Problem: For entrepreneurs, the most popular forms of raising capital are debt or equity. Is there another innovation that could take place in this space?
Solution: This innovation of this business would be to take parts of the record label contracts in the music industry and apply it to term sheets in the venture capital space. Both are legal contracts, but there has not to this point been much cross-pollination of these industries or innovation in startup funding (aside from the SAFE which Y Combinator created in 2013).
In the music industry, the gold-standard of success is a record deal from one of the big three record labels: Universal Music Group (owns Def Jam Recordings), Sony Music Entertainment (owns Columbia Records), or Warner Music Group. In basic terms, these record deals are simply just contracts about the obligations labels have to an artist and vice versa. They are composed of about 7 different parts:
Territory: Where the label controls the rights to your music
Term / Exploitation Period: How long the label controls the rights to your music
Rights: The different things the label can legally profit from, use, and/or control
Recording Commitment: The # of songs or projects you have to deliver
Release Commitment: The minimum product(s) that the label has to formally release
Advances: Recoupable cash payments (aka future earnings) you can spend freely
Budgets: Recoupable cash reserves usually used for specific things, e.g. recording
Royalties / Revenue Share: The % of revenue you keep v.s. the % the label keeps
I want to focus the rest of this blog post on understanding the Advance and potentially applying advances to the venture capital space.
As Gigfaster clearly explains,
The first thing artists need to realize is that an advance will need to be paid back (or “recouped”) out of their future earnings. It’s a loan… Any money advanced to you is “owed” back to the label before they give you any additional money from your royalties. Not only that, but in most cases, the label is entitled to make back its production and marketing costs before paying you more, as well. The good news is that if your record should fail to sell to expectations, you aren’t responsible for paying back the advance money.
There are a few high-level benefits of advances that could be cross-applied to the venture capital space as well. (1) Positioning an “investment” as a loan to be repaid, which could potentially cap venture returns while allowing entrepreneurs to see outsized upsides; (2) a more transparent system of understanding the effects of actions you take by accepting funding; and (3) limited liability on the down-side case that your venture fails.
Of course the recording industry isn’t all sunshine and roses: Dave Chapelle recently released a “public flogging” of Comedy Central and their profit-motivated tactics around the Chapelle Show (it caused Netflix to pull the show from the platform) and Taylor Swift is currently in a fight with Scooter Braun about getting access to the master recordings for her first few albums.
No contract is without problems, but every contract can be improved. This business would be in the business of contracting.
Currently, the contract management software market is valued at around $1.5 billion is and is projected to grow to “USD 2.9 Billion by 2024 at a CAGR of 13.5% from 2019 to 2024.” While this business isn’t necessarily focused on software, it could still be a disruptor to this enormous industry.
Monetization: A small fee for mocking up these contracts.
Contributed by: Michael Bervell (Billion Dollar Startup Ideas)