beatBread’s Moneyball Approach to Funding Musicians
How beatBread is leveraging data & technology to finance artists’ careers
GM readers 👋,
Like many folks, I’ve spent the past month reflecting on goals for Alderbrook and this newsletter. During that process, a mentor sent me a podcast interview transcript with a member of the Doomberg team.
If you’re not already familiar with Doomberg, they write a business focused Substack newsletter with 100k+ subscribers and have a Twitter account with 200k+ followers. If that’s not impressive enough, they’ve accomplished this growth in less than two years. Doomberg is an expert at content creation with a clear-eyed vision and a well-defined methodology to execute their growth strategy (dubbed the “five pillars”). I really admire Doomberg’s north star for the company, which is discussed in the interview:
“But our objective all along was never to make the most amount of money. The objective was to make more than enough money doing only what you love.”
As someone who is still a novice content creator and has been grappling with the long-term vision, the Doomberg interview was inspiring! It’s a long read, but if you’re interested in business building, branding, and/or content creation, the interview is insightful and worth checking out!
For this month’s piece, we’re going to cover our first start-up! The topic – financing music IP – will likely be familiar to regular readers of this newsletter. However, we’re going to analyze a slightly different part of the market. This start-up is using technology to provide smaller, independent artists & labels with greater access to funding and more flexible terms.
As a reminder, these company-specific deep dives are intended to explore what businesses are up to, speculate where they might be going, dissect their risks to getting there, etc. In short, I hope to “level up” my understanding of them. Importantly, I’m not trying to shill any investments.
And with that, on to the disclaimers…
Note: I write this newsletter to learn in public. This piece is for informational purposes only. None of this is financial or legal advice. I don’t have any investment holdings in beatBread. Do your own research!
Thanks again for reading. Now, let’s get after it!
PS if you’re not already a subscriber to Leveling Up and don’t want to miss out on future newsletters, feel free to enter your email below and you’ll receive new posts directly in your inbox:
beatBread’s Moneyball Approach to Funding Musicians
“Billy, this is Chad Bradford. He's a relief pitcher. He is one of the most undervalued players in baseball. His defect is that he throws funny. Nobody in the big leagues cares about him, because he looks funny. This guy could be not just the best pitcher in our bullpen, but one of the most effective relief pitchers in all of baseball. This guy should cost $3 million a year. We can get him for $237,000.” - Peter Brand, a character in the movie Moneyball
In 2002, Billy Beane, the general manager of the Oakland Athletics, and Peter Brand, a young Yale economics graduate, sought to assemble a competitive major league baseball team on a limited budget. Using Brand’s objective statistical framework (“Sabermetrics”), Beane successfully identified overlooked and undervalued players, culminating in a then-record breaking 20-game winning streak and a division title. The story inspired a 2003 nonfiction book by Michael Lewis and subsequent 2011 film both titled Moneyball.
beatBread is arguably following a similar playbook to finance emerging musicians’ careers. Since launching in 2020, beatBread has made more than 500 artist advances and entered into more than 10 white-label partnerships with independent labels / distributors, including United Masters and Symphonic Distribution. It also recently closed a $100 million fund that will allow it to provide funding to artists considering major label deals. Meanwhile, the company doesn’t listen to any of the artists’ songs that it backs. Instead, beatBread takes an objective approach focusing on billions of data points – an artist’s historical streams, social channel engagement, and various others – to forecast cash flows and price the funds it advances artists.
In this piece, we’ll take a look at beatBread’s origin story and strategy. Next, we’ll consider the size of the opportunity. Finally, we’ll speculate on where beatBread is headed and some potential risks to getting there.
What is beatBread’s Origin Story?
It’s pretty safe to say that Peter Sinclair, the CEO and co-founder of beatBread, is a music industry outsider. And that’s not a huge surprise given his company’s innovative vision. Sinclair spent over a decade scaling a series of tech start-ups before joining Universal Music Group (“UMG”) in 2015 to lead the major’s eCommerce platform.
In interviews, Sinclair has described how the idea for beatBread formed during his time at UMG. Major record labels have historically provided artists with a bundle of services, such as funding, marketing, and distribution. In exchange for these services, artists typically give up copyright ownership in their songs and a majority of future royalties associated with songs. However, over the past several years, there have been a number of companies offering artists’ specific services, thereby enabling artists to unbundle the traditional label deal.
At UMG, Sinclair lived this trend. He saw that many artists' needs were not a fit for a major label. Some artists already had their own digital marketing team and/or their own digital distributor, and they didn’t want all of the label’s services bundled into the deal. The graphic below illustrates this emerging trend.
