This ‘Next Big App’ Will Be Music to Investors’ Ears
I don’t watch TV or movies the same way I did 10 years ago. Do you?
Probably not.
Statistics say you’re likely part of a growing movement that’s getting your TV, movie and video fix at least partly through the internet.
Appointment TV? It’s going, going, gone. Why limit yourself to watching TV programs at a specific day and time?
Network loyalty? That’s fading fast, too. In fact, I don’t even know what it means anymore. My favorite shows come from about a dozen networks, studios or stations – no channel hunting required.
I have Netflix to thank for that. It led the charge.
It was brave (at the time) little Netflix that first changed our movie-viewing habits… and then our TV-viewing habits.
Back when it first debuted on the Nasdaq some 14 years ago, it closed at $1.08. Now its shares go for almost $100 each… nearly 87 million percent above its first-day price.
If you were one of Netflix’s lucky investors that day (and if you held onto your shares), you made nearly 90X.
Netflix’s founder, Reed Hastings, taught high school in Africa. He’s now worth $1.54 billion – most of it from his stake in Netflix.
Now, it’s too late for you to make much money off of Netflix. I’d estimate that at least 90% of its growth has already happened.
But there is a similar opportunity out there. Because what it did to TV, another company is about to do to radio.
The similarities between the two are uncanny…
- At its inception, Netflix was one of the first to use technological advances to select movies for its users… Today, this internet radio company is the first to use the cloud to curate music for its users.
- It took Netflix eight years to attract 4.5 million users… It’s taken our music-streaming company eight years – to date – to grow to 6 million monthly active users.
- Netflix spent its formative years as a “rental underdog.” Its upside potential wasn’t well understood at the time… Likewise, our radio company is little known or understood.
- Netflix offers a combination of cost savings and convenience that traditional movie renters can’t match… Meanwhile, our up-and-comer offers a degree of music personalization and discovery that’s beyond the capabilities of its peers.
- Netflix first gained traction with millennials and then moved up the generational ladder… As for our radio company? Today, about 88% of its listeners fall into the 18 to 34 age group.
In hindsight, we realize that Netflix saw a future that others didn’t. Since almost everybody watches TV and movies, it was addressing a massive market.
The company I’m about to introduce you to has a similarly large opportunity, since 91% of Americans alone listen to the radio.
How Big Is Your Opportunity?
Already, half the U.S. population listens to internet radio. Its increasing popularity is not a prediction: It’s a fact. In 2015, for the first time ever, the record industry generated more revenue from streaming than it did from either downloads or physical media.
Music apps have led to some of the biggest gains in the private markets.
Consider the case of Pandora, which started out as a music-store kiosk service back in 2004.
Yet when it went public in 2011, early investors could have cashed out on a mammoth 18,185% payday.
And then there’s YouTube, the internet music and video business founded in 2005 that quickly grew to a $15 million valuation.
Not bad. But here’s the really amazing thing…
If you held onto your stake from 2006 until now, you’d be sitting on a breathtaking gain of 1.4 million percent.
A hundred bucks would now be worth about $1.4 million.
Even lesser-known online music businesses have made a fortune.
For example, Shazam’s founders started the company with literally $100 in the bank. Today, it’s valued at $1 billion.
This Market Is Massive
The U.S. radio industry alone generates $17.6 billion in annual ad revenue.
Globally, it’s a $46 billion business.
But the truth is that terrestrial radio is quite limited and hugely flawed.
You basically have the same genre choices now that you had 40 years ago: talk, sports, country, pop, soul, jazz and classical. The only real changes it’s made to adapt to the times is adding hip-hop, funk and Latin/reggae. Oh, and it’s basically dropped jazz, which is a shame.
Meanwhile, the number of annoying commercials has gone way up.
That’s simply not good enough – not in this day and age.
Admittedly, terrestrial radio is dominating the market right now, with about 80% of listeners tuning in that way (as the chart below shows).
But as the chart also shows, this doesn’t have to be true for much longer.
People think that because radio has lasted so long without changing much, it can go on another 100 years as-is.
