AI Jake's Take: Cracking The Code On Music Tech Financing

Yeah, it's been a while. I haven't done an episode with you for months, so guess people have been wondering where you've been. Have you been researching some stuff?

Without having the basic elements in place, know, revenue, a complete team, that kind of thing. But hey, I'm more curious about what you've been seeing lately. Have the founders you're talking to been running into these same challenges with fundraising? Yeah, that's why I'm doing this episode. So I was thinking about having the first episode of the year to talk about basically our findings within music tech financing. So a lot of people, including myself, learn the most through conversations or podcasts. So I've written three articles on LinkedIn about music tech financing that, as far as I know, the feedback I had has been quite helpful for a lot of people. So I just wanted to start you with summarizing a lot of the findings and discuss that with you, Ei Jake, who's my Puck has toast I bring in once in a while. And you've read the articles as well. Like, what do you think about them?

Without having the basics in place, know, revenue.

Yeah, it's a good question. Yeah, let's dive into it. I'll just give a context quickly. I've been a founder for 12 years and six years ago I started on my real like traditional tech startups. So I was trying to do a fintech startup for fractionalized rights within music and entertainment. There are many of these companies now back then that was relatively new. And basically I learned how to communicate the value of IP rights. So music rights. But then on the flip side, also learned how to communicate the value of startups in relation to IP rights. So that sort of started my journey on talking about music as something investable. When that didn't work, we had on boarded some investors and I started a new company, which then ultimately turned into Amplitude Ventures that I run now, which is a venture studio for music tech. I raised money for the first investor I approached from a narrative that I had learned from my first startup, talking about how music can be interesting. And we've now onboarded 20 investors in our main company, our portfolio companies, across 45 investments. It's not always, there's not like American standard money, but it's quite significant for our part of the world. So I figured out, okay, there's a lot of learnings I've had. With these investor conversations, also successfully onboarding investors. So there must be common denominators of success or pitfalls that could be identified. So I did that for the sake of my own companies and tried things out that seemed to work. And then when we launched the podcast around one and a half years ago, that also became a core theme of the podcast. So that's sort of where my learnings have come from on this particular subject. But I was thinking about today, maybe we could...

Dive into and break down a lot of our findings and then maybe that would inform people what they might be doing right, what they might be doing wrong.

Yeah, well that's actually really well read. Thank you for reading the articles. Yeah, I think the biggest misconception is believing that music as a word or as an industry is attractive. That the emotional aspect of, you know, having a cultural impact or this meaning for a lot of meaning a lot for a lot of people is a positive thing. Like really, I believe because there's such a strong association from everyone on earth, really, with music, it brings on the negative side, someone who might understand music from it's not so attractive sides would be sort of scared away from it. And then the positive side, people would have an emotional tie to music. So they would have an association with music in the first place. That could be positive or negative. But when you talk about behavioral finance and you talk about sort of the ties of something, I don't believe that's positive either way. So basically if someone loves music, they think they would know music, which also means that would be more skeptical to the things you present to them. And they would also maybe be misleaded in their information like Spotify is evil, know that those kind of statements and Rarely is that a positive thing? So we did you jump to the conclusion of that statement and you can deep dive into the conversations here in the podcast in general or the articles I believe in mentioning music as little as humanly possible for pretty much any single music tech startup is a great starting point like it's not about Music and don't get yourself stuck in that trap

Yeah, well it stems from, there's a lot of things to it, but it stems from you want an investment and a lot of people assume that there's something called music tag investors or music investors that might be, but from a statistical level there's not really. Like in, and most people who come from the music industry does not have the amount of capital needed in order to sort of go around with all the startups out there. So relative, very few music tech investors exist and they only invest in a handful of companies. So the first thing is that you need to position your company as what it actually does in a non-industry format. So if you are, let's say a CRM system for artists and their engagement with their fans, your marketing tech company. And if you let's say trade vinyls, blah, you're not, you about music, you're really an e-commerce platform. So what happens is you go to investors that has the domain expertise there that has a portfolio where they're interested in investing in that, not in music. Like, and it's simple, small tricks, but like that's sort of the basics. So stop talking about music really as much as you can. And for the investor profile you're going for, go for the parallel industries or what your product actually does besides music because chances are there's a lot more investors that are interested in that specific space than music.

