The 2020 Music-Tech Investment Report: A six-year low, but with genuine impact on the horizon

By: Cherie Hu

Published: 2021-01-29

Trying to tell the overarching story of music-tech startups in 2020 is… complicated.

Let’s start with the bad news. According to my own research, coupled with data from Crunchbase, global music-tech startup funding totaled just under $700 million in 2020 — a six-year low. Previously, the category attracted $2.4 billion in funding in 2019, implying more than a 70% dip year-over-year (YoY).

This is in stark contrast to the narratives you might be seeing elsewhere in the tech industry. In fact, if you look at aggregate numbers, U.S.-based startups actually raised more VC money in 2020 than in any other year in history — somewhere between $130 billion and $140 billion, depending on your source.

Why was music so left behind? It’s likely because, in spite of recent technological innovation, much of the music industry is non-digital on the level of artists’ business models, which tend to rely heavily on brick-and-mortar touring to turn a profit. This means that music (alongside tourism and hospitality) was much more severely impacted by the pandemic-induced financial crisis compared to more tech-driven fields. In turn, tech investors likely do not view music as a “high-opportunity” category, at least in the short term; instead, they’re turning their focus to other areas like remote work, healthcare, ecommerce, gaming and social media.

Now, let’s talk about the good news, or at least a silver lining: In part due to the constraints of the pandemic, the music industry is more open than ever to working with new technology.

As I wrote previously, the whole music industry is now familiar with the concept of “pivoting” — i.e. changing their approach to business in response to unforeseen changes in market trends or audience preferences. Just because funding is at a record low right now doesn’t mean that artists and entrepreneurs haven’t stopped building and experimenting with alternative solutions to the status quo. In fact, in an environment where incumbent solutions are clearly failing many artists, the larger project of technocultural innovation is more urgent, not less.

In a way, music-tech funding in 2020 actually reflected this penchant for experimentation by focusing on earlier-stage companies. According to Crunchbase, 83% of all music-tech funding rounds last year were either seed or pre-seed rounds — marking the most early-stage investment behavior in music-tech since 2015. This implies that even though there’s relatively less capital going around, most deals are dedicated to supporting a newer generation of startups that could make a real impact on an industry like music that’s still trying to find its way in the coming months.

Below, I’ll dive deeper into specific trends in the data and what they reveal about the current state of the music-tech ecosystem. My original database of startups and investors on which I based this analysis will also be available to paying Water & Music members in a separate post.

What does “music startup” even mean?

In a world where music increasingly blurs with other entertainment formats, and where musicians are building more diversified brands around their careers, the exact definition of a “music startup” can be difficult to pin down.

For the purposes of this analysis, I define a music startup as any software or hardware company that meets one of the following criteria:

In other words, there has to be some core strategic tie to music, either in the startup’s value proposition or on its cap table. I did not include startups from other entertainment sectors like film, podcasts or gaming in my analysis unless they raised funding from or struck partnerships with notable music-industry investors. (To be fair, I think this is actually a pretty generous definition of a “music startup”; the total music-tech funding for 2020 could be as much as 50% lower if we used stricter criteria.)

I should also note that my dataset has a Western bias. 57% of the startups on my list are based in the US, 36% are based in Europe and only the remaining 7% are based in Asia, Africa, Australia or Latin America. I built my database by aggregating publicly announced funding rounds from English-language publications, plus monitoring and vetting automated announcements on Crunchbase; this approach may have led to a few geographic blind spots. Nonetheless, I think this list still offers a representative view of the current state of music/tech.

Part I. The top music startup categories of 2020

We can measure the top music startup categories of last year by two variables: The total capital raised, and the total number of startups funded. These two rankings will look quite different from each other, because the former variable favors categories of later-stage startups with larger funding rounds, while the latter highlights categories with a high concentration of earlier-stage ventures.

