ARTISTS / BANDS SEEKING INVESTMENT CAPITAL 

 
Investing In Artists • 360-Degree Deals • Venture Capital For Bands
Do you know someone or a local business that has money to invest?  How do you obtain an investment when everyone believes music sales are dropping like a rock? 

If you place all your ideas, music and assets into a corporation YOU own, and if you pledge your rights, your services and every potential entertainment-related income stream to YOUR corporation, you may be able to sell shares to investors.

This post will show you how to create a Music Venture Investment presentation.  This post does not cover writing a business plan; I will cover that on another day.  This advice is for the artist or manager that has created a plan, and now he or she wants to know how to sell it to investors.

I have only worked on several music venture investments.  However, I have done similar deals on other non-music related projects.  This article should be regarded as general advice and it should be used as a foundation for discussion with a qualified attorney.

Your Corporation Is Your Extended Band
A corporation is a legal entity that holds all your assets.  It’s the best way I can think of to make a commitment to your bandmates, to your business team, and to your investors.  

Once formed, your corporation is your extended band and you should show it as much “love”, dedication and commitment as you did your unincorporated band.  It’s your legal bond to the people that support you and invested in you.  It’s been said that forming a corporation is like getting married; in many ways, that’s true.  Don’t accept someone’s money and don’t make promises to your corporation unless you are willing to put responsibility to your corporation first.

Because you must provide leadership and unwavering commitment to your own corporation, hammering out the agreements that govern your corporation, that specify how revenue and profits will be split, and the details that specify everyone’s obligations to your corporation are as important as anything you will ever do on the business side of the music industry.  

The Goals of Your Presentation
If you really want to attract investment capital you should demonstrate - by what you write and by the words coming out of your mouth - that you understand the gravity of the previous section titled “Your Corporation Is Your Extended Band”.  Beyond a great business plan, nothing pleases an investor more than dealing with someone that understands what RESPONSIBILITY TO YOUR CORPORATION means.  Here are some other things you want to demonstrate in your investor presentation:

• Honesty and integrity - It helps to have genuine recommendations from people that know you as an honest and dedicated person.  It also helps to have known and respected members of the community write you recommendations.
• Transparency - Show that you understand that information will never be withheld from those that you are obligated to share it with.
• Minimal bullshit - Don’t be afraid to admit you don’t know the answer to something.  Ask for assistance or volunteer to obtain the answer within the next 24 hours.
• Respect for money - You are asking for an investment; don’t say you don’t care about money!  If you did not care about it, you would not need it.  
• Demonstrate that you are a leader that can ALIGN EVERYONE’S INCENTIVES.  Aligning incentives is the most important part of creating your extended band.

Mutual Alignment of Incentives
One of the biggest problems in the music industry is the fact that the incentives of artists are typically not aligned with the incentives of record labels or investors.  For example:

• An investor or a label may propose to profit from music sales.  However, you may choose to give music away to drive traffic to your shows.  This puts you and the investor at odds.    
• Another example is when labels lobby to push down royalties.  Labels argue that exposure sells music and that higher royalties reduce exposure.  Alternatively, artists argue that royalties are the only way to earn a living.

When you negotiate a deal with an investor, you want to make sure that there are no hidden incentives; you should want 100% mutual alignment of incentives between you and your investors.

Achieving Alignment of Incentives
The easiest way to achieve alignment of incentives is for you (the artist) to assign all of your rights, services and income streams to a corporation that you and ultimately your investor(s) own together.  To do this, you will be asking an attorney to form a corporation and then you and your bandmates will be signing a Rights & Services Agreement that pledges all of your ENTERTAINMENT-related assets and services to YOUR OWN corporation.  Once you have placed all of your “incentives” into your own corporation, you are almost ready take on an investor.    

Letter of Intent (LOI)
As part of your presentation to an investor you are going to offer a DRAFT Letter Of Intent (LOI) to the investor.  The reason you are offering the LOI is to give investors an “inventory” of what they are getting for their money.  Remember, everyone has the general notion (right or wrong) that music sales are plummeting; so it’s important that you tell people, beyond your business plan, what it is they are investing in.   

Who To Include In Your Letter of Intent
The language of your LOI may have account for more people than yourself and your band.  Your LOI may have to include your manager, your illustrator, your band’s filmmaker, and everyone that is currently part of your elaborate plan (team).  Don’t worry; you can always include other people later.  I will cover how to expand your organization and how to divide up stock (equity) in another post. The bottom line: you are looking to prove to investors that everyone involved is 100% committed to your venture / corporation.