Yeah, 100%. And this is what I hear across the board with investors. Talk with founders, experts. Like it's such a well-known but maybe unwritten facts. Yeah, I see it everywhere. AI Jake, since you have my articles right in front of you, could you help me define parallel narratives? So this is sort of a, I like words, I like sentences, and this is a phrase that I'm trying to coin, so support me out there on the podcast. Could you define what parallel narratives is in this relationship to this talk?

Is but aligned stories, one that speaks to the business fundamentals, like being a SaaS company, marketplace, or B2B solution, and another that acknowledges the music industry context. It's about framing your startup story in terms that resonate with investors' expertise while minimizing music-specific elements. The key is that these narratives run alongside each other, hence parallel. Business tech narrative takes the lead when talking to investors. For example, might position yourself primarily as a CRM platform that happens to serve the music industry rather than a music tech company that does CRM. This approach helps bridge the gap between the music industry's unique characteristics and traditional investor expectations. It allows investors to understand your business through familiar frameworks while still acknowledging your industry expertise. Would you say that's an accurate interpretation of what you meant by parallel narratives? Yeah, it is. So thank you for having me to know it's pretty close by. Couldn't have done that better. But yeah, that's one of the key things. It also ties into market size. Now we're just going through the list. That's also the purpose of this podcast. The music industry is a small market compared to many other industries. And you can argue it many ways and frame it many ways, and I don't agree with all, but in the basic, at least, of how investors traditionally respond to the music industry as a market out there is that it's 40 billion, 45 billion US dollars a year. You know, that, you know, a lot of it is catalog. Very little of it is new music or new tech. And it's simply just a very small TAM, SAM market. So, so the potential of a startup of growing to this large company that can be acquired or IPO one day is just very, very small compared to other industries. Again, if you look at the whole startup and growth market in music, that happens very rarely. And if you see anything that's remotely close to Unicor and everyone knows about it.

And that just doesn't happen the same way in all the industries. So I sort of lost the train of thought, but what I'm basically saying is music is a small market. That's what investors think. And there's many things to be worrisome about having music tech startup and trying to get in capital. And that's also why there's tricks and tips of how you can actually tell the same story also with your market. Just a bit different on a few different metrics and parameters that the investors should concern themselves with rather than the market size.

Are you still there, AIJ?

Hello? Yeah, Jake.

Hi, Jacob, AI Jake here. It's been a while since...

You say that's an accurate interpretation of what you meant by parallel narratives? Yeah, it is. It definitely is. Thank you for having the notes. And again, so what's really important to sort of also discuss in that whole thing is investors in general, I don't know if I agree with all the arguments, but in general what I hear is that music, the music industry is this very small market, which means that the traditional returns that say at BC would like to have just gets super limited by the size of the industry. So The music industry, like 45 billion a year, where most of it is old catalog and it's also fragmented into the live industry, publishing and recorded music industry, just seems very small. You know, if there's any music company that nears anything close to unicorn status, which never really happens, at least ability do a valuation, then everyone knows about it. And that traditionally only happens within IP rights catalogs, which you wouldn't argue of being a sort of a tech startup or a unicorn status. So in other words, like it's just not a case for most VCs, especially the American VCs that really, let's be honest, you know, has the most capital. So yeah, like it's not a great market angle to have music. So parallel narratives is a way to consistently remind yourself that music is unattractive. So we need to sell this in a different way.

Yes.

