The Music Business Is Like The Venture Capital Business

The record business is a lot like the venture capital business.

Both put a lot of capital to work trying to create valuable franchise properties. In both the returns are largely based on a very few hit (companies or bands) carrying a much larger number of investments that dont do well.

VC associates are like the AR guys scouting talent. There are a lot more companies/bands that want to get funded/signed than ever will. Lots of people never get funded or signed. Due diligence in both is about de-risking. Traction (fans) is good. Previous hits are good. Both labels and VCs spend a lot of time and money working with and developing the talent. Hiring, team building, skills development.

One giant hit can make a label or a VC, a large percentage of investments in both music and VC are pure wash outs, the middle breaks-even but the margins suck.

Both are getting radically changed by the smaller capital requirements of doing business in the cloud.

Its very possible that the music business (and the companies that support the music business) are going to shrink to the point of becoming what the VC world calls the lifestyle business. Theyre fine little businesses that you do because you love them, but they will never grow very big.

This is not necessarily a bad thing for musicians and consumers. But it does mean that music businesses will become an underperforming place for VC investment.

  • Mr Whitman

    And I think that theres another parallel in that the most interesting stuff is happening in both recording and VC in the cases where people are exploring alternatives to the strictly hit-driven model.

    As you point out, one huge hit can *make* a label or VC, but it cant *sustain* either, and chasing hits is a pretty high-risk undertaking. 

    When youve got a VC fund thats a specific amount of money to be invested for a (relatively) defined timeline this may well make sense for everyone involved; if youre a recording company interested in sustainable growth and getting regular paychecks to a bunch of people, maybe less so. Sure, it worked for a while, but that doesnt mean that it was a particularly good idea.

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