Monday, February 28, 2011

The Struggles of a Start-Up:

The Struggles of a Start-Up:

            Founded in 2007, provides funding for independent musicians to record albums by allowing listeners to preview the artists’ work and decide whether or not to invest.  It is very similar to the venture capital model used by many start up companies to fund their early efforts.  The company’s founders, Rocky Liu and Peter Wong, had even gone so far as to identify four distinct revenue streams for their business model.  The company had set a minimum target of $50,000 for musicians to raise before they could use the funds invested by listeners and fans to record an album.  As a fee for bringing together investors and musicians, would earn 33.3% of any future profits of the musician’s album sales. would also collect interest on the funds while not in use.  This could conceivably be a decent revenue stream as it would very likely take unknown musicians quite a while to generate the type of following necessary to raise $50,000.  The third stream was from a premium service that would allow users to interact with their favorite musicians through private chats on the site and receive a signed copy of the musician’s CD when it was produced.  Finally, like every other web-based company, would collect revenue from ads that site visitors clicked on by using Google Ads. 
The Good       
Liu and Wong were correct in identifying the music industry as an aging business model in need of a stark makeover.  The music industry’s core market has been selling albums in local record stores or other retailers.  However of the years leading up to 2007 when was founded, the music industry had seen digital media erode its core market at an increasing rate.  Record companies have long relied on album sales to offset the cost of identifying talent and producing albums.  When consumers purchase an album, they pay for the hits and the songs that are less known.  The less known songs help to subsidize the costs of production. However, by 2007 digital platforms had already been offering individual songs.  Now consumers were able to buy just the hits and record companies that had relied on lesser known songs to generate revenue were scrambling for new ideas.  Liu and Wong correctly identified an industry ripe for change as record companies were in a state of change.
The Bad
            While they were correct in identifying the music industry as ripe for change, Liu and Wong set out to identify revenue models for their service before determining if there was a market for their service and in doing so, missed the mark.  To be successful, a start-up must provide value for its costumer.  It must relieve some pain or stress for the costumer in such a way that the costumer recognizes the relief and is willing to pay for it.  Similar to, was created with the vision that its offerings would be highly desirable and that users would be attracted to the site in droves.  Unfortunately, very few individuals cared enough to participate in funding unknown musicians’ album productions.  The site failed to give users any incentive to invest their money in the future of unknown musicians.  True, 33.3% of album sales would be returned to investors but this was hardly motivation to invest hard earned money on the future of unknown musicians. only made the decision to invest more difficult by setting a target of $50,000 that had to be reached before an album could be recorded.  Even though that was the estimated cost to produce an album, users realized that it would take a very long time for musicians to raise that much money and then sell enough copies to cover the costs before they could recognize a profit on their investment.  In fact, making a profit was very unlikely. itself was also unknown to users.  In order for new users to become investors, they first had to trust to deliver the services they promised and then had to believe enough in an unknown musician’s future to fund his/ her album.  Overcoming one of these obstacles would be difficult but overcoming both on a shoestring budget would test the founders’ resolve.
The Ugly
            The struggles above were not the only ones faced by Liu and Wong.  To begin, the website itself was three months late in development and blew the budget by 40%.  Liu and Wong disagreed on why the effort was delayed, why it cost more than expected, and worst yet, the road ahead.  The road ahead was becoming much more difficult for because the delay in the development of the website allowed an unforeseen competitor to enter the market and drained the company of funds that it desperately needed to build brand awareness.  A Liu and Wong’s struggle to agree on a path ahead is not uncommon story for young start-ups but without quick resolution the business likely ceases to exist. 
What Now?
            Liu and Wong really have three options at this point.  First they can use the remaining $5,000 to invest in the website so as to attract and retain more users.  They have received feedback that the site is boring and does not hold visitors long enough to convert them to investors.  The second option is to redefine the market.  Most individuals are not interested in funding unknown musicians’ album expenses but record companies are very interested.  Liu and Wong could use the remaining $5,000 to tailor their offerings to create value for record companies.  Finally, Liu and Wong must consider shutting down.  They must consider all past efforts and costs as sunk and honestly evaluate’s ability to become a profitable enterprise at its current state. 
   does provide some value but its revenue model is misaligned.  The option to shut down cannot be recommended just yet.  Instead should redefine itself with its remaining capital in the mold of an Indy-rock Pandora.  Musicians have already happily uploaded their music to with the hope that someone will listen to it and enjoy it. can then categorize the content and stream it to visitors inserting short advertisements every few songs.  If applied a feature where users could “like” or “dislike” a song, the company could keep track of popular songs and bands which could be useful data to major record companies trying to identify new talent while reducing their search costs.  Record companies spend a lot of time and effort trying to identify the next big star. could provide a way for record companies replace their more capital intensive ways of identifying new talent by collecting data on popular songs and bands and packaging it record companies.
            When starting a business, either web-based or brick and mortar, great care must be taken to identify a source of pain or stress in people or business’s daily lives.  The pain or stress does not have to be physical, it could simply be “I do not like that my mail box does not lock because I think people will read my mail.”  Relieving the pain or stress is how a start-up can provide value and charge for its services. created a fun idea but it did not solve a problem for anyone.  Nobody wakes up in a cold sweat in the middle of the night wondering if they forgot to help fund an unknown musician produce an album. still has time to modify its website and offerings so that it can provide value to a different market.  However, with feuding partners and only $5,000 left, time is running out.

1 comment:

  1. This is a very good break down of a start ups challenges. These issues are always on my mind as well. Just curious, what is your background?