One of the things I’ve heard many times through working with musicians and music industry business is an optimism about the business side of their work. How many times has an act walked through my doors with the attitude: “Our music is great, everyone loves it, we’ll be rich and famous.”
My response is always the same: “Famous is easy, rich is hard.”
Often the thing which fuels business growth is the ability to raise capital. But getting business finance from a financial institution is a real issue for the music industry. Unless you can provide real security, property or assets, banks are reluctant to provide money to fund your growth.
It can be very difficult to get business finance when you’re working in a business that many don’t take seriously and appears on the outside to be one of extremes – going nowhere slowly or overnight success.
People in the music industry are also good at getting an initial hearing, because potential investors get excited by music and the association with celebrity or fame. Plus people in the industry are generally great at talking up themselves or their ideas because their passion for what they are doing shows through.
They tend to fall over when it comes to backing the pitch up with real figures and information. Rarely is there a business plan with details on how they intend to grow and monetise the business.
Here are three trends I see in capital raising for the music industry:
- It’s getting rarer for someone to invest in a business or its long-term growth and much more likely that they’ll get funding for a project.
- Industry investment is also more likely than bank finance – they get what it is you do and you may fill a horizontal or vertical gap for them or add a genre they don’t have.
- Companies which merge music and technology are gaining attention from investors. Think of them as tech start-ups with a music edge.
You can find money from lots of sources – private equity, crowdfunding, government grants, loans and so on – but the first step is to gain clarity on what it is you’re trying to do and how much it will cost. Funding your genius music industry idea with other people’s money is a big step, so it’s important to have a clear, compelling idea right from the start.
The first point to be clear on is whether you are looking to fund a project or to grow a business. Let’s say you have started a new music industry business and are looking for some capital to fuel its growth. Have you given it proper thought before going to market? Do you have the answers to the questions the people with money will ask?
Here are a few of those questions you’ll need answers to:
- What is the business venture?
- How and what will you spend the money on?
- Do you need all of it in one go?
- How soon will I get my money back?
- What is the risk that I don’t get my money back?
- What rate of return will I get on my money?
- What is the breakeven point of your business?
- Why give you the money versus invest/spend it on something else?
- Is there any guarantee I’ll get my money back?
- Have you done a business plan?
- Is the business saleable and/ or scaleable?
- Is the business too reliant on you?
- Do you know your market, i.e.
- who are your competitors, do they have more money than you?
- who are your customers, what is their price point and what influences them?
- Can you afford a loan that must be repaid and if not how much of your business are you prepared to give away?
- Would you put your own money into this venture?
If you’re fully prepared to answer those questions, here are a couple of other curly ones to ask yourself:
- What do you need more than money? For instance, expertise, contacts or advice. Will your potential investors offer those?
- Are there pre-existing businesses that might benefit from your venture who might be interested in merging or partnering with you? This can be a lot less work than going it alone.
- Can you build the business without the funding? It might be slower but you’ll own more (or will you miss a window of opportunity without it?)
- Do you really need the full amount you’re asking for? Do you need less or more? If you go back for more, it’ll cost more and look bad, but if you need less, you may not need to give away as much.
- What are you spending the funding on? If it’s for your own salary or reimbursing costs, it’s unlikely to interest an investor. They are looking to make sure you have something on the line too.
Capital raising for the music industry has its unique challenges, but it’s also similar to any other business deal. You need to weigh up the cost versus the benefit – how much of future income are you agreeing to give away for an upfront amount of cash. Uppermost in your mind should be the about the cost of OPM – Other Peoples’ Money.
Jacqui Crouch was a speaker at Music Australia’s 2017 National Contemporary Music Roundtable. This is an edited version of her contribution to a panel on Capital Raising for the Music Industry.
Generate has a long history of working with musicians and other creatives to help structure their deals and build their businesses. Get in touch with us today for a free consultation. We’d love to help.