This Dire Straits Investment Shows How Fintech is Transforming The Music Biz

When you remove market frictions, overall participation increases to the benefit of virtually all participants.
September 20, 2018

Today, we’re proud to introduce our second Private Syndicate offering — a rare and unique opportunity to invest in royalties generated by the catalog of rock legends Dire Straits.

This is a catalog that includes the record-breaking album Brothers In Arms, hits like “Sultans of Swing,” “Money For Nothing,” and “Walk of Life” (among many others), and even solo work from frontman Mark Knopfler, like his soundtrack for the classic film “The Princess Bride.”

You can read all about the Dire Straits offer here. But what’s really interesting about this is how it all came to be.

Typically, when catalogs of this size are sold, it’s a traditional music business institution doing the buying. It’s not something your everyday investor would have access to, just like all those music industry deals you read about in Billboard.

So how did our small startup in Denver, CO come to offer investment-grade shares of a catalog like this to a community of investors who otherwise have no music industry connections?

To answer that question, we need to step away from the music business for a moment.

See, although what we’re doing at Royalty Exchange might be new for the music industry, it’s part of a large, trend that’s altered the investing landscape over the last two decades.

At the heart of this trend are platforms democratizing access to investment opportunities previously limited to only a handful of insiders and institutions. These tech-enabled platforms destroy the market friction that protects the fat profit margin of incumbents. We’ll discuss a few such platforms like Prosper and AngelList in a minute.

But first… What is market friction?

Market friction is anything that makes it harder for willing parties to freely transact. Think about what eBay did to connect buyers and sellers. In some cases, friction is simply awareness of and access to a market. In others, friction can be caused by distrust, regulation, information asymmetry, no standardization, or a lack of transparency.

But in all cases, the only benefit of this friction goes to the gatekeepers trying to protect their turf. When you remove these and other market frictions, overall market participation increases to the benefit of virtually all participants.

Take for instance the personal lending industry. Before 2006, if you needed a loan, you went to a bank and submitted an application. Banks knew you probably weren’t going through the trouble of getting loan quotes from every bank in town. So they likely weren’t offering you the most competitive rate possible (if they deemed you worthy of a loan at all).

But then fintech startups like Prosper and Lending Club emerged, pairing anyone seeking a personal loan with individual investors willing to provide them. This alternative to the bank lending monopoly quickly provided far greater access to competitively priced credit. Likewise, investors gained access to a totally new way to invest their capital.

What followed was a sharp drop in the borrowing costs, with rates as low as 6%. Lending Club estimates it has saved borrowers over $250 million in interest charges while providing investors yields upwards of 10%.

Result = A loss for the traditional gatekeepers, but a win-win for both borrowers and investors.

Another example is seed funding for startups. Companies like AngelList and OurCrowd provided a platform where qualified individual investors fund early stage startup companies. Previously, investors had few ways to access these kinds of deals, and startups had few resources to achieve funding outside of a handful of venture capitalists (assuming they could even get a meeting, let alone a favorable term sheet), or friends and family, or credit cards.

By creating what’s been called a “ for investors and startups” AngelList and its peers revolutionized startup funding, bringing over $200 million in startup capital to early stage companies over the years.

Result = A loss for the traditional gatekeepers, but a win-win for both entrepreneurs and investors.

Both are examples of platforms that made a new asset class investable, at scale, by removing the unnecessary market friction, ultimately increasing the value for all as a result.

This is what Royalty Exchange is doing with music royalties. We’ve removed the historic friction that limited access to royalty investments. In doing so, we've brought over $43 million of new investment capital into the creative community at far better terms for music creators than the traditional gatekeepers would have or could have offered over the years. And investors have gained access to a new breed of investments with the potential for double-digit yields (The Dire Straits Private Syndicate forecasts a 10-year yield of 12-15%).

The result = A loss for the traditional gatekeepers, but a win-win for both music creators and investors.

That’s why Dire Straits’ manager and over 300 other music creators have come to us to raise money. That’s why more than 22,500 investors have created profiles on our site to access these investments.

And it’s just the start. Ultimately we believe investors could deploy a billion dollars or more annually into music royalties if enough friction is removed. That’s Royalty Exchange’s main role... to destroy the market friction that exists in this space to the benefit of music creators and investors alike.

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