Why and how to scale your music business (Part 2)
I’m Nick and I’ve spent the last 15 years working in different parts of the music industry such as management, sync, live, instore, and labels. This is an attempt to put a bit more of a strategic voice into our weird niche.
So last time I covered why you might not want to scale and what to do about it and, as promised, this the counterpart on why scaling can be great with a third part coming up for SyncTank where I’m looking at the current companies in the market and who might win.
Scaling and raising the capital to scale (and then making good on the promises to investors) should only be for a specific type of business and the opportunity they’re going after. Mostly synonymous with Venture Capital and Silicon Valley, the question most founders will need to be able to answer is what is the total addressable market and how likely am I to be able to capture a chunk of it. The music industry was sized at about $20 billion in 2019, which compared to something like healthcare (sized at over $8 trillion) is relatively small. That being said, there have been plenty of examples of companies raising Venture Capital and Private Equity, therefore proving the market size is still big enough to warrant investors placing their capital at risk.
Having covered how you would choose to scale or not, the question that now needs to be answered is why you would want to take on such a mammoth task.
So why would you? Some of the most successful examples of businesses that have scaled have focused on wanting to create meaningful change and large impact. These founders usually have personally experienced a level of frustration that they believe others shouldn’t have to encounter, and feel compelled to do something about it. Examples of this can be found across all areas of the music industry including Ditto, Tunecore or Distrokid in distribution, Spotify et al in recorded music, Audio Network or Epidemic Sounds in sync and Kobalt amongst others in publishing.
All have borrowed in part from Clayton Christensen and his theory of disruptive innovation to leverage the dent technology has made in the previously capital and labour-intensive processes that saturated the music industry up until the mid-90s. The option to scale was right for all these businesses because they saw a combination of factors align; the size of the addressable market, the benefit new technology could give them over incumbents, and the opportunity to significantly improve the experience for their customers or artists. With scaling there is no guarantee of success and the jury is still out on a number of companies including Lickd, Artlist, Songtradr, musiio, and a number of other hugely exciting companies currently scaling.
Business Model
As with staying small, when scaling there is almost an infinite number of different combinations of business models to adopt. One huge advantage is that your margin can be considerably smaller in regards to the unit economics in your product or service, with Jeff Bezo’s infamous quote “your margin is my opportunity” ring in any founder’s ears. Further similarities with staying small appear in that most incumbents have become over-stretched and bloated. This leaves new startups with the ability to be much more focused and capture an opportunity to become a better match for specific customers, as long as that pool of specific customers is big enough to support the end goal of scaling.
The ideal end state and size for a scaled company allows the amount of initial investment to be much larger than if the ambition was to remain small. This means the capital required for the initial infrastructure, which is essential to scale, becomes achievable in the business model. In the same way capital is available for infrastructure it is also possible to plan for a loss-making business for a period of time, although this is increasingly less popular with investors. The greatest music industry example of this is Spotify who has convinced the world that they will reach such a scale that profitability will no longer be an issue. The length of time that is possible to stay without profit is directly linked to the size of the opportunity as well as the credibility of the business in making it happen.
Revenue Model
A common trait with nearly all scaling businesses, regardless of sector, is the challenge to find continued growth as they start to mature. Most scaling businesses start with a relatively simple revenue model, directly linked to the challenge they are solving for their customers. Simplicity is one of the key characteristics of those that successfully scale but with every business comes to the challenge to continue to expand their growth opportunities to attract new investment (or prop up their share price after they list on the public markets).
In the tech sector companies such as Dropbox and DocuSign have attempted increasingly creative ways to continue to fund that growth, including expanding into adjacent products or finding opportunities to charge their existing customers more, which leads to a precarious situation. I mentioned at the beginning of this article that one of the opportunities for new entrants is incumbents becoming overstretched or bloated. Attempting to continue to expand the opportunities for revenue, and therefore losing focus, is one of the factors that leads directly to this. A big consideration for any scaling business is how much money to raise as this will in turn relate to the size of the growth required.