That’s like saying 15 years ago that the dial-up telephone would last decades longer because it had already lasted decades – immune to immense changes in technology.
In other words, terrestrial radio has no place to go but down.
The only questions are… How fast? And what will take its place?
Certainly, satellite radio – the main one being Sirius XM – is in the mix. But that isn’t cheap. Radio listening has been free all these years, which makes for a tough habit to break.
This brings us to internet radio…
It comes in both free and paid service packages. If you’ve ever listened to Spotify or Pandora, you’re already familiar with the concept.
What you may not know is that, while online listening is skyrocketing, an estimated 136 million Americans remain untapped.
Terrestrial radio’s days are numbered. Internet radio is the future.
We already have a slew of such companies at our disposal.
In addition to Pandora and Spotify, some of the bigger names include Google Play, Apple Music and (JZ’s) Tidal. They have hundreds of millions of paid subscribers. And that doesn’t include the lesser-known ones like Rhapsody, iHeartRadio and Deezer.
They’re all looking for an edge, vying for exclusives and creating playlists. In fact, playlisting has exploded.
For example, Apple Music has spent millions in hiring a small army to hand-build playlists. I don’t know the exact number, but it’s created thousands of them.
Impressive, right?
Actually, not so much, since another company has outdone it. This rival has created more than 2 million playlists!
Moreover, it creates 10,000 new ones every month. And it spends zero dollars to do so.
That’s right… A BIG FAT ZERO.
And that’s the kind of company we want in our portfolio.
So how does it do it? By letting any old subscriber create a playlist… for free!
The model works. Using crowd curation is a brilliant twist.
Apple pays for its army of playlist builders. But our company’s army is strictly voluntary. Right now, it has 174,000 voluntary playlist builders, whom it calls DJs. And that number is growing by the day.
It’s the only crowd-curated internet radio company out there.
That certainly got my attention. So I did what I do with any startup I’m interested in. I spoke with its team, including its founder, who’s a graduate of the Berkeley Haas School of Business. And let me tell you… This company has the full package.
It’s doing a lot of good things right now. It’s about to embark on a steep growth path. And it has chosen its competitive weapons well.
Which makes it high time I told you its name…
The Joy of Discovering Your Favorite Mixtapes
The company is 8tracks.
As I already mentioned, it’s been around for eight years, with its technology going through several iterations to date. New versions of its iOS and Android apps will be ready by the end of the year.
8tracks wants to introduce its listeners to songs they won’t hear anywhere else. Two-thirds of its music come from independent artists and labels.
I’ve been listening to music on 8tracks for the last four months. And I’ve discovered dozens of musicians I really like whom I had never heard of.
You can choose your playlist by genre, activity and mood. Under the genre category, I do a lot of indie, indie rock and folk. When it comes to mood, I usually choose “happy” or “upbeat.”
But that’s just me. You could make entirely different choices and end up with completely different playlists to select from.
As a result, you’ll probably have two thoughts :
- That’s the kind of music I want to hear right now.
- Why haven’t I heard of any of these musicians before?
That’s 8tracks’ offering in a nutshell.
As a consumer, I was sold pretty fast.
As an investor, however, it took a little more digging, plus several conversations with the founding team before I was convinced.
But I can now tell you that this company has the full package. Here are the three biggest reasons why…
- The market: As I’ve already mentioned, it’s huge. But hold on; there’s more to it…8tracks is taking aim at only a part of this market. Its playlists aren’t for the musically incurious… or the ones who want to hear the latest hits.Yet even a modest slice of a market as massive as this one is still more than big enough. And it leaves plenty of room for 8tracks to grow.
It also comes with a silver lining. It puts 8tracks on a different competitive track from businesses like Pandora and Spotify. So it’s not butting heads with the gorillas – which is a very good thing.
8tracks has been called “Pandora’s younger, cooler sister.” It doesn’t merely want to grow a customer base; it seeks to develop and deepen a passionate community of music lovers made up of DJs, artists and listeners.
As an investor, I like the strategy. It has a lot of pluses. For one thing, communities are loyal. They use the service more. And they’re more willing to pay for things.
