Posted by: hdemott | April 25, 2010

More On The Middle Class

Yesterday I wrote about the similarities between the VC industry and music business.

Amazingly, this morning, I woke to find that Fred Wilson had reblogged a great take on this meme (here) from the original blog written by Shane Snow (here).

All good stuff.

My take on all of this is that the lowered frictional cost of finding an audience as a band – or a community of users as a consumer facing social network has never been lower. As a result of this fact, competition comes in quicker when an idea is seen to be gaining momentum – and investors can wait longer , and invest fewer dollars. As a result of increase competition – returns should be lower – thus an investing middle class. Sure there will be big winners and big losers – but in general – there will be less capital deployed into each business – and perhaps given the nature of the funding business (wither music or VC) there will be more investments made.

Interestingly, this has a direct bearing on both he music industry as currently structured. Big corporations like Warner Music and EMI will have to really continue to slim down over time – just as the VC industry will likely have to bifurcate into funds that make a lot of smaller investments (nimble teams with smaller funds – more partner focused etc…) and the larger more investment banking like teams that will play in later stage companies at much higher valuations. So if Live Nation buys the rest of Madonnas career (and they did) they will pay a stiff price – and likely generate a substandard return (see the interesting NY Times article this morning here). If DST puts money into Facebook, Groupon, etc… at much higher valuations than traditional VC’s or if hedge funds jump into the later stage VC space (Allen and Company does a pretty good job doing late stage deals into public investment funds)  – they had better be right – because there is little room for error there at some of these valuations.

In finance or any sort of business – positive returns attract more capital – and if there are not high barriers to entry – returns are dragged down.

Similarly, if the cost of distribution drop to zero (or damn close) – you will have far more companies and bands vying for attention – and logically – returns or fan count should – on average drop.

Of course like any one who is hitting for singles and doubles – you will occasionally get a home run (heck the best lead off hitter in baseball history – Ricky Henderson – had over 300 home runs in his career.)  – but more likely you will get a lot of singles.

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Responses

  1. Fred Wilson: A DJ http://goo.gl/fb/VGuai

  2. Thanks for the link. Good to follow up with more members of the community.

  3. Thanks to you and Fred for putting some things in perspective for me.

    I am a founding member of http://badoo.com, but had the fortune/misfortune of having quite a bit of investment already lined up by my partner, even before we solidified our idea. The next time around, I will have to sort all that fun stuff by myself.


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