A great example of this is Epidemic Sounds. They are undoubtedly a great company but their latest round of investment valued them at $1.4 billion, which is a staggering amount for a company focused specifically on the background music industry. They started out with a core product that was extremely disruptive and solved a huge problem for thousands of people creating videos for the internet but as they’ve grown so has the complexity of their rate card and their offering. When scaling and attempting to meet the valuation and opportunity (to create the long-term impact) companies will need to think about how they have a business model that is resistant to new competitors disrupting them on their way up. There is a myriad of ways to approach this including brand building, focusing on core assets such as music catalogues and developing unique technologies but it is essential to consider this rather than just bolting on new pricing structures to deliver more revenue as a company scales.
Operations
There are several key factors to consider when thinking about scaling operations. As mentioned in the previous article the de facto software as a service model is a great, low-risk way to start a business, however, it nearly always diminishes your economies of scale (as those companies are too trying to find ways to achieve their valuations).
The way to think about this is looking at what is worth investing in as a fixed cost and what is acceptable to continue as a marginal cost. What products and services will be so essential to your business that it will be impossible to switch to different providers? What elements will scale in a very inefficient way as you grow? Which services or products have the least accommodating pricing structure with how you run your business? If you can identify the answers to these questions early on it may allow you to decide to develop your own technology or at least try to protect against your suppliers having too much leverage. In addition to these costs, understanding and tracking your unit economics will give you the best chance of long-term success. It is likely the cost of adding new customers will change over time and the cost of delivering your product to them is likely to change too.
In terms of talent, where generalists reign supreme in a business that chooses to stay small, a scaled business needs specialists, especially in areas that are key to the business. For example, understanding what channels are likely to be key to your growth and having the depth of knowledge required will be an essential factor for success. Daniel Ek of Spotify regularly talks about having a new role every 3 or 4 years inside Spotify because of how the company has changed around him. The key lesson from this is to ensure you can plan for the phases of growth of your company and the talent you will need at different phases. It may not be the easiest of challenges but perhaps the people that get you to $10m are not the people you need to then get to $100m.
What You’re Giving Up
Having spoken to a number of people currently scaling, and having experienced it myself, a lack of focus can ultimately be one of the things that kills a company. There will be many exciting opportunities that spring up as you are building a business and being able to differentiate between the pivot that makes a company and running around chasing every shiny object is crucial.
These shiny objects can also legitimately make your business a better fit for your customers but they may not be compatible with delivering that level of service or product at scale. It's key to ensure you remember what that initial momentum for the business was and strive to deliver it, even if it means not being able to achieve everything that comes up along the way.
Being an employee or a founder in a scaling business requires a huge amount of discipline and sometimes it can be less enjoyable than being able to pursue a fantastic new project that happens to catch your eye but the ultimate payoff will hopefully balance the disappointment of having to let things go.
Summary & The Challenges Left To Solve
The summary for scaling isn’t too different from the summary for staying small. Having a clear understanding of the challenge you’re solving, the commercial opportunity and the investment required are the three pillars for embarking on a business that can and should scale. It is likely to be far easier, although not easy, to stay small than scale. The altruistic way to approach it is that even if yours is one of the 70% of startups that fail, there will be others that pick up the mantle if you’ve chosen a noble enough cause.
Beyond the companies I mentioned that are already in progress, there are a number of other opportunities that I believe require solving in a scaled way in the music industry. The one I’ve written a lot about is the opportunities to be independent and what that may take but the gaping hole is the knowledge of how to get there.
Adult Education as an industry as a whole is going through a seismic shift, which has been accelerated by the pandemic, and music is an area that requires dramatic improvement. The first sign that there is a huge opportunity is the number of hugely expensive ($1000+) courses for artists and managers to pursue the skills that were previously provided by record labels and publishing companies. These are predominantly being run as companies wanting to stay small, however, I believe the market size is large enough to warrant an attempt at creating something impactful at scale.
Let’s see who takes up that challenge..