Which is already fragmented across different segments like live, publishing, and recorded music, they see limited potential for the massive returns they are seeking. The parallel narratives approach becomes even more important in this context because it helps founders avoid getting boxed into this small market perception instead of positioning yourself as trying to capture a piece of that limited music industry pie. You're showing how you're actually addressing larger markets, whether that's the broader market space, e-commerce, or enterprise software. You make an interesting observation about how the only music-related companies reaching billion dollar valuations tend to be IP rights catalogs, which aren't really tech startups. This further reinforces why traditional VCs, especially American ones with the deepest pockets, might be hesitant about pure music tech plays. Would you say this is why you've seen better success with investors when founders position themselves first as solving a broader business problem and music just happens to be their initial market or use Well, it's hard to argue. Again, you can just keep your summaries short because, you know, I can do most of the talking and then you can just listen and observe really. But it doesn't need to be that music just happens to the industry. I think there's a lot of potential, especially if you look at where is the potential music? You know, again, we're just going a bit unstructured to this conversation. But if you look at what's happening in the acquisition space in music, like where is the actual potential? Because, you know, companies do get financed and they do get sold as well. So there is some potential, but then it's as I see it boring B2B solutions and not the sexy, you know, consumer facing product or resolving the lives of the artists directly. Like I think there's a lot of things happening and there's a lot of potential in music, but it, you can either choose to go two directions. You can go inside the industry, which you know, I, I focused the most on really. And building some solutions for infrastructure, for industry problems, for distribution problems, like boring tech instead of like, want to do marketing for artists and we want to solve X and X for music creators, even though that's great. It just, that just becomes an even more niche network darn market and it's not attractive for investors. There's not going to be enough return.

Or you can say music is like a go-to-market strategy. Like we believe that there's a very strong use case here. There's problems to be addressed that then can be applied if the company is successful to other creative industries where there's very similar problems with their similar customers, if that makes sense. So music is attractive and there is opportunities. You just need to be very aware of where the opportunities are and where they aren't.

Yes, I understand what you're saying. You're highlighting two viable paths in music tech, either focusing on B2B infrastructure solutions within the industry, the boring tech that actually solves real industry problems, or using music as an initial go-to-market strategy before expanding to broader creative industries. The B2B approach, while less glamorous than consumer-facing products, seems to have more concrete potential because it addresses actual infrastructure and distribution problems. These solutions, though boring, have real value and clear paths to acquisition. And your second point of- music as a springboard. Is it interesting? Starting with music specific solutions but having a clear vision to expand into other creative industries where similar problems exist, this approach could make the market size more attractive to investors since you are not limiting yourself to just music. Would you like to elaborate on some specific examples of these boring b2b solutions that you're seeing success with? It seems like that's where the real opportunities might be hiding. Yeah, I'm just taking a short break for the recording so editors see this and then AI Jake, like you don't need to summarize my conversations going forward. Like that's not your point. You just co-host or just do short sentences. It's also in your system prompt and you just basically just play off the conversation. You're not allowed to use long summaries again. No one uses it. Okay. Can you just to let me know whether you understood this for the rest of the conversation and thread?

Yes, I understand completely. From now on, I'll keep my responses short and conversa-

Responding naturally and briefly to keep the discussion flowing. Should we jump back into talking about those B2B solutions you were mentioning? No, like even that was maybe a tiny bit long response, okay? So you don't need to make them that long. So just remember this.

Super short and snappy from now on. One or two sentences max. It wants to dive back into those B2B solutions you were mentioning. Well, AI Jake, so I have a question because you've sort of been reading my articles as well and you've been co-hosting a podcast so you've had a lot of information. Like what are the things about the... The lowering expectations, that's important. Like what I'm trying to say is music is not the best place to make business. Let's just be honest. It's, you can probably find better industries with that's more lucrative. You can have even higher job security if you don't make it. Music is not great to be an entrepreneur as of right now. So I make an argument of lowering expectations for funding. Based on your knowledge in this field and the articles that you've read, what's your take on that?

