Talk from @daltonc

Dalton Caldwell Startup School 2010

Who am I?
Stanford ’03, B.S. Symbolic Systems, B.A. Psychology
Founder/CEO of imeem, 11/03-11/09
Key stats as CEO of imeem:
Raised over $50MM from Sequoia and others
Acquired 3 companies, 95 headcount
Reached a $24MM yearly revenue runrate
imeem.com reached Alexa rank 75, 26MM uniques
imeem music widgets reached 108MM monthly uniques at peak, at the time ~10% of the internet

The most important things I will say
Silicon Valley vs Hollywood, aka “Us” vs. “Them”
Polarized groups constantly misinterpret each other actions & view everything through a lens of mistrust
People tend to over-ascribe behavior to innate personality , and under-ascribe behavior due to situational factors
You can quote me on this:
The music industry is largely populated with smart people who are largely ethical, nice and reasonable… in equal % to silicon valley

Part 1: The ubiquity of music startups

Reasons to do a music startup
Everyone is an expert
“Someone needs to fix the music industry”
“It’s hard to discover new music, we help you discover music from your social graph ”
It’s easy to get traffic. Lots of traffic
Users will overlook buggy or unusable products
It makes you seem cool

Recognize this?

Cool story, bro
It is worth examining the opportunity costs
Chris Dixon: “Every time an engineer joins Google, a startup dies”
Me: “Every time a founder does a music startup, a likely-more-successful startup dies”
This applies to me personally as well
Spending 6 years building something, then watching it dismantled and scrapped, sucks

Part 2: Specific music startup challenges

“Tools for artists” startups are hard
Artists, especially small ones, don’t have any money.
Market is totally saturated
Hundreds of these startups exist
TuneCore is really good
Disruptive “flat fee” services pricing model w/upsell
Topspin is really good
The economics are challenging
Assume 20% margins for running your own store.
ie you have to sell a $250K of indie band downloads every month to make 50K to run a startup on. Good luck.

Download store startups are hard
Major label route
Advances
iTunes has >90% of market share
Also the matter of Amazon, Google (soon) & dozens of others
You have to pay in ~$5MM to play, and you make 20% margins. ie you have to sell $25MM of Justin Bieber to get back your paid in capital

Ad-supported is hard
Per-play minimums are very challenging
Quarterly minimums + advances are deadly
International, publishing, long-tail content owners
The labels have soured on ad-supported
They feel it devalues music and is slippery slope
Ringtones propped them up through early 00s but smartphones have killed the 1.99 ringtone business
When free music services translate to mobile things & your car, it is officially “substitutional”

Subscription startups are hard
Spend ~2 years doing deals pre-launch
Find investors to put in several million for licenses
Give the labels 10-30% of your company
Hypothetical subscription music deal
$10 per month from user, ~10% monthly churn rate
After content owners + publishing, you are left with $3-$5 to pay headcount, bandwidth, and customer acquisition
Quarterly minimums, regardless of subscriber numbers
Each country has different licensing bodies
Napster, Rhapsody, Spotify, Rdio, Thumbplay, MOG
Rhapsody has had $300MM dollars of ads on MTV/VH1

Wrapping it up
“ Unlicensed” or “sorta-licensed”
Recent headline: “UMG declares legal jihad against Grooveshark”
Being sued is not badass. Ask anyone who has been sued.
DMCA radio seems to be the best approach(?)
Pandora is doing a great job, but if you do 100MM in revenue and not exactly be profitable…
Lobbying congress to survive is hard
(yes, I am missing other business models)

Part 3: The structural barriers to innovation

Antiquated legal framework
Similar to the software patent quagmire
Poorly defined rules for what is right or wrong
Mashups, DMCA, publishing, international
Even iTunes gets sued all the time for infringement
Lawsuits seem to choose targets that get popular/have lots of cash.
M&A Catch-22 Non-transferable deals
no deals = no acquisition
have deals = no acquisition
Company as an asset is effectively not transferable

Why the reason labels seem irrational
Market went from ~$15B in the 90s to < half of that and declining
Executives are tasked with filling/slowing this revenue gap
Need new streams to generate $100MM to billions, fast
They are emotional because laying off people, and worrying about your job and future career path SUCKS
Your bootstrapped, ramen-profitable music site is useless to them
It’s worse than useless, your potential revenue is not even worth their salaries to talk to you and do a deal
Every startups pitch about “planting seeds” and “focusing on user growth first” is the same. They have tried this and gotten burned.
“ If you go out of business, there will be 2 more to take your place”

Structural cash incentives
From macro-view startups are money transfer vehicles
Follow the cash from VCs, to startups, to labels
The structural incentives are for immediate cash
Label deals are evaluated/rewarded on short term income
“ Advances” & “Settlements” are immediate cash
A/B tests show that aggressive litigation/threats is more financially successful than no-money down partnerships
Similar to short-term incentives on Wall St leading to non-optimal long-term outcomes, and sometimes disaster

My best shot at an “answer”
Broadly available, legal music APIs
I tried… sorry imeem couldn’t pull this off
Congress expands statutory licensing frameworks
Clearly defined publishing
Clearly defined audit/reporting
Clearly defined technical definitions of legality
International adoption of this statutory licensing
Similar solution to software patent issue

How I felt after it was over

Anyway…
Don’t be cannon-fodder. Work on things you love. Life is too short.
I am working on a new startup:

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Talk from @daltonc

by daltoncaldwell on Oct 20, 2010

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Talk from @daltonc — Presentation Transcript