The Value in D2C

Direct to Consumer (D2C) model for distributing music has been on fire the past five years. As musicians flock to the Internet with dreams of gold as their fans open wallets to purchase every new version of their latest hit. Larger profit margins can be obtained versus using a third party for distribution. It builds the fan base and costs the artist very little.  In the article Direct-To-Fan Holds Much Promise, Many Problems, Kyle Bylin explores the reality of this sales model for a musician. While the profit margins are undoubtedly greater then utilizing a third party on the surface, many costs do not come into consideration by most musicians when making this choice. In the article he interviews several individuals in the industry that have experience both positive and negative with D2C. I will boil it all down to some simple concepts, but first I will state that do not be deterred in the use of D2C as it does have valuable results, just do not depend on it as your sole source of distribution revenue.

For me it boils down to aspects of cost, SEO and placement for the finding the new fan and selling an album. A band website or Facebook post alone are not positioned to be the ideal locations to sell an album (unless you already have a strong fan base and following exceeding 10,000 individuals). Why? Well let us examine successful models like iTunes which have many employees whose sole job is to drive traffic to the website. I do not know the budget they have for SEO but I am pretty sure that the average musician trying to build their brand does not have the budget to accomplish what they already have. This brings me to cost of which there are many when considering D2C for example, secure website service for customer transaction (SSL), shipping, returns, advertising or pay per click ads, and let us not forget the labor from the band members managing all of this.

Just to remind you the reader I am not saying do not do it, just examine the costs and find those transactions that are worthwhile to the fan and help establish revenue to continue doing what you should be doing best, your music that your fans love.

Cooperative Funding and the SBA

Finding funding for a worker owned business is a daunting task. Restrictions on types of outside investment limit for-profit cooperatives to loans. The Small Business Administration (SBA) according to an article by Micha Josephy with the Cooperative Fund of New England (CFNE) states that the SBA as of 2010 now views cooperatives as small business.  While resources have been open for not-for-profit cooperatives SBA funds were restricted for the small worker owned business. The Small Business Act of 2010 opened the doors of the SBA to worker cooperatives to access low-cost funding as well as other SBA resources available to traditional small businesses.

In this Act created an Intermediary Lending Pilot of which non-profit organizations can obtain funds for creating community development. This includes CFNE and they have already applied, received and dispersed funds for worker owned businesses in New England. Further cooperatives now have direct access to 7(a) General Small Business Loans across the country. These loans are lower interest and the SBA regulates terms.

This finding gives cooperatives of all industries access to resources, that were limited to agriculture and rural community cooperatives. This SBA FAQ on the Intermediary Lending Pilot states the qualifying factors for determination as:

“A producer cooperative is eligible for SBA financing if: (1) it is engaged in a business activity, (2) the purpose of the cooperative is to obtain financial benefit for itself as an entity and its members in their capacity as businesses, and (3) each member of the cooperative is small.  (SBA Standard Operating Procedure 50 10 5(C), p109).”

“Worker cooperatives, in which the employees of the small business cooperatively own the company, are eligible for loans under the ILP program if they meet the requirements for eligible small business concerns in 13 CFR § 109.400.”

This is great news for anyone interested in developing a cooperative structured business. 

Shark Tank and the Business Plan

Image 1.

Currently I am focusing on the business plan and I thought that speaking about a show I currently enjoy watching Shark Tank. This show is derived from a Canadian show titled The Dragon’s Den and if you have not seen an episode has a panel of entrepreneurs that the participants then pitch their idea or company in hopes of landing a investment deal. Two of the Shark Tank investors are from the Canadian show, Robert Herjavec and Kevin “Mr. Wonderful” O’Leary. Both are Canadian and quite successful in their given fields and as entrepreneurs. Herjavec I admire the most not only his personal takes on business but his story being a first generation immigrant from Yugoslavia to his days at IBM and then as a information technology security consultant and multimillionaire.  His human touch but distinct business rational are a combination that appeal to me. O’Leary while he can cause many people to hate him is very much on point about what he wants out of a deal (Money). This transparency is fact he will make a deal if the ROI is right, if not he is not interested. Come prepared and have your numbers handy.

The ABC site for Shark Tank has several interviews and article on advise for potential business endeavors or those who think they may want to be on the show. One such article is titled Business Tips from the Sharks, which covers ten topics. Numbers five and six both ask about the business plan itself. How do you create a business plan that works?

 Herjavec response places emphasis on the overall Vision and creating short-term plans. He states forecasting to far in the future is dreaming and that over time size of a company through growth demands plans that extend into the future. Keep it simple and small is what I took away from his response. Where can I get help creating a business plan? Again Herjavec stresses less importance on the plan and more on doing the work of the business. Talking to people, selling your product or service, build a reputation and network.

Given that several questions do point to what the investor looks for in an investment. That being the point of writing a business plan we can examine common threads in what needs to be communicated in order to secure the deal. First and foremost each of the Sharks state do the numbers make sense and will there be a healthy capitol return for the risk, next is there an element of trust. These two items seem to resound from all of the Sharks despite their own individual investment preferences.