You may already invest in early-stage tech start-ups, fine art and even a certain vintage of wine. It’s prime time to further diversify this side of your portfolio with an investment in emerging music artists.
In 2006, an entrepreneur was seeking funding to launch her product to market. She received money from an investor and went on to sell 30 million units of her product worldwide, making her investor (and herself) a lot of money. But this wasn’t a VC buying into the hottest new tech start-up. That investor? XL Recordings. And the entrepreneur? Adele.
The music industry has troughed and is officially back to growth; in 2015, global music revenues as tracked by the industry body International Federation of the Phonographic Industry (IFPI) grew 3.2 percent with digital revenues growing 10.2 percent. Traditionally, the opportunity to invest at the bottom of the cycle was available only to the major record labels and well-connected industry insiders, but this alternative asset class is quickly becoming available to private investors and their managers via a new breed of online marketplaces. Simply put, the ‘next Adele’ may have a home in your portfolio alongside your shares in the ‘next Uber.’
The industry has seen a dramatic technology-led transformation over the last decade, which has stunted the growth rates of the big record label companies with large exposure to physical CD sales. However, the sector has consistently remained an industry with a high rate of return on invested capital even before the industry returned to growth last year. IFPI reports that record companies have consistently invested ~$4 billion in new artist development and marketing while the global music industry (including live concerts) generates ~$50 billion in annual revenue, according to Statista.
But what does it mean to invest in a musician? And how does one pick the winners? A few answers are below:
What would I actually own?
Fundamentally, you’re buying into a copyright of a song(s) and all of the revenue streams that are derived from that copyright. Revenue from streaming, downloads, licensing of music for film/TV/ads, and concerts are just some of the most common ways musicians at all stages of their development monetize their talent.
What are the funds used for?
Building a successful music career is a puzzle composed of many small projects. Artists will typically raise capital to record their new material, develop a marketing campaign to promote existing work or fund up-front costs of a tour. Achieving these projects directly influences the pace of advancement for an artist. In other words, the funds raised by artists from investors are very high-impact dollars, directly impacting the ROI potential of the investment.
How to pick winners from losers?
While music, like all art, can and should be appreciated for what it is, true commercial success in the music industry lends itself to patterns not dissimilar to those in the corporate world. Successful music investors look for artists with undeniable raw talent, a strong sense of a differentiated “brand,” signs of solid traction (e.g., social media or streaming numbers) and early validation by influential tastemakers.
Isn’t it very risky and complicated?
Investing in developing artists is certainly highly speculative and there is no liquid secondary market at the moment. Investors should only consider allocating the proportion of their capital they are comfortable losing. However, the risk/reward trade-off that’s inherent to many early-stage start-up investments is an appropriate analogy. By diversifying through portfolio construction and filtering for artists with higher signs of traction, investors can significantly mitigate their risk profile.
As for complexity, the online platforms fostering this asset class also take care of the legal and structuring heavy lifting, leaving the investor to focus on transparent, easy-to-grasp concepts.
The music industry remains a dynamic space and an often-overlooked market from an investment standpoint. Investors looking for an uncorrelated, uncrowded asset class should consider building an investment portfolio of emerging artists. Who knows? Your investment could help develop the next superstar.
Andrew Kotliar is the founder of LIVAMP, an online platform facilitating fair and sustainable investing in developing talent.