A Sample Letter of Intent
Here’s a ROUGH sample of a LOI written for a fictional band called Long Alley.

Put the words NON-BINDING DRAFT PROPOSAL at the top of your letter of intent.

To Whom It May Concern:

Thank you for taking the time to consider making an investment in our soon-to-formed corporation called Long Alley Incorporated.  

Long Alley is a team that includes (list band members and team members - one per line with proposed ownership percentages before each name.) 

Note: Young artists have a tendency to want to split everything evenly.  In a few weeks I will show you why this is not in the best interest of your team.  If you can’t wait, consider dividing up shares based upon individual commitments of time per year.

The attached business plan covers important items like target markets and promotion plans.  This draft letter covers the assets, the rights, and the services that members of Long Alley are willing to pledge to Long Alley Incorporated in consideration for obtaining the investment capital we need to execute our business plan.

 
The members of Long Alley are willing to pledge the following master recordings to Long Alley Incorporated.  (List names of recordings / completed songs.)

Long Alley intends to record the following songs within the next XXX days, and these songs will also become property of Long Alley Incorporated.  (List the songs.)

It is our intention that all of the new songs Long Alley writes and records over the next (X) years will become property of Long Alley Incorporated.

It is our intention that all of the revenue generated from (list ALL potential revenue sources covered in your business plan) will flow into Long Alley Incorporated; where it will be divided according to the terms of our agreement after subtracting the expenses also outlined in the attached business plan.

It is our intention (important) to invest XX hours of time each week (don’t over promise here) to achieve the objectives outlined in our business plan.

Note: The ability of each team member to invest TIME may vary.  Make a list of time commitments; this list should correspond to the equity splits (stock ownership) you are proposing.  You may have to value one person’s time more than another’s when you are doing your ownership calculations.

The members of Long Alley will work exclusively for Long Alley Incorporated for X years; however limited to entertainment.

 
The following assets will also become property of Long Alley Incorporated:

• Our name: Long Alley Band.
• Our website and website URL: www.longalley.com
• Our MySpace page and MySpace URL: www.myspace.com/longalley
• All Long Alley photographs and videos.
• The Long Alley logo

In consideration for pledging the rights, the services, and the assets just described, Long Alley is seeking an investment of $100,000.  The $100,000 will be used to fund our business plan and to pay the legal bills associated with securing this investment.

Note: This example letter is short and brief.  When you write your own letter, you should add enough language to make sure that the presentation goals mentioned near the top of this post are met.

 
Thank you for considering an investment in Long Alley.

 

Notes on Legal Strategy
Don’t let the attorneys suck up all your investment money negotiating your investment.  Try to iron out as much detail as possible on your own first.  If you have a sticking point with your investor, call him or her directly to resolve the issue; don’t have the attorneys do the back and forth negotiating.    

Make your best upfront effort to explain to your potential investor that your financial position requires you to have all legal fees covered as part of the deal.  You may even want to have a short signed letter that states that the investor will pay for all legal fees; even if the deal falls apart at the last minute; and with no exceptions.  Having legal bills hanging over your head is a sure way to loose control of your negotiating position.  

It is essential that you have your own attorney.  Do not represent yourself and do not use the investor’s attorney.  A smart investor will always make sure you have outside legal representation; this will also protect the investor from having you invalidate the deal due to inadequate legal counsel.

You Are Not Selling Shares, The Company Is.
I just want to make it clear that when investment capital comes in, it is not your money; the money belongs to the corporation.  You will not be able to withdraw compensation unless it was specified in your business plan and covered under the terms of your agreement.  

How Much Is The Band Worth Prior To The Investment?
If you have an interested investor that likes your plan and understands your commitment, the next hurdle to cross is how much of your company (stock) do you have to give up to obtain the cash you need to fund your plan?  For example, if an investor wants 50% of your corporation in exchange for investing $100,000 then he is valuating your company at $100,000 before his investment.  ($100,000 divided by (your $100,000 + his $100,000) gets you 50%)

There are a lot of factors that can increase your valuation, such as the genius of your plan, your current revenue, your popularity, and subjective factors such as how much the investor likes your music.  If this post is popular, I will cover this in more detail later.

Final Note
You are probably not going to be able to raise money if you plan on generating all your revenue from music sales.  You can still be an artist or a band, but you will need to have an elaborate plan that demonstrates how you are going to be entertaining on the Internet, and how you will build momentum for your brand.  The journey from here to wherever you are going will involve a multitude of people and multiple sources of revenue.  Forming a corporation, creating the RIGHT agreements, and learning how to manage the task of compensating partners with equity (stock) in lieu of cash are all part of managing in the music business in 2008.