A. Total capital raised

Let’s follow the money and start with the music-tech categories that attracted the most VC dollars in 2020 (note that I’ve pictured only the categories that raised over $10 million in total):

To clarify, many startups on my list were part of more than one category. For instance, it was common for a startup to qualify for both “artist payments and biz management” and “consumption data monitoring,” or for both “livestreaming and virtual events” and “experiential, immersive, VR/AR/MR.”

But the top three categories pictured above — livestreaming / virtual events, consumer audio streaming and music creation software — did all happen to be mutually exclusive, and together accounted for nearly 70% of all music-tech capital raised.

Again, this 70% share is being eaten up mostly by larger funding rounds for later-stage companies, which are outliers in the primarily seed-based music-tech investment ecosystem.

Let’s focus on the top two categories, starting with livestreaming. The majority of money that went into livestreaming last year went not to early-stage platforms focused on concerts, but rather to B2B platforms tailored for larger events like conferences and summits (e.g. Hopin and Run The World). While these might not immediately look like “music companies,” many artists and music-industry professionals have used their tech in the near future to host a variety of different online events. For instance, Hopin was the platform of choice for events like the Music Tectonics Conference and The Future Party’s panel series, and just acquired StreamYard, a popular multicasting tool for artists and influencers.

At the same time, despite its top-heaviness, the livestreaming landscape is also incredibly fragmented at the bottom — a bit like the early stage of music streaming circa 2005:

[Above: A non-exhaustive view of the current livestreaming landscape.]

Generally speaking, I think everyone in the industry should be taking the merging of recorded and live music more seriously. With more capital going into livestreaming — and an anticipated increase in startup exits this year, like Live Nation’s acquisition of Veeps — 2021 might be the first time in history that the live music sector embraces a genuine hybrid online/offline model for the future of its business.

For the sector to grow to its fullest potential, the industry should invest more in two areas:

Meanwhile, looking at consumer-facing audio streaming platforms — the second most-funded category — the vast majority of investment went to companies that were founded back in 2007, including SoundCloud, Deezer and Qobuz.

All-in-all, investments in music streaming services accounted for 20% of music-tech funding for the year. This is a dramatic decline from just four years ago, when DSPs ate up a whopping 75% of all music-tech funding. The fact that DSPs don’t dominate the investment landscape anymore could signal a few things:

B. Total number of deals

Now let’s dive into the top categories by total number of deals, rather than by total capital alone. Because the deal-count metric favors earlier-stage categories, our chart looks pretty different:

Artist payments and business management — which I define as helping artists manage, and get paid for, their work and intellectual property — comprised the most popular use case for the music startups that got funded last year, with music creation and immersive/mixed-reality experiences coming out in second and third, respectively. It’s notable that almost all of the companies in these categories can be described as tools for artists, not for music consumers or fans.

Some examples of these startups include:

While these three categories attracted 40% of all music-tech investment deals, they captured only 27% of total capital raised, due to a higher concentration of early-stage ventures. For instance, even though artist payments and business management startups got the highest number of deals last year, they raised only around $30 million in total — or just 4% of the ecosystem as a whole.

Historically, I’ve noticed that few startups focused specifically on musicians’ businesses have made it to later-stage funding rounds. Instead, they usually end up shutting down, pivoting and/or getting acquired by a larger, incumbent music company.

You could spin this in multiple different ways depending on your perspective. Perhaps it speaks to the perceived lack of market opportunity; after all, it’s difficult to build a high-margin business off of a customer base such as independent musicians who don’t have much pocket money to invest in new tech in the first place (just ask music distributors).

Or, as with any challenge, you could see this as a wide-open opportunity. Thanks to both Black Lives Matter and the pandemic, 2020 drove several major calls for greater financial transparency and accountability around music streaming — mostly recently from the UK government — that will require both legal and technological solutions to actually put into practice. Moreover, tools to help artists manage their finances as a whole (not just streaming royalties) will increase in value and relevance as more musicians decide to build their long-term careers independently. The rise in general business tools for the “creator economy” will help drive more interest in helping independent artists as well, inside and outside of music.

