Every once in a while I will read about a business venture that is so business-savvy, yet so simple, I pinch myself for not thinking of it, while applauding the ones who did at the same time. A recent post on IP Finance introduced a new business model that is currently being tested in the music industry. In short, bands and artists are asking their loyal fans (and those that just hear them and think they are good enough to make it) to invest in their success. At a time when the cost of equity in a company is decreasing (and equity will continue to be undervalued for at least another two years), but also when raising capital is becoming extremely difficult, upstart bands and starving artists are beginning to sell shares in their musical enterprise to fans that believe in them. For the sake of this post, I will call these unsuspecting investors, fan-vestors.

The article on IP Finance introduces two companies, Sellaband and Slicethepie. Essentially, fans can listen to new music on the sites and if they like a certain band, they can donate money to help the band record a professional album. For certain price-points, the fan-vestor receives new levels of access and larger slices of the success pie. If a particular band raises enough money ($50,000 in the case of Sellaband), that band can then record a professional album.  Any future profits made from selling the album and royalties derived from the copyrights created therefrom are divided amongst the respective fan-vestors pro-rata. For more details on how the business model works, you can read the article or visit their sites. According to IP Finance, “already 29 artists from 12 countries have raised the full $50,000 on SellaBand and over $2,200,000 has been invested in unsigned artists.” Amazing. (For more reading on fan-vesting in the music industry, read another great article -  thanks to IP Finance.)

The apparent short-term success of this business model confirms a lot of my own premonitions about the upside potential in using IP as an instrument for shareholder investing. Fundamentally, IP acts like an annuity for investment purposes with future royalty streams posing as stock dividends and corporate distributions. Investing in copyrights, before they are even created, combines considerable risk with the opportunity for great profitability. When you throw music into the equation, you have a candidate for investment that fan-vestors can actually believe in (and understand!). The very fact that Sellaband calls its fan-vestors “Believers” once they donate should explain why this model is so lucrative. This is just another example of the incredible business and investment prospects provided by the dynamic flexibility of intellectual property. The opportunity to detach creator from rights-owner, or the free transferability of intellectual property,  lends itself  to utilization as an investment vehicle.

This is just the tip of the iceberg when it comes to this business model, especially in the intellectual property context. The newly coined term, “user innovation”, has been the driving force behind business models used at companies like Threadless, where the customer is actually the company. As seen with Threadless, Sellaband, and Slicethepie, equity in IP does not have to be divided ex-post. IP auctions and proposed IP stock markets are lending transparency to a platform in which investors can throw money at IP once it is brought to market, but the idea of using royalty streams and future return on IP as an instrument for raising capital ex-ante is novel, and genius. Behold, the flexibility and adaptability of IP.

In IP’s future as a tradeable asset class . . . I am a “believer”.

This entry was posted on Saturday, January 31st, 2009 at 4:34 pm.
Categories: Burgeoning Business, Copyright Caucus, Investment Intelligence ~ by Ian McClure.

2 Comments, Comment or Ping

  1. josh

    thanks for the great post. i wonder if this “crowdsouring” funding model could apply to any industry? for example, could this apply to clean technology? are there legal issue prohibiting this?

  2. Ian McClure

    It absolutely could, but only if the patent owner for a new clean technology is willing to sell “bits” of his patent as shares of stock in his technology. This model could work in any IP-intensive industry where the real underlying assets are intellectual property rights.

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