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Talk from @daltonc

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Slides from Dalton Caldwell's talk at Startup School 2010.

@daltonc on twitter

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Talk from @daltonc

  1. 1. Dalton Caldwell Startup School 2010
  2. 2. Who am I? <ul><li>Stanford ’03, B.S. Symbolic Systems, B.A. Psychology </li></ul><ul><li>Founder/CEO of imeem, 11/03-11/09 </li></ul><ul><li>Key stats as CEO of imeem: </li></ul><ul><ul><li>Raised over $50MM from Sequoia and others </li></ul></ul><ul><ul><li>Acquired 3 companies, 95 headcount </li></ul></ul><ul><ul><li>Reached a $24MM yearly revenue runrate </li></ul></ul><ul><ul><li>imeem.com reached Alexa rank 75, 26MM uniques </li></ul></ul><ul><ul><li>imeem music widgets reached 108MM monthly uniques at peak, at the time ~10% of the internet </li></ul></ul>
  3. 3. The most important things I will say <ul><ul><li>Silicon Valley vs Hollywood, aka “Us” vs. “Them” </li></ul></ul><ul><ul><li>Polarized groups constantly misinterpret each other actions & view everything through a lens of mistrust </li></ul></ul><ul><ul><li>People tend to over-ascribe behavior to innate personality , and under-ascribe behavior due to situational factors </li></ul></ul><ul><li>You can quote me on this: </li></ul><ul><ul><li>The music industry is largely populated with smart people who are largely ethical, nice and reasonable… in equal % to silicon valley </li></ul></ul>
  4. 4. Part 1: The ubiquity of music startups
  5. 5. Reasons to do a music startup <ul><li>Everyone is an expert </li></ul><ul><li>“Someone needs to fix the music industry” </li></ul><ul><li>“It’s hard to discover new music, we help you discover music from your social graph ” </li></ul><ul><li>It’s easy to get traffic. Lots of traffic </li></ul><ul><li>Users will overlook buggy or unusable products </li></ul><ul><li>It makes you seem cool </li></ul>
  6. 6. Recognize this?
  7. 7. Recognize this?
  8. 8. Cool story, bro <ul><li>It is worth examining the opportunity costs </li></ul><ul><ul><li>Chris Dixon: “Every time an engineer joins Google, a startup dies” </li></ul></ul><ul><ul><li>Me: “Every time a founder does a music startup, a likely-more-successful startup dies” </li></ul></ul><ul><li>This applies to me personally as well </li></ul><ul><ul><li>Spending 6 years building something, then watching it dismantled and scrapped, sucks </li></ul></ul>
  9. 9. Part 2: Specific music startup challenges
  10. 10. “Tools for artists” startups are hard <ul><li>Artists, especially small ones, don’t have any money. </li></ul><ul><li>Market is totally saturated </li></ul><ul><ul><li>Hundreds of these startups exist </li></ul></ul><ul><ul><li>TuneCore is really good </li></ul></ul><ul><ul><ul><li>Disruptive “flat fee” services pricing model w/upsell </li></ul></ul></ul><ul><ul><li>Topspin is really good </li></ul></ul><ul><li>The economics are challenging </li></ul><ul><ul><li>Assume 20% margins for running your own store. </li></ul></ul><ul><ul><li>ie you have to sell a $250K of indie band downloads every month to make 50K to run a startup on. Good luck. </li></ul></ul>
  11. 11. Download store startups are hard <ul><li>Major label route </li></ul><ul><ul><li>Advances </li></ul></ul><ul><ul><li>iTunes has >90% of market share </li></ul></ul><ul><ul><li>Also the matter of Amazon, Google (soon) & dozens of others </li></ul></ul><ul><ul><li>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 </li></ul></ul>
  12. 12. Ad-supported is hard <ul><li>Per-play minimums are very challenging </li></ul><ul><li>Quarterly minimums + advances are deadly </li></ul><ul><li>International, publishing, long-tail content owners </li></ul><ul><li>The labels have soured on ad-supported </li></ul><ul><ul><li>They feel it devalues music and is slippery slope </li></ul></ul><ul><ul><li>Ringtones propped them up through early 00s but smartphones have killed the 1.99 ringtone business </li></ul></ul><ul><ul><li>When free music services translate to mobile things & your car, it is officially “substitutional” </li></ul></ul>