Add all of this to 8tracks’ ability to sign up business clients – like Under Armour and Victoria’s Secret – and its potential to pull in revenue becomes very compelling.
- Monetization: Advertising constitutes 98% of its revenue. It’s early on in its life cycle, but even though it’s still small, revenue is going through the roof – having jumped 293% the past two years.It’s currently entering an accelerated growth phase where I expect millions of users to come on all at once.The company’s subscriber base already passed 6 million active users per month.
A moment like this can end with much higher valuations… or, in the case of a business like Beats Music… a $3 billion payday from a buyout.
- Management and Team: David Porter is 8track’s CEO and founder. He’s a smart guy. I enjoyed talking to him.David actually wrote the blueprint for this business while at Berkeley. In 1996, he moved to London along with his accounting firm, Arthur Andersen. And he fell in love with the city’s electronic music scene (not to be confused with the mid-1970s, when I was hitting up London pubs to hear Elvis Costello perform).David later led Live365, a before-its-time internet radio service that also featured user-created stations. He saw his vision of the future play out as more music became available via downloading and streaming. More than ever before, he believed that “listeners needed a musical sherpa, a human filter, to make sense of it all.”
So in 2008, he founded 8tracks.
And then he did a hard thing. He bootstrapped. For the first three years, he went without employees. He got people to work nights and on the weekends – not an easy thing to pull off.
As a result, 8tracks now employs 26 people. And in one of the most positive signs I know of, it has several highly respected venture capital firms loading up on its shares, including Index Ventures, Andreessen Horowitz and 14W (backed by Len Blavatnik, whose Access Industries owns Warner Music Group).
The same goes for several angel investors from the music sector, including Atlantic Records’ Chairman Craig Kallman.
Terms of the Deal
You’d be investing in 8tracks’ Series A rounds.
Now, Series A rounds have historically been reserved for institutional players only, mainly VC firms.
But that’s changed.
Anybody can now invest in these private deals. It no longer matters how much you make or how much wealth you have.
8tracks raised a little more than $3 million in two previous rounds. Its other money came from Silicon Valley Bank, which lent it $2.5 million in mid-2015.
The minimum investment is $99. You can put in more if you wish. But you can’t put in less.
The kind of shares you’ll be getting are called preferred shares, so named because they come with preferable conditions. The main benefit is that you’re put at the front of the payout line in case of bankruptcy.
Remember: These shares are not liquid. There is no developed market to buy and sell them. You can only cash out if 8tracks goes public via an IPO or is bought out. And that could very well be three, five or even 10 years from now.
Finally, there’s one more key term to look at: valuation.
8tracks is valuated at $28 million. Its shares in this round cost $3.20 each. Its last round – in mid-2014 – carried a valuation of $15 million. Almost doubling valuation in a two-year span isn’t abnormal, and the valuation is reasonable.
Sector: Music
Status: Raising up to $11 million under Regulation A+ (where anyone can invest, not just accredited investors)
Share Price: $3.20
Valuation: $28 million
Previous Price per Share: $2.18
Offering: Maximum of 3,437,500 shares of Series A Preferred Stock
Minimum Investment: $99
Use of proceeds: To cover operating expenses, including the expansion of engineering, product, advertising sales, marketing and business development teams; and to pay royalties (including royalty obligations incurred in the past), the cost of the offering and deferred employment compensation
Platform: SeedInvest
How to Invest
You need to join SeedInvest first. Go to its website by clicking on the following link: https://seedinvest.com/8tracks/series.a, or copying and pasting it into your URL box.
You’ll then see this…
Just click on the blue box, “Sign Up To Invest” and follow the instructions that come up.
You’ll be asked to make a payment by wire or ACH (automated clearing house), which operates pretty much like an e-check. Just enter your account information (including routing number) into a payment screen, and select a date for payment. The payment will be processed on that date and deducted from your account. That’s all there is to it.
If you’re having difficulty at any point in the process, I suggest you click on the “Chat with Us” link, which is on every page as you go through the application process.
Good luck!
Invest early and well,
Andy Gordon
Co-Founder, First Stage Investor