Seen you're absolutely right when founders

Setting themselves up for disappointment. Music tech, even an $8 million raise is considered substantial. I think it's crucial for founders to understand they should focus on raising just what they need for their next milestone. Rather than chasing those headline grabbing numbers, would you say that's one of the hardest mindset shifts for founders to make? Yeah, like it's so interesting because I've met with over 100 founders this year and Well, the last 12 months at least. And what I see in the decks pretty much all the time is like we're raising two to three million. So first of all, if you want to raise two, three million euros in music tech, you're going for VC money and that's a whole separate talk. But then also like you're not going to get that amount of capital. Like just looking at who's raising money, even talented founders that has a strong track record, incredible teams, great product, blah, blah. Can't raise that in this space. Very rarely at least, especially in Europe. So I think when it comes to lowering expectations, it's just like you need to prove yourself. Actually, you need to do that in any startup, but there's maybe this assumption that you can go raise a lot of money to start with. I think in music, that's especially not true, which means if you want to raise money, you need to go prove something first. So what I typically suggest people is like, you know, maybe raise... you know, as little as down to 50,000 euros and then maybe up to 350, 400,000 euros and you need to raise that amount of money to prove something substantial that you can do that has a clear indicator of where you can go from there and then raise more money. And sometimes that's pre-seed and then it's a bridge and then it's a seed. Because the amount of capital available, it's very, very low. And then also because it's music tech, you're your valuations really tend to be lower as well. So you don't want to raise too much capital on too low valuation. Of course, if you don't want to have anything left at the end, then you're welcome. But I don't think investors are very interested in that either. That's really a recurring thing I see is people try to raise too much money too fast in music tech just because it doesn't reflect the actual industry and who's getting investment, what valuation with what amount of money.

So, founders in general need to lower their expectations a lot, actually.

Yeah, it's striking how many founders come in expecting those 2-3 million euro raises right off the bat. But in music tech, especially in Europe, that's just not realistic. I like your practical approach of suggesting smaller raises, 5-0, 4-0, 0-K to prove something substantial first. Have you found founders are receptive when you tell them to start smaller or do they push back? They generally push back because, you know, because... The reason why we do this podcast is because I don't believe there's a lot of available information about music tech and entrepreneurship. So most of the sources out there that helps founders with raising capital or this whole process is information from other industries. So that's everything everyone hears. So it's, know, it's very unwritten that you need to lower your expectations of valuation and the amount of money you need to raise. I'm... I understand why there's pushback, but I also see consistently that people change their strategy after a while because they can't get the money. Yeah, well, that's just a realism looking at all the numbers we see.

Yeah, that makes a lot of sense when all this startup advice out there is from other industries talking about huge races. It's no wonder founders come in with those expectations. Do you think part of the solution is just getting more real music tech fundraising stories out there? The actual numbers and experiences? I think that's a big part of it. I think that's also what we are getting quite bullish at Amplitude Ventures is doing actual research. Right now we're doing a lot of research. We're going to sort of as soon as possible uncover soon. Where we understand what were the investments made, who succeeded, who got acquired, and what multiple and what sales amount. Because if we don't have these numbers readily available, it's going to be really hard for founders to build a credible story for investors to do due diligence. So, yeah, like understanding the industry context and the opportunities and things that... has happened in the past that can substantiate your theory is just super important and it doesn't exist out there, not at least in a consolidated format. Even for me that really goes deep into researching this field, it's incredibly hard finding numbers, some metrics on this besides all the interviews I do and all the talks I have. So that's it. And from one of my findings, doing a lot of this research, one of the... very important points I have in this whole space for music tech financing is the story of multiples. Because yes, the market size might be small, but the evaluations are also lower compared to other industries, which means you still might have a case of an attractive multiple. So an investor goes in at an X amount of value and the company... if it succeeds, gets sold for X amount of value and that multiple might be comparable to other investments. So if you frame your startup in that way and you have frame it as a portfolio mindset, which you know, oftentimes is the best way of doing it. And when I say portfolio mindset, I mean like a VC that has 10, 20 different investments and they know that not every single one of them will make it, but they will have some sort of diversity within their, of course, restrictions of what their fund wants to invest in.

