Thursday, October 9, 2008

LESS LIQUIDITY, MORE VOLATILITY: CAN MUSIC STARTUPS STILL GET FUNDING?

You have a smashing idea, but financial markets are getting smashed to bits. Can music-related startups hope to secure financing as the broader market keeps melting? That was a major question at Popkomm in Berlin on Wednesday, especially for a startup segment that has historically failed to deliver meaningful returns.

Funding rounds are still happening, and money is still available, according to top venture capitalists. But entrepreneurs are competing for a shrinking pot. According to Julie Meyer, chief executive at Adriadne Capital, most early-stage companies will be forced to scrape from nearby sources. "Right now, for a pure startup, you'll really need to rely on your friends and family," Meyer advised. "It's time for boot-strapping or that very close circle."

Undoubtedly, money is shrinking. But by how much? Charles Grimsdale, cofounder of Eden Ventures, estimated that available financing will shrink by 30 percent compounded annually given current outlooks. "There is still some money, but the pool is shrinking," Grimsdale relayed.

So, how does one woo coveted dollars - or euros or pounds? Broadly speaking, almost any investment vehicle is a loser in the current climate, and that makes a promising startup a theoretical possibility. "A lot of investors are looking for alternative investments, because their money is not in real estate or the stock market," said Michael Bornhausser, head of Yabo Consult. Whether that cash is safer within a music-specific startup remains questionable, though perhaps the right pitch, vision and team can rustle funds.

For the rest, the well is quickly drying. But that is not necessarily a bad thing, especially for a lean-and-mean company. "Startups can fare well in down economies, but you've got to be careful about how much cash you consume," Grimsdale said. "But no one else is getting financed either, and there's less competition. It can be a great time to start a business."

Meanwhile, music-related funding announcements continue to emerge. That includes ReverbNation, which just grabbed a $3 million series B from ETF Venture Funds, Novak Biddle Venture Partners and Southern Capitol Venture. Elsewhere, ad-supported digital music play Spotify, a Swedish company, has reportedly rustled $21 million from an investment group that includes Northzone Venture Partners, according to TechCrunch.

But those deals may have been in the pipeline for months, and all of the rounds predate the relatively recent financial meltdown. On that point, Grimsdale told Digital Music News that time horizons on deals "totally vary," and discussions can predate an announcement by many months. That makes it difficult to project dealflow into the future, though the pace of funding will undoubtedly slow.

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