 

This post will argue that the one of the most effective ways build a brand on the Internet is to join forces with other artists.

Building a brand in any industry is difficult.  Building a nationwide or global brand in the music industry is a colossal undertaking.  When it comes to entertainment, there are dozens of alternative and competing product categories, and when it comes to music there are millions of options to choose from.

If you are looking to build a business in music that generates ongoing revenue, the only real option is to build a brand on the Internet.  If you have a strong brand on the Internet, your live show traffic will increase, you will sell and stream more music, you will sell more merchandise, and you will attract sponsors and advertisers.

The Unsprung Message Of The Month
You cannot build a great MUSIC brand on the Internet by being informative; you have to be entertaining.

The Number One Mistake Made By Record Labels And Artists
When attempting to build a brand on the Internet, every label and every artist I have ever studied fails to strongly and competitively deliver the correct, or desired (by consumers) value proposition.

The correct or desired value proposition for any product or service is the ONE BEST QUESTION that compliments the bolded question on the next line.
WHAT DOES THIS PRODUCT OR SERVICE DO FOR ME?
Does it make me sexy?
Does it feed me?
Does it make me horny?
Does it make me safe?
Does it entertain me?
Does it inform me?
Does it make me feel happy?
Does it make me smart?
Does it make me strong?
Does it make me healthy?
Etc., etc., etc.,

Does It Entertain Me?
Standalone Artist Websites And Profile Pages Are Not Entertaining
To succeed at delivering the WE ENTERTAIN YOU value proposition you have to COMPETE with EVERYTHING, AND I MEAN EVERYTHING, that delivers the WE ENTERTAIN YOU value proposition on the Internet.

By default, and by the nature of what it is, a website or profile built around ONE artist/band cannot easily compete (but it is possible) with other sources of entertainment like video games, Internet games, Internet radio, 500 television channels, movie downloads, or even with the activity of surfing the Internet, YouTube or MySpace for entertainment.  A single website or profile page just doesn’t compete.

Surfing from one web site or MySpace profile to another is entertaining, but when someone purposely dives into a website or profile owned by a single band or artist they are NOT really doing it to be entertained - they are doing it to become informed about shows, music or biographical information.

In addition, hitting the play button on your MySpace music player with five songs in it - is not the same as hitting the play button on an iPod with 300 songs in it.  The MySpace music player informs people about your music, whereas the iPod with your songs and 295 others - entertains people.  

Informative versus entertaining is the reason why the ratio of songs played per site/profile visitor is around 1.5 (songs played per visitor).  It’s also the reason why the average visitor to your site spends less than five minutes on it.  If you still think you are delivering entertainment, you are delivering the shortest form of entertainment in the marketplace.

If have to say this again (and again): You cannot build a great MUSIC brand on the Internet by being informative; you have to be entertaining.  You have to competitively deliver the correct value proposition.

If One Doesn’t Work - Try An Alliance
A gang, a consortium, a syndicate, or an alliance of many artists working together can competitively deliver the WE ENTERTAIN YOU value proposition on the Internet, and more effectively in the physical world.  Where a single artist struggles with just being informative on the Internet, numerous artists on a single site are instantly entertaining.

Long Alley - The Example
The easiest way for me to prove this point is to describe a fictional example.  Below you will read how Long Alley Music (the fictional example) competes with other forms of entertainment on the Internet, and with other things entertaining in the physical marketplace; including other artists.  (The Warped Tour is a great example of an alliance.)

Long Alley Music - The Description
There are forty-five artists contributing over seven hours of music from one hundred and ten songs on Long Alley Music (@ www.longalley.com).  Every song falls into a genre Long Alley describes as Jazz Infused Rock.  Each song on Long Alley is handpicked and voted in by the artists that co-brand under the Long Alley name.  Long Alley listeners streamed over one million minutes of music last year through Long Alley Radio.  Long Alley artists contributed over twenty-six thousand high-resolution photos of fans at shows that were snapped in thirty-six different cities around the globe last year.  The Long Alley website also showcases thirty-five recent videos featuring live and studio performances of twenty different Long Alley artists.

Long Alley Music Is Entertainment
The Long Alley website, the music player with seven hours of songs, the high-resolution photos, and the continuous stream of videos are entertainment.  Hopefully, you can instantly see and hear the difference between Long Alley and a website owned by one artist.  Long Alley can be played at a party, whereas your music player cannot (for example).