C. Underdog categories

There were a handful of music startup categories that I was surprised to see rank lower on the list in terms of deal flow, but that I expect to grow more quickly in 2021:

The top music-tech investors of 2020: A direct tie to socioeconomic opportunity

It’s not surprising that the VC firms that invested in the highest number of music startups in 2020, namely Raised In Space and Plus 8 Equity, focus on music. Outside of VC, specialized startup accelerators such as Techstars Music and the Betaworks Audiocamp also contributed several companies to my list, as did a few entertainment-focused corporate investment arms like those within Sony Corp. (Warm, Tracklib, Lynq) and Warner Music Group (Anything World, and most recently Roblox).

We’re also seeing more artists and music executives on cap tables for startups than in previous years, including but not limited to Quincy Jones (Lyte, Musimap), Scooter Braun (Wave, Moment House) and Kylie Minogue (Roxi). That said, I think we’ll see even more growth in the number of artists backing startups outside of music, using investment as a vehicle to diversify their wealth outside of entertainment. In the past month alone, we saw Rick Ross investing in Jetdoc, Lizzo investing in Apartment List, Master P bidding to buy Reebok and The Chainsmokers investing in Public (which has risen to prominence this week as a Robinhood competitor).

Perhaps the most important new trend to know is that 13% of music startup investments in 2020 came from funds focused exclusively on Black- and minority-owned businesses — namely, Google’s Black Founders Fund and Andreessen Horowitz’s Talent x Opportunity Fund with the Tides Foundation. Both of these funds focus on early-stage companies, offering no more than $100,000 to each founding team, and were launched in the wake of the Black Lives Matter protests last summer.

This new class of investors for music startups suggests that technocultural innovation will play a significant role in closing the racial opportunity and wealth gaps in society. In fact, this connection should not be surprising, given the consistent influence that people of color, especially Black artists and consumers, have on global culture.

Yet the cultural diversity of global music trends is currently not reflected in the people building its technology. According to my calculations, only 12% of music/tech companies that got VC funding in 2020 had women founders and/or CEOs, and only 21% had people of color in those same positions.

The recent wave of dedicated funds for minority-owned businesses, as well as diversity commitments from accelerators like Techstars Music, will hopefully make these percentages higher in 2021 and beyond. That said, it remains to be seen whether these earlier-stage diversity initiatives will then extend to their beneficiaries getting equal access to later-stage funding opportunities as well.

I would also love to see more music celebrities get more involved in supporting future generations of minority tech founders. One of the only examples of this approach that I know of is what Pharrell Williams is doing with his Black Ambition Prize, an investment and grant program for Black and Latinx entrepreneurs (interestingly, the main categories covered by the prize are Consumer Products and Services, Design, Healthcare and Tech, with music nowhere to be found). Williams also partnered with Georgia Tech and Amazon’s Future Engineer program on a youth educational program called Your Voice Is Power, which teaches Python and Java through music composition and beatmaking with the help of an application called EarSketch.

Zooming out, more tech reporters are homing in on the gap between the runaway success of the tech startup sector and the financial struggles that many everyday people continue to face, especially women and people of color. “The tech industry has flourished during the pandemic. Many sectors of the economy haven’t,” Laura Mandaro wrote for The Information. “This gap could set the stage for a deeper tech backlash — and the opportunity for creative solutions to address economic disparities.”

All of these ingredients — big-tech backlash and the interest in building alternative economic solutions — are already well underway in the music industry, and I hope future music/tech investment partnerships keep this social and economic context in mind. Given the precarious state of many artists’ careers and ongoing conversations about diversity and inclusion, the music industry should treat startup innovation not simply as a lottery to be gambled on, but as a more deliberate investment into urgent values, healthier ecosystems and preferred futures.

In general, many outside fields look to music to take the pulse on where culture is moving next, and I think we as an industry have to take this responsibility as innovators seriously, on the front lines of both creativity and business.