Is the Venture Capital industry and Record industry that different?

by Ashok Nayar

These two industries are tanking. The facts speak for themselves. Starting a company has never been cheaper, and record sales have never been lower. You could wrap up a MySpace clone in a weekend, or find the whole Beatles discography on Limewire. At what point do these industries need to step aside and decide whether the outdated paradigms that made them their wealth, need to change? To continue to provide yourself, or your industry, value, you need to stay relevant and innovative. That may mean, in the case of the music industry, more so than the investment industry, that you have to completely revolutionize your model. Complaining never got anyone anywhere and pointing fingers didn’t either.

What’s interesting to note is that while there has never been a cheaper time to start a company (web based at least), there hasn’t been more venture capital flowing into companies since 2000. Ironically, this may be a result of the ease of entry, and to set themselves apart, companies may feel it necessary to secure an influx of cash, not only to distinguish themselves but also for credibility. Saying you got funded by Sequoia will elevate you to the top tier in the valley. But doing so also involves taking on a huge obligation. And I say obligation and not responsibility because you’re suddenly required to move towards a much larger liquidity event than you may have otherwise planned. You lose control of your company, and may not be able to scale as quickly as the investors would like. You inevitebly change direction and potentially lose focus. Taking on capital may prove to be counter productive in and of itself. Granted, there are companies that truly do need the working capital to be sustainable and in such cases, you will need an influx. But I’d strive to say the majority don’t, and staying small and agile is an enormous competitive advantage you can have.

So how do VC’s continue to provide companies value? If you don’t need their cash, why would you need them at all? Well there are a few things they can provide. For one, the connections a reputable firm has is invaluable. Providing you with human resources is another asset the VC’s can provide. Ultimately, it’s direction, advice and guidance that they can provide young companies. Intangible resources that can prove to be invaluable. There are already companies that have seen this trend. Y Combinator provides companies an environment where they can passionately pursue their startup, while guiding them and helping them scale. (Disclaimer: I have submitted an application to YC for an investment opportunity). It’s only a matter of time before young companies realize they really don’t need much capital at all, and VC’s will have to adapt to stay in business.

Similarly, the record labels provide no value whatsoever to established artists. If you’re an established artist, you can, for almost no cost at all, sell your music to your fans. The value of distribution has gone out the window with the internet. Radiohead has already proved this by literally giving away their music and still make money. But where labels still provide value to artists is in marketing and promotion. Small upcoming bands, whether they may like what I say or not, want to get onto MTV. MTV sells records, and promotes bands, it’s that simple. Whether it may be the bane of the independent music culture, it’s inevitable to promote yourself on a large scale. But record labels don’t see this. They think that by suing their customers and complaining about downloads, they’re going to get somewhere. No. Let established artists take the risk of how to distribute music. You clearly cannot come up with an innovative way of doing so, so lose that liability. But make money where you can. Promote young artists and help them grow. Figure out a way to make money from that. I’m waiting for the first person to develop a music store that allows any artist to do what Radiohead has done on a large scale. Now that would be cool.