As Sinclair dug deeper, he also discovered that many artists were simply too small to draw interest from a major record label. These artists could make $1K to $100K+ per year but still required funding to continue growing their careers. Industry data suggests that this cohort of unsigned artists is growing quickly. For example, according to Spotify, there are 52,600 artists earning more than $10K per year from Spotify alone, a 2x+ increase from 2017. With only 1,040 artists earning more than $1M on Spotify, over 50K of these artists aren’t superstars yet. It’s also important to note that the Spotify figures don’t account for the fact that artists with record label deals typically only capture a small percentage (<20%) of Spotify’s streaming royalties.
Similarly, beatBread estimates that ~30K artists earn more than $50K per year from recorded music (not just streaming), a 6x increase from 2015.
At the same time, the major labels aren’t scaling their rosters quickly enough to provide funding to the growing number of “middle class” artists. beatBread estimates that there are currently 7,500 active artists being worked by the major record labels annually. This implies that 20,000+ artists earning more than $50K per year need to find funding elsewhere. beatBread expects this cohort of artists to grow to 100K+ by 2030, with 52% of unsigned artists already reporting cash flow issues as a major issue in their career.
Based on these insights, Sinclair’s bet was that two artist personas would immediately find an unbundled funding product attractive:
Artists who want a different funding option than what the major labels currently offer
Artists whose following is too small for a major label to be interested in signing them
These problems ultimately drove Sinclair back to his start-up roots. After five years at UMG, he left the major in 2020 to build beatBread.
What is beatBread’s Value Proposition?
In order to solve the funding problems facing independent artists, beatBread has built a platform that connects artists (who want capital) with investors (who want returns on their capital). beatBread stresses that it’s only focused on funding. It’s not a record label, distributor, or artist services company. And it offers one financial product – an advance – with terms that are customizable based on an artist’s goals.
For those unfamiliar, an advance is an upfront payment by a label/investor to an artist in exchange for a percentage of future royalties generated from the artist’s music. Once the advance is “recouped” (i.e., paid back), artists begin earning royalties tied up with the advance again. It is a common way for artists to fund their careers in the music industry.
How does beatBread Deliver Value for Artists?
For artists, beatBread provides some of the following benefits over major label deals:
Greater Access to Funding: beatBread offers advances from $1K to $2M. This means that artists earning as little as ~$100 per month from streaming are eligible to receive a beatBread advance. According to beatBread, more than half of their advances are for less than $30K, which makes sense given that major labels aren’t focused on funding advances of this size.
Ability to Retain Copyright Ownership: beatBread allows artists to retain 100% of their copyrights, whereas artists typically have to transfer ownership to a label when receiving a label advance.
Greater Control over How the Funds Are Used: Artists can use beatBread advances however they want rather than being forced to use a label’s distribution, marketing, production, etc. partners.
More Artist-Friendly Contract Lengths: beatBread advances are for a finite period of time as opposed to major label’s typically retaining an interest in royalty income for the life of the copyrights (i.e., in perpetuity).
More Artist-Friendly Recoupment Terms: beatBread advances have recoupment rates (the percentage of royalty income applied to paying down the advance) above 50%+, whereas these rates are ~20% with major label deals.
Shorter Closing Times: beatBread estimates that most artists who agree to a deal receive funding within a week of submitting their initial information. It also says that it can and has closed deals within 48 hours.
Greater Flexibility in Funding Terms: beatBread has designed its platform to enable artists to choose the best deal structure for them. The platform’s accessible UX allows artists to select from different terms, including the contract length, what songs are included in the deal (e.g., back catalog only vs. catalog plus future releases), and the percentage of income paid to the artists during the term of the contract. Based on an artist’s selections, beatBread generates a funding estimate in real-time (depicted in the image below). If you’re interested, this video shows you the entire beatBread funding process from the artist’s perspective.
beatBread’s core artist product is also available to independent labels under the brand chordCashAI. This white label platform rebrands beatBread’s platform with the label’s logo, font, and colors. But it allows indie labels to provide the same benefits and experience for their artists, as beatBread’s direct-to-artist platform.
beatBread relies heavily on technology in order to provide artists and independent labels these benefits. Along these lines, “data scientist” is the most common job title at beatBread. The company’s technical talent has developed: 1) an algorithm to evaluate how much funding to offer each artist and 2) tools to automate workflow processes. This automated system is what gives the company confidence to offer better terms and quicker offers than traditional labels.
beatBread’s algorithm is derived from billions of data points (streaming history, social channel engagement, etc.) on 100K+ artists and millions of songs. Once an artist provides their historical streaming data and desired deal terms, the algorithm can estimate an artist’s future earnings and automatically offer an advance. In theory, as beatBread accumulates more data, the company’s model should improve leading to higher returns with less volatility.