The Brand Proceeds You
Artists pre-announce and banner the Long Alley brand on every show they perform at, thereby sending smoke signals to fans that a Long Alley artist is in town.  It would be nice to show up in a city 1,000 miles away and know that you have brand recognition; especially if the brand equates to quality + the genre of music you specialize in.  It’s also GREAT for fans to be able to travel to another city and know that a branded (Long Alley) show is in town; as it’s a lot easier to make a purchase decision when you are comfortable with a brand.    

Everything Is Easier
From selling tickets to t-shirts, when fans can do it all one website it’s convenient and easier.  More importantly, if you build a syndication of artists located all over the country, it’s easier for national advertisers and sponsors to justify investing time into making deals with your brand.  Remember, if a dealmaker from a national beverage company (for example) has three hours to invest, she’s going to spend her time on the brand that has the potential to deliver the best audience.  (I will define best some other time; as best does not always equate to largest.)

Brand Together - It’s Done Successfully All The Time
Branding together does not have to be any more complicated than assembling a movie soundtrack, and as we all know, soundtracks are some of the best selling albums in the history of music; just look at High School Musical, the best selling album of 2006.

Branding Together - How Come Nobody’s Doing This Yet?
Beyond putting three bands on a flyer and playing a gig together, it wasn’t easy 24 months ago, and everyone’s brain is stuck in the past.  Look, everyone was chasing record deals and playing the zero sum game; if she got a record deal, you wouldn’t; there were only so many deals to go around…  Artists have been hoarding fans and competing for deals for so many years that real collaboration only happened with song writing or in the studio.  The days of traditional record deals are over; distribution is no longer a roadblock, and anyone can stream music and video on the Internet now.  The new mindset has to include collaborative marketing, fan sharing, website sharing, revenue sharing, and co-branding.  It’s the easiest way to be entertaining on the Internet.   

Never Put Sand Into Butter
This post on Branding Together is going to spawn an entire series of articles.  But, I want to mention a couple of cautions for those that jump ahead.  If you are thinking about assembling a content syndicate, here’s the biggest mistake you can make:  I call it putting sand into butter or glass into ice cream.  This happens when you let songs into the mix that radically diverge from the Spectral Deconvolution (melody, harmony, tempo, pitch, octave, beat, rhythm, fullness of sound, noise, brilliance, and chord progression) of the rest of the songs in your syndicate.  This is analogous to putting glass into ice cream.  

Second, if 80% of the artists you co-brand with play in coffee houses and in bookstores, use caution if you are thinking about bringing in a rock band that plays in live music clubs.  Remember, fans want stability in presentation as much as they want stability in sound.  

How To Build Something Like Long Alley Music
Sorry, the rest will come shortly.  Here are some topics I will cover in the near future:  
Creative ideas for choosing a name for a syndication of artists.
Creative ideas for sharing ownership.
Creative ideas for sharing revenue (which is different from ownership).
Creative ideas for putting the legal plumbing together.
Creative ideas for finding and selecting songs.
Creative ideas for approaching other artists.
Creative ideas for approaching advertisers and sponsors with opportunities.
Creative ideas for promoting your syndication (co-brand).
Creative ideas for doing merchandise and ticketing under a co-brand.

There has been a lot of discussion on this blog and on the Internet about the death of the album.  Spending mind time on the decision to make albums or to sequentially release singles is missing the point.

Revenue from the sale of music is slowing considerably for everyone.  Reoccurring revenue, which is the ongoing stream of revenue you make outside of touring, is going to come from consumers that tune into and fall in love with your brand on the Internet.



To persuade fans to tune in, to fall in love with, and to spend money on your brand, you need an elaborate plan that goes way beyond the album or singles decision.  You will have go far beyond creating a MySpace page that features five of your songs and ten pictures of your band.  You will have to rethink what it means to be entertaining on the Internet.  

The name of your brand, the URL you use, the first word you type, the sequence in which you release your songs, your lyrics, the images you feature, the videos you release, the messages you type, and everything you put into your online presence should be part of an elaborate plan to seduce fans.
 
The concept of seduction does not have to be sexual.  I use the concept of seduction to convey complexity and long term planning.  Map out a two year or three year plan that elaborately pulls people into your world of images, poetry, lyrics, stories, music, mystery, hints, clues, energy, characters, plot, storyline, drama, intrigue and excitement.

A regular old website or MySpace page is not the ideal vehicle for building a brand upon.  Your name and your image may not be the ideal vehicle to build a brand upon.  Start by thinking like the creator of a television series.  What do you call it?  What is it about?  How many “seasons” will it take to tell the story?  Make the presentation simple and compelling, but make your plan to seduce - elaborate, intriguing and complex.