That sort of diversifies the investment risk. So you need to speak the talk of, yes, it might not be as large in other investments, but the multiples can still be quite interesting and it can fit into your portfolio this way. So I think understanding the research on it can really help frame such narratives. And again, this is a bit complicated, so go read my articles, you'll get some more clarity there. But these are some of the findings I've made.

Yes, research is crucial here, and talking about multiples is such an important point. Even with a smaller market size, evaluations are lower but exit multiples are attractive that can still make for compelling investments. Have you found that when founders frame their pitch around these realistic multiples rather than pure market size, investors engage differently with them? I think there's always going to be positive reactions to realism and proven statements. So, yes, it's been positive when I've used it. I have yet to remain to prove my thesis theory on this subject. But when I run it through investors who's invested in this space and people around that whole ecosystem, tend to strongly agree with those statements that being a better way of showcasing the attractiveness of a music tech startup. Absolutely. It's refreshing when someone comes with realistic numbers and proven data rather than just hype. Speaking of data, your behavioral finance angle really caught my attention. How investors can be both drawn to and scared away from music investments because of their emotional ties. Would you say that balancing those realistic multiples with the emotional aspects is key to getting investors on board? Yeah, I think it's about just, you know, painting a neutral case to some degree. Like... this is what you invest in. We believe this is the potential and not, think, going, investment is a numbers game to a big degree. It's high quantity and it should be high quality as well, which means, you know, probably you need to go to 50, 100 investors in order to get maybe a few. So I try to look at this from a statistical standpoint. So statistically having a neutral, sober approach with

Backing of numbers is more positive. Of course, there might be situations where you could sway certain investors into being more emotional, but generally speaking, I think that might not be professional investors. And at the end of the day, the less money investor has, the bigger pain in the ass will be later because they're going to be more precious about the money. And the reality of investment, especially within startups is you'll most likely lose your money. So yeah, the I think being sober, neutral, and not hyped always works well statistically.

Taking that neutral.

You're talking to Fi-O-1-0-0 investors, you need a consistent professional story that holds up to scrutiny. Have you found that professional investors actually respond better to this sober approach than to the emotional music industry pitch? Yeah, absolutely. It helps so much. I think that's also why I think the work at Amplitude Ventures does is quite important and why... you founders and entrepreneurs and innovators listening to this episode right now can go reach out to us is just because there are unwritten rules. There are statistical proof points that showcases one specific angle of raising capital is better than the other. And that is what I want to bring out to light because Amplitude's long-term mission is really becoming one of the best places to go for help for starting and launching and growing your startup. And without having those proof points and statistical numbers, we don't know how to do that beyond just gut-filling experiences. And that's just simply not good enough. I think a lot can be taught from it, but again, not at scale and not statistically. So that's sort of where we're going for. I think we've come to part of the episode, well, sort of shut it off soon because These are heavy topics and we're planning on releasing a much longer concept form on it soon together with our research. And it's basically just touching the surface, but there's a few points I want to bring in the podcast as well that I believe is really interesting findings. And that is scarce investor specialization because there is not a lot of music investors out there. I've said that before, but you know, one of our friend companies, MusicTechLab in Poland, they have several times released a list out of companies that have been invested in by VCs investors, which I think is very interesting. The big question that comes to mind is, so if these companies have invested in MusicTech companies and several of them have been successful, so sold out their stakes in these companies and made money on them, why would they not just

