For new record labels, distributors, promotion companies, and other businesses looking to raise capital, the music industry has unique benefits and challenges. Traditional options, such as angel investors and venture capitalists, are available, but businesses will likely have to concede some creative control of their company. While music industry businesses can also take advantage of funding opportunities from arts councils, or from state or federal government sources, these monies are difficult to obtain.[caption id="attachment_21966" align="aligncenter" width="550"] Photo courtesy of Hunters Race (Unsplash.com)[/caption]
Below is a brief summary of the investment opportunities commonly available to businesses in the music industry, along with the advantages and disadvantages of each:
Angel Investors: Angel investors are wealthy individuals or groups of individuals who invest their money into an early-stage startup business for a share of equity in the business. According to the latest statistics, angels invest approximately $20 billion per year in more than 60,000 businesses. Businesses can get in touch with potential angel investors using online platforms, or traditional networking. Many music industry veterans who have “made it big” are willing to pass on their expertise to a promising business.
Venture Capital Firms: VC firms also provide capital in exchange for an equity stake in the business. However, unlike angel investors, VC firms invest funds collected from a variety of sources. While angel investors are more willing to get in on the ground floor, VCs typically look for start-ups that are farther along in their life cycle and have enjoyed some measure of success. The upside is that VC firms often provide several “rounds” of funding, while angels often make a one-time investment. Because VCs do not traditionally invest in music, it makes sense to only target those with experience with businesses in creative industries.
Friends and Family: Raising money from friends and family is one of the most common ways to fund a new venture. While pitching your business idea to those closest to you may seem easy, there are still significant legal issues involved in friends and family financing. Assuming the individual is not making a charitable donation, he or she will want to be paid back or receive an equity interest in the company. The terms of any such deal must be in writing and comply with any applicable securities laws.
Art Councils: Many art councils and other non-profit organizations that support music and the arts provide funding, often in the form of grants. While the amount of money available is often less than what a VC or angel investor could provide, the primary advantage is that the money does not need to be repaid.
Major Record Labels: Record labels may be willing to invest or develop as a joint venture with independent labels that have proven to be successful and are looking to expand. However, as with any investment opportunity, the business must be willing to give up something in exchange.
Distributors: Independent labels that don’t have the capital to fully fund a project can sometimes find a distributor that is willing to invest because of a catalog they might have or just acquired for distribution. In exchange for helping get the project off the ground, distributors will often require being paid a percentage of the label’s net profits.
Finally, businesses looking to obtain financing from any of the above funding sources should always have a comprehensive business plan in place. Remember, you are pitching to an investor and not another artist. Key questions to address include: what will your project, product or service accomplish; how is it different from what is already on the market; how will your market/sell it; and who are your competitors. To boost your chances of success, it is always wise to consult with an experienced business lawyer.
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Ron Bienstock, at 201-806-3364.