Music-tech funding takes a hit in 2020

By: Cherie Hu

Published: 2020-07-15

In some ways, now is a good time to start a music-tech company. After all, in a world without touring, technology and the Internet are practically all that artists and music-industry professionals have to work with if they want to continue engaging with their fans and building their businesses. There is also an appetite for new models that are more sustainable than the economics of streaming, and that put the artist-fan relationship at the center.

But in another, important way — namely, getting money to make sure you can exist in the first place — running a music startup is harder than ever.

According to my own research, coupled with publicly available data from Crunchbase, around 60 music-tech startups raised under $300 million in total funding in the first half of 2020. Compared to the first six months of 2019, that’s a 40% dip in the number of music-tech startups funded, and at least a 60% dip in the amount of capital raised.

Moreover, this decline in music-tech capital is much steeper than what the overall venture-capital and tech sectors are seeing. For comparison, VC deal flow in H1 2020 across North America, Asia and Europe was down by around 16% year-over-year, according to PwC and CB Insights. This implies that compared to VC/tech as a whole, music-tech has taken over 2.5x the average hit on the number of startups funded. For an industry that needs new technological solutions more than ever, this is not a good sign.

Why is there such a massive drop in music-tech funding compared to other industries? There are three potential explanations, some of which are more obvious than others.

One obvious one is the COVID-19 pandemic itself, which has disrupted nearly all aspects of the U.S. and global economy and has thrown the live-music sector in particular into free-fall. Major music promoters, talent agencies and media companies, including Live Nation, AEG, Paradigm, WME, ICM and Valence Media (the parent company of Billboard and Vibe), have all faced significant layoffs and furloughs; by some measures, 90% of indie venues in the U.S. may close in the next few months without government support.

Not all music-tech companies have been immune, either, even if they don’t have a direct tie to live events. In the past few months alone, Eventbrite, Patreon, Sonos and Epidemic Sound have laid off between 12% and 45% of their staff.

Against this backdrop, VC firms in pursuit of the next growth opportunity may understandably be compelled to turn away from music in favor of other sectors that have not been as heavily impacted. Or, firms that are in survival mode are going to focus more on keeping existing investments afloat, rather than taking a riskier stance on new companies.

This brings us to the second reason why music-tech funding might be down: Media and entertainment investors see areas outside of music as better growth opportunities in the short term.

In fact, all of the biggest entertainment-related investments of the year so far are not in music, but rather are in adjacent areas such as on-demand video, livestreaming, gaming and social audio that have all seen unusually high growth in the past several months. A handful of examples: Quibi’s $750 million pre-launch round, Sony Corp’s $400 million investment in Bilibili and $250 million investment in Epic Games, Caffeine’s $113 million Series D and Luminary’s $30 million Series C. Altogether, these five funding rounds alone add up to over 4x more capital than the entire music-tech sector combined has raised in 2020 so far.

Tracking media and entertainment acquisitions over the past six months, one also sees more activity outside of music than inside. So far in 2020, there are only five significant music-tech acquisitions that come to mind for me: Splice buying Superpowered, Downtown Music Holdings buying FUGA, Deezer buying Israeli social-music startup Mugo, Pex buying Dubset and Community buying Sendmate.

The average size of these buyouts is smaller compared to acquisitions that are happening elsewhere in media and entertainment at a faster rate. The podcast landscape has been especially fervent this year: Spotify bought The Ringer for $250 million, while LiveXLive bought PodcastOne, The New York Times Company bought Audm and SiriusXM bought Stitcher and Simplecast (essentially achieving vertical integration for podcasting in the process).

Elsewhere in media, Facebook acquired Giphy in a deal reportedly worth $400 million, while Apple acquired NextVR, a studio that previously created sports and music content for VR headsets, for a reported $100 million. To be clear, there is an opportunity for all of these companies to partner with artists and music organizations in interesting ways, but they are not music-focused companies per se.

The third and final reason why music-tech funding is doing so much worse than the average is less obvious until you look into the data: As a whole, VCs are starting to making a smaller number of investments in more proven bets, which puts music-tech at a disadvantage.

The majority of VC investment deals in music-tech are for companies in their earliest stages. According to Crunchbase, 87% of the music-tech funding rounds in H1 2020 were for seed and pre-seed rounds. This is a much higher percentage than usual: In comparison, just 44% of funding rounds for healthcare startups, 52% of rounds for SaaS startups and 53% of rounds for ecommerce startups over the same time period were seed/pre-seed.

This doesn’t put music-tech in the best position when you consider that VCs are investing less and less money in seed rounds under $1 million, and instead are increasingly opting for a smaller number of higher-priced deals of $5 million or more. CB Insights found that overall seed-stage deals in the first quarter of 2020 declined by 43% year-over-year.

One common hypothesis for this decline is that larger VC firms now prefer to watch startups grow and mature from the outside before investing their money, with the hopes of getting to ink bigger deals for more equity. This means less capital for early-stage music startups who are just getting off the ground, in an industry like music that continues to face such an uncertain outlook right now.