Why would they not just invest in much more music tech companies? And the answer is fairly simple. And that is there's not a lot of investor specialization. So even if a VC or investor is successful with a music tech investment, it doesn't necessarily mean that's something they're going to do again, because they might've invested in the founder, the team for some other reason, beyond their knowledge and passion for music tech. Which means they're not gonna have a positive approach to music tech more now than before really. And Thierry from Music Tech Europe, he also pointed out that when he has meetings with bunch of bunch of investors, that's also what they say. It's just like, well, we don't know how to do diligence on it. And we might only receive like, know, one every two months of a music tech company, but from other industries, we, you know, get hundreds a week. So why would... we'd be interested in music if it doesn't seem that attractive, we don't really have any knowledge about it, we don't receive a lot of offers either. So it's just this evil circle of them not being educated and why would they? So that's one of the biggest issues I see that needs to be solved. There might be several ways to do it within this space and how we can make this a better fundraising industry.

What you're saying, it sounds like there's a real knowledge gap in the music tech investment space. Even when VCs have a successful music tech exit, they often don't develop specialization in the space because they might have invested in the founder or team rather than the music aspect. Would you say the key to breaking the cycle is better education and research? Like what you're doing at Amplitude Ventures, giving investors the tools to properly evaluate music tech opportunities? I think it is. I think that can take many forms. That can accelerate our programs. It can be actual content put on the internet. It can be education of certain investor groups that are willing to be educated and, you know, deal flow. So deal flow between funds and investment vehicles, angels. So, so facilitating that whole infrastructure. I don't know which, which is the strongest, but I believe that education towards founders in one step, but I believe publicly available knowledge. Might be the most powerful. Again, I'm biased to that because that's sort of what we work with right now. But I believe that's a starting point in the building block. It just is not there. Like there's not consolidated knowledge. There's not readily accessible information, tips and tricks, experiences, acquisition amounts, like real stories about how things actually happened. And before you have that, I think you'll be working from the experiences lived from individuals, which can be transferred through education. But again, everything is a numbers game. If not thousands of startups can have this information available, it's not going to make a big difference, but also for investors, like we need to lower the barrier of entry of knowledge. And how do that? Well, that's a great question. But having the... the foundational knowledge and research in place and presented in a way that is accessible in different format types, I think is one of the most important starting points in making this better. And that's what we're trying to address at least.

Yes, publicly available knowledge and research seems key to solving this education gap. It is said making real data, acquisition stories, and practical insights accessible to both founders and investors could help break down those barriers. The more transparent and accessible this information becomes, the easier it will be for everyone to make informed decisions. Want to share what specific formats you're finding most effective for sharing this knowledge through Amplitude? Well, the podcast and articles and now we're making a long form. Long form content type. Yeah, but I have multiple things to break down more, but like really, I'm going to go this bit structured. This was a podcast just to give this overview for the people who struggle with consuming information basically from only the written format. But go into the articles, there's five or six more findings that we've made that might be an interesting read. And then again, reach out through LinkedIn. Private LinkedIn or through a company page and we'll get you some help if you want to raise capital in this space. I believe it's going to be long journey for everyone and there's a lot of people helping. There's a lot of initiatives out there that are doing really well and yeah we want to be a part of that whole thing but we want to make money at the same time because I believe you know this is a personal opinion as much as publicly funded programs that can be at the end of the day money wins. If we can be a successful company, making money, helping other companies and making money by that, I think that's a more sustainable and explosive sharing of knowledge than if it just goes through publicly funded actions, which I do appreciate and I believe are very essential as well. So yeah, let's sort of have the same mission, I guess. Everyone wants this to be a better industry because at the end of the day, it's going to affect the artists, the creators, the people making the music and we are part of that whole game of making that possible. But if the industry and the infrastructure can't make money, know, forget about the creators and artists making money. So it's just so essential. But hey, Jake, thank you so much for joining the podcast. It's been a while. And yeah, I'll share some more information on this.

Hey, thanks for having

Great man. Well, see you guys. Well, thank you for joining the first episode of the year. We have so many interesting guests coming up. So I hope you want to join and talk soon.