Venture Capital and You
Giving Traction to Your Business Idea
As a Music Business/Management major at Berklee, I have learned how to create a strong professional business plan, how to register my business (as S-Corp., C-Corp., or Partnership), and how to market it to the public. Yet there is a huge step between registering a business plan, and actually starting a business. Funding is needed, and it is daunting for a broke college student to approach total strangers for money. Perhaps this article will help you.
I arrived at the college with what I considered a pretty good business proposition: a special online distribution website. During the past year, I refined my original concept by talking to fellow students and faculty. I believe whole-heartedly (not immodestly!) that my business model can actually reclaim a fair amount of Apple’s iTunes market-share—if, that is, the intended investors get on-board.
So on a hope and a prayer, and with my business plan in hand, on October 20 I flew to San Francisco to its Music Tech Summit. This was a meeting of top Music Technology executives and many well-known artists and producers (for more information, see http://www.sfmusictech.com).
Throughout the day, I listened to panels and seminars on a wide variety of subjects, including “Non-Traditional Licensing & Custom Deals”, “Leveraging Data to Generate Revenue”, and my own favorite destination topic, “Funding”. My intentions were to turn some heads, attract interest to my company, and, admittedly, look on the side for a good internship in the summer. I had a gut feeling that I needed to be at this event. If anyone would listen to my business idea, it would be here.
In the event, I found many like-minded individuals looking for the same thing, i.e. the next successful business model that works both for investors, artists, and music buyers. This was a group of progressive professionals fighting the good fight to which I could, perhaps, provide some business solutions of my own. But I learned a lot, and here is what I found.
First, venture capitalists do not invest in record labels. Their business is to pick a winner among competing projects, and adding hit making to their roster of choices just seems to risky for them. Second, if you are thinking about opening a small record label or publishing company you will want to get creative with non-traditional, custom-tailored, licensing deals. There is much information on the above mentioned website about this. Third, when it comes to (sic) “leverage data to generate revenue”, you should know that there is plenty of data out there that can help you present yourself better and target your customers with pinpoint accuracy. One of the main things investors want to know, of course, is who is your customer base. To know whom you are marketing to, be prepared to look at similar business models to your own. Also, study how they mine their data. Two big sources here are the sites HYPERLINK “http://www.marketinsightcorp.com” www.marketinsightcorp.com and HYPERLINK “http://www.myproductadvisor.com” www.myproductadvisor.com .
The only big name I went to this conference knowing anything about was Peter Gotcher, and that was given to me by Professor Peter Alhadeff. Gotcher was a Berklee trustee and financier for Topspin, an up-and-coming company with an all-star marketing team developing a marketing software platform to help artists (and their business partners) build their businesses and their brands.
Peter Gotcher would be the key figure in the panel about funding, and anticipation for this event had already generated a buzz the night before. Three venture capitalists (VCs), moderated by Brian Zisk, the event’s producer and an entrepreneur/investor himself, took the stage. Little did I know that Peter Gotcher was literally “the man” of this entire event.
Gotcher’s credentials just seemed to dwarf everyone else, and everyone wanted to speak to him. Besides being a trustee at CONTACT _Con-3F76F53F1 \c \s \l Berklee, Peter also co-founded DigiDesign in 1984, and took it public in 1993, where it made the top 10 performing stocks of NASDAQ in 1994. He sold the company to Avid Technologies in 1995, where he remained General Manager of DigiDesign and a VP for Avid for a year. He won a Grammy Award in 2000 for Technical Achievement, in honor of DigiDesign’s contribution to the recording industry. Peter then went on to be a technology-focused venture capitalist, when he joined Institutional Venture Partners (IVP). In 1999 he was a founding venture partner for Redpoint Ventures, with a portfolio that includes NetFlix, Ask.com, Excite.com, TiVo, MySpace, and Topspin. Topspin is Peter’s newest creation, and he has been a private investor there since 2003. He also serves on the board of directors of Pandora Media, Dolby Laboratories, Line 6, Avnera Corporation, and dash Navigation.