Meanwhile, beatBread’s automated workflow tools allow the company to ingest an artist’s streaming data from dozens of distributors and quickly provide an advance estimate. In comparison, traditional labels employ a team of finance professionals to process and price these transactions in a more manual fashion. As a result, beatBread’s efficiency enables the company to offer much smaller advances than a traditional label, thereby expanding the pool of artists that can receive funding. In short, technology is the backbone of beatBread’s ability to differentiate (even if these big data processes make me feel like the Rodney Dangerfield confused meme).
How does beatBread Deliver Value for Investors?
It’s important to note that beatBread doesn’t fund these advances via its own balance sheet. Instead, the company has raised a series of funds with capital provided by music companies, institutional investors, and high net-worth individuals. For example, beatBread recently closed a $100M fund from institutional credit investment firm Variant Investments. It also announced the launch of an “Investor Network”, in which music companies, distributors, and high net-worth individuals can bid on deals. This funding feature allows larger artists to potentially receive better economic terms than beatBread’s initial automated offer. beatBread seeks to generate attractive risk-adjusted returns for these investors by accurately forecasting future royalties to properly size each advance.
For investors, beatBread’s advances are potentially interesting relative to other investment opportunities for several reasons. I covered why music IP is considered an attractive asset class overall in a prior newsletter linked here. To summarize, here are a few of the key reasons:
The Emergence of Streaming has led to Higher Growth Expectations: After a ~15 year decline post-Napster, recorded music industry revenues reached an all-time high of $25.9 billion in 2021. Streaming revenues increased from 0% to ~65% over this same 15 year period. For beatBread, this trend is encouraging because the company focuses on offering artists’ funding in exchange for a share of their streaming royalties.
The Recurring Nature of Music Royalties: Music royalties are a source of recurring income. Music royalty income is collected by several different distributors, with income paid periodically to music IP rights holders. Recurring payments are desirable to investors looking for a source of predictable income, typically found in asset classes such as real estate.
Low Correlation to Economic Activity: Music spending has historically shown little correlation to broader economic activity. In the below chart, Goldman Sachs compares the recorded music industry’s 15-year decline due to piracy and its subsequent streaming-driven rebound versus personal consumer expenditures (“PCE”). Per Goldman, recorded music spending has outgrown PCE growth by a factor of 2.4x since 2016.
Attractive Yields in a Low Interest Rate Environment: In the recent market environment, investors are searching for opportunities to earn something on their cash without a high risk of losing their principal. As a result, music royalties have been viewed as an attractive alternative, with mega asset managers – such as Pimco, KKR, Blackstone, Oaktree, and Apollo – all announcing plans to commit billions of dollars to music rights acquisitions in the past couple years. Based upon my research, it isn’t clear what rates of return beatBread is underwriting to. That said, I’d expect them to be 15% to 25%+ net of beatBread’s fees.
beatBread’s Traction to Date
beatBread is a private company, so we don’t have much access to metrics that demonstrate their success so far. That said, we can observe a few data points that suggest beatBread is finding early product market fit. These include:
Multiple Successful Fundraising Rounds: beatBread has raised over $130 million of capital to date from angels and institutional investors. In February 2022, the operating company that owns the IP and employs the beatBread team raised a seed round led by Deciens Capital. As mentioned, the company has raised various artist funds, which is where the capital funding the advances comes from. This includes the recently raised $100M fund with Variant Investments. The ability to raise multiple rounds of capital suggests that the company is meeting its targeted milestones.
Growing Employee Base: According to Linkedin, beatBread’s headcount has grown ~70% to 30+ employees over the past year. A rising headcount is one indicator that the company is finding product market fit and trying to accelerate growth.
Users are Willing to Pay for the Product: beatBread has demonstrated that artists and investors are willing to use the platform. According to the company, it has made more than 500 advances since being founded ~2 years ago and is currently closing more than one advance per day with 10%-15% of artists returning to refinance their first advance. And it’s not facilitating these advances for free either. In exchange for sourcing and administering these advances, beatBread charges $288 plus 2.8% of the total advance amount. If we make some speculative assumptions for transactions to date (500) and an average advance size ($50K), we calculate beatBread’s cumulative transaction volume and revenue of ~$25M and ~$1M, respectively, since inception. Not a bad start at all! But it also suggests that the company will need significantly more transaction volume. The recent $100M raise from Variant Investments should help in this regard. In addition, I’d expect the company to pursue new revenue streams over time (we’ll discuss this more shortly).
Actual Results Performing In-line with the Algorithm’s Forecasts: According to beatBread, ~70% of funded advances are recouping at or ahead of the algorithm’s forecast. The fact that the algorithm has been accurate, on average, is a very positive sign for beatBread’s ability to raise future funding from investors.
