The Deal
Friday, October 24, 
12:51 pm

[Posted on April 1, 2008 - 4:51 PM]

ourstage.JPG"If you look at the music business, the real hit rate is even worse than it is for VCs--it's one in 20, one in 30," says OurStage Inc. founder and chief executive Ben Campbell.

The entrepreneur is describing the raison d'être of OurStage's  music-discovery service, but also suggesting the company's rationale for raising capital from a loose affiliation of more than 100 angel investors through Naples, Fla., venture capital firm Signature Capital LLC for the startup's $13 million first round of funding.

Campbell says he met with traditional VCs in seeking investors for OurStage, which allows users to judge artist-submitted songs in a one-on-one "bake-off." But a 2006 meeting with Signature founder and managing director William Turner yielded an initial $1 million investment in September of that year, followed by scores of individuals signing on to provide additional capital. Rather than go through two rounds of increasingly dilutive venture investment and give up more than half the equity in OurStage, the company chose Signature's model, which includes a 9% commission on the funds it raises from individuals, a 10% direct equity stake and warrants for a future investment. (This MassHighTech story from last week elaborates.)

Many companies--most of which have come and gone, beginning with the original in the late 1990s--have tried to build sites that allow users to "vote up" unsigned artists they like. Some have aspired to function as online record labels. By contrast, Campbell says OurStage will operate more like a supplement to the "artist & repertoire" process, commonly known as A&R, which represents the artist development and talent scouting wing of a record label.

OurStage plans to forge partnerships with labels to host custom competitions, either involving artists the label has already signed or ones it is scouting, for a fee. The company will pursue a more traditional advertising model, bolstered by a new partnership with AOL that will bring it more exposure while giving it a reliable advertising provider in Platform A. OurStage also has agreements in place with other media companies and concert promoters that will give artists more avenues for development.

Interestingly, while the American Idol model has worked on television, 10 years of trying to establish an online voting mechanism to generate hit songs hasn't yielded a single blockbuster. Campbell says American Idol is really a bigger reality television success story than it is a music business success story. "If you look at their top 10, you can find the same level of talent at your local Sheraton," he says, acknowledging that finding artists with staying power remains a tough nut to crack.

In a way, OurStage's humbler goals may work to its benefit. The company doesn't want to function like a label and has no designs on owning artistic content, nor does it want to replace A&R departments.

"We think the labels will use us to help validate the A&R process," Campbell says.

And in an industry with notoriously weak market research, Campbell says OurStage's base of 30,000 users with voting capabilities (among 1.1 million unique visitors and 130,000 regular users) could offer insights into which songs will stick and which won't, adding that the company's user base is growing by 45% each month.

"The free market is already adjusting the way that labels sign artists, and we think they'll have to write fairer and fairer deals," Campbell says. "Warner Music Group lost 76% of its market cap in 2007. The labels are finding that they'll have to experiment."

OurStage may pursue a second investment round, but could be generating Ebitda by mid-2009 without funding, Campbell says. Signature and the company's existing stakeholders possess warrants for future investments, and the current round remains open to additional angels. Traditional VCs aren't as likely to want in on the round, however.

"Theoretically there could be VCs involved in a future round, but Signature Capital's model makes them run out of the room screaming," Campbell says. -- Paul Bonanos

See OurStage's Mar. 6 release announcing its relationship with AOL
See Mar. 21 story from MassHighTech

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