The other two venture capitalists in the panel were Larry Marcus, Managing Director of Walden Venture Capital, and Michael Downing of TransMedia Capital. With Gotcher, here was a collection of music lovers, amateur musicians, and down earth people still looking to invest money into a good idea, even in a terrible bear market. Michael Downing would say that “some of the best companies start in down markets”, and that for venture capital firms to stop investing in new companies right now would be suicidal, because they need to make good with new investments and so compensate their earlier losses. As Gotcher pointed out, nowadays a good exit strategy is key. Most VC’s invest with an eight-month to a year window of reappraisal. This is a time frame in which they try to get their start up company to a point where it can be bought out by a larger company, or go public with an IPO. The hope is that the investment will return anywhere between ten to twenty times the original amount. Now VC firms are looking to spend less, but have a longer exit strategy, because there is no way they will be able to get the return they want from their IPO’s in the next two years. This means that they are looking for a good budget deal and a business plan with room for growth and longevity.
Above all, all three panelists concurred that the number one thing they base a decision on when reading a business plan is (sic) “their gut”, and more than any numbers, projections, or marketing strategies. They also said that how a person presents an idea is very important. He/she needs to be someone they like talking to, and who can show an ability to lead a successful enterprise. Founders need to be incredibly optimistic, and once they get going, stubbornly persistent (almost, it appeared, to the point of insanity). VCs don’t generally make good CEO’s because they are unwilling to give up control. You have to be prepard to take on any extra help you might need. As it takes a strong team to start a good business, investors like to know that you already have a team ready to help you make your idea work.
There are smaller steps that you can consider before going straight to a VC. Think, for instance, of “incubating” your business. Incubators are pretty much ready to go offices fully equipped with management, staff, lobby/reception space, communication infrastructure, computer networks, web hosting, mail service, and 24 hr staffing to help with any of your business needs. These companies usually have investors as part of their package as well. I compare them to the independent label that is under a major label’s umbrella, with an uplift option (just like an artist that sells 100,000 records under an independent label is taken over by major label). If your business performs well in such a structure, investors may find you attractive. Moreover, this set-up can be a great place to get started, and make great connections with other related businesses. But it can also be a source of great distraction and competition, with much micro-management. Remember that if you “incubate”, a financier’s interest is not always aligned with yours.
Another way to go is doing some “bootstrapping”. This is a term that refers to starting a business with your own money, via micro-investments or friends and family (F&F). This is a great method for people that have that option, and do not need a whole lot of money. It prevents you from having to take out a loan or loose control of your business. My suggestion is that if you are going to approach F&F for money, treat them just like your would treat a venture capitalist. Present the business to them in a professional and legal manner, and have contracts to sign if they decide to invest. Otherwise, be prepared for much drama!
Finally, you could lean on an “angel”, a single individual that believes in your idea and is willing to invest in it. You can look for some of these individuals online by going to HYPERLINK “http://www.GoBigNetwork.com” www.GoBigNetwork.com .
If you have a good business idea, get a business plan together and tailor it towards an investor, bearing in mind the suggestions in this article. HYPERLINK “http://www.fundingfriend.com” Www.fundingfriend.com, HYPERLINK “http://www.rapidadvance.com” www.rapidadvance.com, HYPERLINK “http://www.americancapital.com” www.americancapital.com,
HYPERLINK “http://www.redpoint.com” www.redpoint.com, and HYPERLINK “http://www.waldenvc.com” www.waldenvc.com are excellent reference sites.
Do not, however, send out you plan blindly. The industry moguls I spoke to suggested that you make some personal connection first; otherwise your chances of being read or replied to are slim. So, I encourage you to use the Berklee network. That is what connected me to Peter Gotcher. Pester the faculty of MB/M and your student friends. Go to the Career Development Center, and find out about alumni in your field. Help might be closer than you think.
By Leopold Brayman