In April 2020, I wrote about five major music-tech pivots that I was seeing unfold in real time amidst the pandemic — including a renewed focus on digital and immersive media, a preference for direct-to-fan channels over lean-back aggregators and the emergence of new models for digital scarcity.

Many of the music-tech startups that have been fortunate enough to get funding so far this year serve one of these pivots, particularly with respect to growing interest in immersive media. Below are some of the key trends to watch in music-tech investing, based on activity in 2020 so far. Please note that the below is not an exhaustive list of all the music startups that have raised funding — just some notable examples for you to know.

Experiential and immersive media. Fans are increasingly turning to video platforms like TikTok, Twitch and YouTube, not lean-back audio platforms like Spotify or Apple Music, as the primary hubs and leading indicators of music culture. To combat livestreaming fatigue and create experiences that fans actually enjoy (and, long-term, are willing to pay for), artists and their teams are increasingly turning to VR, AR, avatars and other forms of synthetic, immersive media to innovate on the content of livestreamed shows and other online formats.

The biggest funding round in this category so far this year comes from Wave, which raised $30 million from investors including Scooter Braun and Alex Rodriguez and has staged virtual, interactive, avatarized concerts for the likes of Tinashe, John Legend and Imogen Heap, . Many members of the latest Techstars Music cohort, including Strangeloop, TribeXR and ULO, fall into this immersive media category as well.

Music licensing and sync. While box-office revenue may fall by as much as 70% this year, more DIY video platforms like TikTok and YouTube continue to see growth in both creation and consumption, which creates a potential market for legally-licensed music that online influencers and creators can access for their content, especially on a longer-form scale.

One of the biggest music-tech funding rounds of the year so far was $48 million for Artlist, a competitor to Epidemic Sound that lets users license unlimited, royalty-free music and sound effects for their videos for a monthly fee. SyncFloor, a music licensing platform that operates on an à-la-carte pricing model and is not royalty-free (the company works with catalog partners including TuneCore, Create Music Group and Sub Pop Records), received $200,000 in funding as part of Betaworks’ latest Audiocamp program.

Business and audience management for artists. From the artist’s perspective, understanding digital audience behavior and being able to manage finances and business relationships online is more important now than ever.

In this vein, several music startups that received funding and/or accelerator support this year focus on music consumption monitoring (Entertainment Intelligence, WARM) and fan data management (FanSifter). HIFI, a financial-management toolset and membership for artists and their teams, raised an undisclosed sum from the likes of Matt Pincus.

Music creation and sharing. There haven’t been too many examples of music creation apps that raised funds so far, but this may also be a ripe opportunity for rethinking issues like open, legal music creation and remote music collaboration from the ground up.

The few examples in this category so far in 2020 include Tracklib, an online legal sample marketplace that recently transitioned to a monthly subscription model and raised $4.5 million earlier this year; Byta, a private music-sharing service that raised around $1.4 million in seed funding; and Music World Media, a developer of several mobile apps for music creation and DJing that raised nearly $60 million.

Consumer-facing music streaming platforms. Unsurprisingly, some of the biggest music-tech investments of the year so far went to incumbent platforms: SoundCloud raised $75 million from SiriusXM, while Deezer announced a multi-year, $40 million investment deal with TV Azteca. These two deals alone account for 40% of all the funding announced for music-tech companies so far this year. But aside from SoundCloud and Deezer, nearly none of the remaining music-tech funding announcements went to consumer-facing streaming platforms or content aggregators.

This perhaps points to the saturation of the music-streaming market, and the fact that the other major players in this ecosystem that might be worth investing in are either publicly-traded (Spotify, Pandora), or owned by private or publicly-traded big-tech companies (Apple Music, YouTube, TikTok, etc.). In addition, many of the music-consumption platforms that bring the most value to the table in the current climate, like Bandcamp, are not currently seeking venture investment.

Livestreaming. Again, it’s understandable that VC firms and individual investors seem to be turning away from live music, given the immense amount of uncertainty around the future of in-person events.

But the fact of the matter is that the music livestreaming landscape is too fragmented now to be sustainable over time. In the months since I last updated my Virtual Music Events Directory, I’ve learned about at least a dozen more livestreaming platforms that have popped up in the music industry. Some of them, like NoCap and OnGenre, are targeting venues and taking on production costs themselves; others, like FanTracks and Noonchorus, are catering more to individual artists.

While it’s great to see such a wide diversity of offerings for livestreams out there, I think there is an inherent ceiling on how much any one of these music-specific livestreaming tools can grow without expanding beyond music, partnering with a competitor to pool resources or raising funds from an outside investor.

To reiterate: Based on the current state of affairs and the inconsistent reliability of government grants, many artists and music-industry professionals are forced to rely on technology to help make ends meet for the next several months. I think many of us are also in agreement that the economics of the dominant streaming model does not work in most artists’ favor, and on its own is certainly not generating enough revenue for the majority of artists to make a living wage.

So even though music-tech investment is down, we need to address this question seriously: What will the next generation of sustainable, online music consumption and engagement look like, and what will convince people to fund it?