, Bandzoogle, Mozes and many other recent innovators tend to integrate technology and open more markets for smart phones, tablets and other devices.

The presence of constantly changing charts, plummeting album sales and the decline of the major labels do little to help the stability of the music market. Often, non-traditional approaches to business discourage traditional investment practices. Despite the great opportunity for profit that comes with inherent risk, only small boutique-like firms and angel investors may be willing to enter the market. Major investment firms and VC companies are yet absent, but there are examples of smaller investors. Harmonix, a company out of Cambridge, MA notable for creating Guitar Hero received $100,000 in funding from small-scale investors interested in their development. Harmonix has created innovative music video games, often using trial and error methods to determine what the consumer wants. After previous unsuccessful attempts to break into the video game market, they were swiftly bought out by Viacom on behalf of MTV for $175 million in 2006, and created Guitar Hero. Recently, Viacom put Harmonix up for sale after weaker than expected sales of the Rock Band 3, but the company, apparently, was able to engineer its own independent repurchase. Overall, Harmonix’s success can be accredited to the company’s experimental development methods and the unwavering help of small-scale investors. The same could be said of Grooveshark, an ever-growing web-based popular music streaming service, originally made possible by small scale seed funding.

Perhaps the best example of a startup that defies old notions of doing business is Topspin, a private venture financed by ex Pro Tools founder Peter Gotcher and managed by Ian Rogers. Topspin gives artists the tool to record, and release recording product and other merchandise directly to fans. It empowers creators by making them less dependant on the traditional cash advance, for money can be made sooner through the website, whose platform is optimized to pinpoint targets rather than blanket fans. Brian Eno, among others, has become a user. Topsin’s model caters especially for young aspiring independent artists and, though still not fully proven, seems to point the way forward. Gotcher and Rogers, incidentally, are a marriage between an industry pro and angel investor (Gotcher) and a Young Turk (Rogers).

By Kiefer Wells

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