Estimating the Size of the Opportunity
Now that we know what beatBread brings to the table, let’s explore the potential size of the opportunity that the company is tackling. Again, the company is currently focused on funding independent artists and independent labels. This subsection of the recorded music industry is growing faster than the market. For example, MIDiA forecasts that this “Artist Direct” (i.e., artists not signed to a label) revenue was $1.5 billion in 2021. While this is only ~5% of the global recorded music industry, it has increased over 200% from 2017 when it generated only ~2% of total industry revenues.
Meanwhile, MIDiA estimates Independent Label revenues of $8.4 billion or ~30% of industry revenue in 2021. Independent Label revenue has nearly doubled since 2017 when it made up ~23% of total industry revenues.
While the combined revenue of these two segments is ~$10B, we need to estimate how much is required to fund career development. IFPI reports that global record labels are spending 30%+ of their annual total revenue on A&R and marketing to develop their artists. Applying this percentage to the Artist Direct and Independent Label annual revenue figures implies an annual funding need of $450M and $2.5B, respectively.
If we assume that beatBread addresses 100% of its current target market’s annual funding needs and the average advance size is $50K, I calculate an annual revenue potential of ~$100M. So, while beatBread’s addressable market is sizable and growing quickly, its current market focus and monetization model doesn’t appear likely to generate a venture-backed outcome ($1 billion-plus valuation). As a result, I expect the company to continue expanding its offering and potentially tweaking its monetization model over time.
Where is beatBread headed?
It’s still early days at beatBread. The company is growing quickly, but it’s still only 2 years into its journey. beatBread says that its long-term goal is to become the largest source of funding in the music business. In order to achieve that vision, I’d expect the company’s product offering to evolve over time. For example, let’s compare an artist’s potential funding needs over the course of their career to a technology start-up (depicted below).
Today, beatBread is primarily focused on earlier stage artists, which might correspond to Seed to Series A stage start-ups. However, I expect beatBread to gradually go up market over time. For example, offering advances to major label artists (Series B and later stage start-ups) provides a potentially large – albeit more competitive – opportunity. Longer-term, if the company’s algorithm continues to prove accurate, I wouldn’t be surprised to see beatBread start purchasing catalog assets as well.
For business strategy nerds out there, this potential playbook may sound familiar. It’s Clayton Christensen’s Disruptive Innovation framework, where a product or service takes root in simple applications at the bottom of a market and relentlessly moves up market, eventually competing against and potentially displacing incumbents. Incumbents tend to ignore lower tiers of the market due to lower profitability, smaller market sizes, etc., creating opportunities for disruptive entrants to enter the market.
beatBread likely has other opportunities to expand its market size down the line. Today, the company is focused on providing advances against recorded music streaming royalties. Over time, it will likely try to offer advances against other recorded music royalty streams and begin offering advances to songwriters and publishers against their music publishing & PRO royalties. beatBread could also adjust its monetization model by incorporating a profit interest structure with its investors, under which beatBread receives a portion of profits above some minimum threshold.
Of course, there are potential risks that could disrupt the company’s journey. From my perspective, three of the larger risks include:
Competitor Risk: There are already companies (Sound Royalties, RoyFi, etc.) offering independent artists and independent labels advances. Meanwhile, The Music Fund (acquired by HIFI) is/was running a similar data driven advance playbook as beatBread. It remains to be seen whether the company can carve out and sustain a meaningful share of the market.
Underwriting Risk: beatBread’s algorithm is derived from a billion historical data points over the past five years. And its early results for forecasting artists’ future streaming income appear to be encouraging. But will this early success continue, especially in a scenario where recorded music market growth decelerates or even declines?
Team Risk: beatBread appears to have been able to attract the technical talent necessary to build its platform, based on its traction to date. However, will the company be able to retain its existing employees and attract new talent necessary to continue scaling its products?
In summary, I expect beatBread to expand its offering upmarket and to new markets over time. This aligns with the company’s long-term objective to become the largest funding source in the music industry. Of course, there are still several hurdles that must be overcome in getting from here to there.
Like the Oakland A’s under Billy Beane, the beatBread team has taken an objective and statistical approach to funding a largely overlooked part of the market. beatBread’s platform is compelling enough that independent artists and independent labels are closing deals at a pace of 1 or more per day. With 500+ deals closed and $100+ million of capital raised in the past two years, beatBread does not appear to be a flash in the pan.
How will this story unfold? For Billy Beane, once his Moneyball approach was proven successful, Beane took a higher paying job with the Boston Red Sox, a higher budget baseball team. Meanwhile, the rest of the league incorporated his playbook into their scouting process.
For beatBread, we may see acquisition offers from the major labels and financial institutions, if transaction volumes continue to grow and its algorithm continues to perform. Meanwhile, in a success case, I’m sure others will look to replicate their playbook wherever possible. Ultimately, we’ll have to see how their trajectory develops, but I intend to keep a close eye on beatBread and its platform, both of which could redefine how a meaningful part of the market accesses funding.