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What Music Tech Startups Need To Succeed

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by Dan Runcie

Every week, Trapital's free memo will give you insights on the latest moves in music, media, and culture. Join 32K+ readers who stay ahead of all the trends:

The music industry is often one of the first to get disrupted. What happens in music is often a preview of what’s to come in other sectors. The incumbents in music aren’t easy to overtake though. Record labels, event promoters, and ticketing companies have control of the talent, distribution, and access. It’s hard for new entrants to thrive. This is an industry run by executives who will lawyer up and take down a company that tries to go after what’s not theirs. From the original Napster to Songkick, there’s a long list of companies that struggled.

The largest music startup exit of the past decade is Spotify. It’s the dominant player in its space but it took ten years for its growth to really take off (and analysts are becoming more bearish on its podcast investments). This is a long game for any standalone player.

That said, music tech has plenty of exits, rising success stories, and opportunities. These challenges are less likely to take on the status quo head-on (at least a first). Instead, they focus on the overlooked areas, like the long-tail that the incumbents don’t focus on, or other opportunities that are far less consolidated than recorded music and live entertainment.

Despite the economic outlook for 2023, it’s an exciting time. Here’s what it takes to succeed.

Catering to the superstars (at first) is a waste of time

To be clear, many music startup founders would love to take down the incumbents eventually. This sentiment is especially true for venture-backed founders who want to build a multi-million dollar business, but are pushed by investors to grow a billion-dollar business. The larger their total addressable market, the more funding they will likely get.

But it’s usually better to start where the major players aren’t yet focused. Some of the strongest live entertainment and ticketing companies are focused on smaller venues where Ticketmaster does not have exclusive deals. Eventbrite is focused on smaller events and sees “creators” (event organizers) as its primary customer. DICE is also focused on smaller venues, but is rethinking the entire concert experience for the end consumer. Sofar Sounds has reimagined the entire live experience with home concerts and secret shows. These companies aren’t focused on serving the Swifties, the Barbs, or any artist with a superstar fanbase. At least not yet.

The recorded music side is even more challenging. Several independent companies have started as an alternative to record labels. They focus on distribution but can help with both marketing and risk-sharing as well. Several have succeeded, like EMPIRE. But others quickly see how expensive it is to serve unprofitable artists. Customer service isn’t cheap! On the flip side, these companies lack the funds to help their big artists maximize their potential. If they survive, they often get acquired by the major labels… the same institutions they set out to disrupt!

That doesn’t mean true disruption is impossible. It is. But a lot of companies only address the emotional argument against the incumbents and overlook the business perspective.

“Artists shouldn’t have to give away their masters” or “Fans shouldn’t have to pay excessive amounts to see their favorite artists” are understandable positions. But it takes more than a rallying cry to build a successful company. It’s much better to take a step back, analyze the entire opportunity, assess what the incumbents’ strengths and weaknesses are, and see what lines up.

The overlooked areas

Some of the most successful music startups in recent years have focused on areas that aren’t as top-heavy as recorded music or live ticketing. For instance, music sampling, sync, and catalog access are categories that are much more fragmented. Epidemic Sound, Tracklib, and several others are worth hundreds of millions of dollars and continue to grow. They are also timely given the influx of multimedia content and the desire to offer cheaper and better deals.

In the fall of 2021, I wrote an essay called The Overlooked Levels of The Creator Economy. A lot has changed from the height of the pandemic stock rally, but there are a few themes that still stick.

–  Helping creators get better at running their business

–  Helping creators get better at their craft

Several fintech companies in music are helping artists with the former. Streaming payouts are not a transparent market. Major artists like Meek Mill still complain about not knowing what’s coming and when. These B2B companies may not have a Spotify-level exit, but the likelihood of actually making money may be higher. Emerging technology also offers plenty of opportunities too. NFT music players are a dime a dozen, but developments in A.I. feel fresh. A.I.-focused founders will have to be mindful of the potential legal issues, but that doesn’t mean the challenges are impossible to navigate

The next billion-dollar exits

The unfortunate history of successful music tech companies is to ask for forgiveness instead of permission when using music. Moving fast may seem like a rite of passage, but the growing companies in the space don’t need to follow that mantra. If anything, it’s likely better to have the majors on your side in the beginning. Warner Music Group is pretty active in startup investing, and others have followed suit too.

I won’t be surprised if there’s eventually a new entrant in a space that’s currently controlled by powerful incumbents. But it’s much more likely to come from a company that succeeded in the long tail than moved upmarket once it had enough momentum and traction to play ball.

Dan Runcie

Dan Runcie

Founder of Trapital

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