We often get asked questions relating to bands and artists finding financial backers for recording or other projects. In this week’s blog, I thought it would be worth-while to review the different types of backing available and give some band related examples. Read on for more information.
Debt finance
The reality is that not very many entrepreneurs (especially in the music industry) are able to secure debt finance, especially from the banks. The music industry is anything but a certainty when it comes to success. The music industry struggles to convince banks and other debt financers that a business idea is a sure thing, especially in the startup phase. It does happen from time to time, but not very often.
Equity finance
These sources of finance are far more common in the music industry; in fact, they are far more common for new business in general. There are a number of sources, so we will consider them individually.
Own funds
The first avenue to consider is your own funds, I know it sounds obvious but why would anyone else want to invest in you and your music if you are not prepared to put your own money on the line. Don’t look for investors to help you buy an instrument or get lessons. If you can’t get that stuff together for yourself – forget it! These may be savings, assets or investments that can be converted into cash.
Credit
If you juggle things just right, you may be able to get the business started with this revolving door of credit from your suppliers and creditors. It is hard to manage, however, and if one step goes wrong it can leave you unable to pay your bills. This is a high risk strategy! Use this method at your own risk!
FF&F (family, fools and friends)
This unfortunate name refers to that group of people who you know on a personal level and who may be enticed into financially backing your band. FF&F could be referred to as an informal source of finance, and they may even provide finance without the desire to hold equity in the business. (Those cases are extremely rare, however; it is not often that even family, fools or friends will give something for absolutely nothing in return.) They can only usually be relied on for start-up funds. So, even if you have a rich uncle who is willing to help you, you will still need to convince him that his investment is worthwhile. (How do you think he got rich in the first place? By making wise investments, most likely.) There are countless cases like this in the music industry, country artist Gina Jefferies for example.
Internal capital networks
These are networks that are often culturally based — that is, a group of people who share a culture of some sort and who are willing to help out others who share that same culture. A local religious group or cultural society are typical examples. I saw a recent example of a Christian band who were able to source a huge amount of money from an internal network to make their album. The network felt strongly that the band was talented enough and that the community would benefit from the making of the album.
Angel financers
Angel financers tend to be individuals with a high net worth who are interested in assisting business entrepreneurs. The ideal angel financer is someone who will give you all the funds you need (and more) and will believe in you enough to stay out of the way and let you run the business. It rarely happens that way; they are more likely to take an interest in how the business is run. Angel financers will invariably demand a level of equity of the business for their efforts.
The record company is really a good example of this (although they tend to be fairly hands on when it comes to making the music.) However there are still those occasional financers out there who want to feel cool and have some involvement in the music industry. Unfortunately these ‘too good to be true’ offers usually turn out to be just that. The investor usually can’t help but try to get too involved, they have no experience but they want to manage and be the record company and everything else along the way. It usually ends in tears!
Venture capitalists
Here are a few interesting facts about angel financers:
- Statistically, they are most likely to fund business amounts of $50,000 to •$150,000, but occasionally invest more (up to $1 million).
- They expect returns of 3–5 times their investment within 2–5 years.
- They tend to be middle-aged males with business or professional backgrounds, often with their own entrepreneurial experience.
- They are hard to find and usually do not promote the fact that they are willing investors.
(Source: Peter Balan, Centre for Development of Entrepreneurs, University of South Australia)
Getting money to get things happening is one of the major challenges for unknown acts. It is a vicious circle of needing to work to stay alive but needing to put more time into the music career to be able to give up work. I can recall having a conversation with Joe Hanson the bass player from Grinspoon about this topic just before Grinspoon really made it big. He was seriously thinking of leaving the band to concentrate on making some money. Thankfully he hung in there and the band has done well ever since.
Photo Banner Credit
Roman Synkevych
