With the music industry dominated by major players, how can smaller startups carve out a place for themselves?

Music tech investment has seen significant changes over the past 15 years, reshaping how startups approach funding and growth. In an engaging interview with Jakob Wredstrøm on sound connections podcast, and investor Gareth Deakin shared his perspectives on the challenges, successes, and opportunities in this dynamic space. This post explores key questions from their discussion, offering insights into how music tech is evolving and what it takes for startups to succeed.

Key Takeaways:

• Music tech startups must address unique challenges in funding, scalability, and ecosystem navigation.

• The music industry’s transition to digital has unlocked new opportunities across the value chain.

• Success often depends on reframing investment narratives to align with investor expectations.

• Early-stage startups benefit significantly from ecosystem-building efforts and clear educational support for founders and investors.

How Has Music Tech Investment Changed Over the Last 15 Years?

As Gareth Deakin explains, the focus of music tech startups has shifted dramatically over the years. Fifteen years ago, many startups targeted consumer facing products like streaming platforms or music marketing tools. These ventures addressed visible industry needs but often struggled to achieve sustainable success.

Today, digital transformation has restructured the music industry’s value chain, opening new opportunities in areas like royalties, rights management, and operational efficiencies. Startups now span a broader spectrum, from B2B solutions to creator tools, with innovations aimed at solving deep, systemic problems. This evolution reflects how music tech has matured, offering more entry points for entrepreneurs while also demanding a deeper understanding of the industry's complexities.

Why is raising capital in music tech perceived as difficult?

The challenges of raising capital in music tech are rooted in the industry’s small market size and structural complexity. Many investors, particularly venture capitalists, find music’s intricacies—such as licensing and royalty systems difficult to navigate.

Raising capital in music tech is challenging for several reasons, as outlined by Gareth Deakin:

1. Market Size: The music industry is relatively small compared to markets like gaming or health tech, making it less appealing to venture capitalists seeking large returns.

2. Revenue Distribution: A significant portion of industry revenue is concentrated among a few major players, leaving limited opportunities for smaller companies.

3. Complexity: Music rights and royalty structures are notoriously difficult for outsiders to understand, increasing perceived risk for investors unfamiliar with the space.

4. Historical Barriers: The industry has lacked high-profile success stories, and the absence of visible exits makes it harder to attract new capital.

What are the common denominators for success in music tech startups?

Successful music tech startups often exhibit the following traits:

Sustainable Goals: Many music industry startups are acquired within 3-7 years of operation, typically for $10 million to $50 million. These startups are smaller compared to those in the broader tech industry and usually raise less capital

B2B Focus: Many startups find success by addressing operational inefficiencies, such as royalty processing or rights management, rather than consumer-facing solutions.

Capital Efficiency: Startups that operate lean, requiring less funding, are more attractive to investors.

Clear Market Fit: The best companies solve real, pressing problems in the music industry, ensuring steady demand for their services.

These characteristics position startups to succeed in a challenging but rewarding ecosystem.

How Can Music Startups Improve Their Chances with Investors?

Gareth Deakin outlined several ways music startups can enhance their appeal to investors:

1. Reframe the Pitch: Founders should present their companies in terms investors can relate to, focusing on financial opportunities or parallels with other industries rather than getting lost in music-specific jargon.

2. Simplify Presentations: Pitch decks should focus on securing meetings by emphasizing key value points, leaving detailed explanations for later stages.

3. Target the Right Investors: Founders should prioritize smaller, specialized funds or angel investors with a background in music or adjacent industries.

4. Educate and Build Trust: By reducing the complexity of due diligence, founders can lower barriers for investors and build confidence in their ventures.

Aligning their approach with investor expectations is key to securing funding and fostering long-term relationships.

Is the Lack of Publicized Success Stories in Music Tech an Issue?

Gareth emphasized that the lack of widely recognized success stories limits the growth of music tech. While companies like Duetti have raised significant capital, such achievements often remain confined to industry circles.

Additionally, many acquisitions in music tech are shrouded in secrecy, with deal terms and valuations rarely disclosed. This opacity limits the ability of founders to inspire confidence in investors and attract new entrants to the sector.

Publicizing success stories can create a "halo effect," drawing attention to the industry's potential and motivating both founders and investors to explore opportunities in music tech.

Advice for music tech startups

• Understand Your Industry: Gain a deep understanding of the music industry’s operational and structural complexities. As Gareth Deakin advises, this foundational knowledge is crucial for navigating the sector.

• Start Small: Focus on achievable milestones and build incrementally rather than chasing large, unattainable goals.

• Seek Mentorship: Participate in accelerators and incubators like Abbey Road Red to gain access to networks and expertise.

• Be Flexible: Adapt quickly to feedback and adjust when necessary to meet market demands.

• Focus on Building a Business: Prioritize establishing a sustainable business model over mastering industry-specific complexities.

Conclusion

The episode explored how music tech startups succeed by addressing industry inefficiencies with realistic goals and smaller capital needs. Educating investors about the sector’s complexities and parallel narratives is key for attracting funding. Publicizing success stories can inspire confidence, while ecosystem building efforts are essential for encouraging collaboration and reducing barriers.