  13. 13. Subscription startups are hard <ul><li>Spend ~2 years doing deals pre-launch </li></ul><ul><ul><li>Find investors to put in several million for licenses </li></ul></ul><ul><ul><li>Give the labels 10-30% of your company </li></ul></ul><ul><li>Hypothetical subscription music deal </li></ul><ul><ul><li>$10 per month from user, ~10% monthly churn rate </li></ul></ul><ul><ul><li>After content owners + publishing, you are left with $3-$5 to pay headcount, bandwidth, and customer acquisition </li></ul></ul><ul><ul><li>Quarterly minimums, regardless of subscriber numbers </li></ul></ul><ul><ul><li>Each country has different licensing bodies </li></ul></ul><ul><li>Napster, Rhapsody, Spotify, Rdio, Thumbplay, MOG </li></ul><ul><ul><li>Rhapsody has had $300MM dollars of ads on MTV/VH1 </li></ul></ul>
  14. 14. Wrapping it up <ul><li>“ Unlicensed” or “sorta-licensed” </li></ul><ul><ul><li>Recent headline: “UMG declares legal jihad against Grooveshark” </li></ul></ul><ul><ul><li>Being sued is not badass. Ask anyone who has been sued. </li></ul></ul><ul><li>DMCA radio seems to be the best approach(?) </li></ul><ul><ul><li>Pandora is doing a great job, but if you do 100MM in revenue and not exactly be profitable… </li></ul></ul><ul><ul><li>Lobbying congress to survive is hard </li></ul></ul><ul><li>(yes, I am missing other business models) </li></ul>
  15. 15. Part 3: The structural barriers to innovation
  16. 16. Antiquated legal framework <ul><li>Similar to the software patent quagmire </li></ul><ul><li>Poorly defined rules for what is right or wrong </li></ul><ul><ul><li>Mashups, DMCA, publishing, international </li></ul></ul><ul><ul><li>Even iTunes gets sued all the time for infringement </li></ul></ul><ul><li>Lawsuits seem to choose targets that get popular/have lots of cash. </li></ul><ul><li>M&A Catch-22 Non-transferable deals </li></ul><ul><ul><li>no deals = no acquisition </li></ul></ul><ul><ul><li>have deals = no acquisition </li></ul></ul><ul><ul><li>Company as an asset is effectively not transferable </li></ul></ul>
  17. 17. Why the reason labels seem irrational <ul><li>Market went from ~$15B in the 90s to < half of that and declining </li></ul><ul><li>Executives are tasked with filling/slowing this revenue gap </li></ul><ul><ul><li>Need new streams to generate $100MM to billions, fast </li></ul></ul><ul><li>They are emotional because laying off people, and worrying about your job and future career path SUCKS </li></ul><ul><li>Your bootstrapped, ramen-profitable music site is useless to them </li></ul><ul><ul><li>It’s worse than useless, your potential revenue is not even worth their salaries to talk to you and do a deal </li></ul></ul><ul><li>Every startups pitch about “planting seeds” and “focusing on user growth first” is the same. They have tried this and gotten burned. </li></ul><ul><li>“ If you go out of business, there will be 2 more to take your place” </li></ul>
  18. 18. Structural cash incentives <ul><li>From macro-view startups are money transfer vehicles </li></ul><ul><ul><li>Follow the cash from VCs, to startups, to labels </li></ul></ul><ul><li>The structural incentives are for immediate cash </li></ul><ul><ul><li>Label deals are evaluated/rewarded on short term income </li></ul></ul><ul><ul><ul><li>“ Advances” & “Settlements” are immediate cash </li></ul></ul></ul><ul><ul><li>A/B tests show that aggressive litigation/threats is more financially successful than no-money down partnerships </li></ul></ul><ul><ul><li>Similar to short-term incentives on Wall St leading to non-optimal long-term outcomes, and sometimes disaster </li></ul></ul>
  19. 19. My best shot at an “answer” <ul><li>Broadly available, legal music APIs </li></ul><ul><ul><li>I tried… sorry imeem couldn’t pull this off </li></ul></ul><ul><li>Congress expands statutory licensing frameworks </li></ul><ul><ul><li>Clearly defined publishing </li></ul></ul><ul><ul><li>Clearly defined audit/reporting </li></ul></ul><ul><ul><li>Clearly defined technical definitions of legality </li></ul></ul><ul><li>International adoption of this statutory licensing </li></ul><ul><li>Similar solution to software patent issue </li></ul>
  20. 20. How I felt after it was over
  21. 21. Anyway… <ul><li>Don’t be cannon-fodder. Work on things you love. Life is too short. </li></ul><ul><li>I am working on a new startup: </li></ul>

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