By Matthew Smith
Royalty Exchange just completed its best quarter ever.
But walking around our offices today, it’s hard to believe how shellshocked we were a year ago. Outsiders, and probably a few insiders as well, wondered if we’d even survive as a company.
In Q1 2019, the Royalty Exchange marketplace completed $7.6 million in royalty transactions. That’s the most we’ve conducted in any quarter ever, representing a 30% increase over Q4 2018, and a 276% increase over the same quarter last year.
And that brings our total transactions over the history of the marketplace to $57 million.
What makes these results particularly satisfying is that just a year ago, everything that could go wrong, was going wrong.
Our well-publicized failure involved our plans to take a portion of Eminem’s catalog public through the IPO of our subsidiary Royalty Flow. The failure was embarrassing and demoralizing for our entire team And even before the dust settled, it was clear that the all-consuming IPO had smothered the momentum of our core business—the Royalty Exchange marketplace.
In retrospect, this embarrassment may have been exactly what we needed.
Let me explain.
Royalty Exchange has one mission… to build a marketplace where buyers and sellers of royalties can easily and confidently participate. Our belief is that we can get there through a relentless effort to reduce market friction.
We succeed when market participation is easy, participants understand the opportunities and risks, and the transparency is high so everyone knows they’re being treated fairly.
We’ve gained a reputation for achieving this through online auctions. We like auctions, but they’re not always the perfect solution so we’re not wedded to them. We see auctions as one of many market mechanisms. And our view is that experimentation with virtually everything—including mechanisms—is a critical step in increasing market participation and building a truly effective royalty marketplace.
Royalty Flow was one such experiment. Flow proposed to acquire a portion of the Eminem catalog—and over time… others—and place them in a NASDAQ-listed public company. This would make music royalties broadly available to investors of all levels.
The launch of the IPO for Royalty Flow received tremendous press attention, including segments on Good Morning America, CNBC Closing Bell, NPR Marketplace, and nearly every major newspaper in the country (and even some overseas).
Admittedly, Royalty Flow turned into a far bigger experiment with much more at stake than we’d planned initially. Still, we thought it would work.
It didn’t. At the 11th hour, we pulled the plug on it due to regulatory complications and, frankly, exhaustion (which I outlined in this Medium post). It was a very public (and expensive) failure.
Even worse, the IPO had distracted us so much that our core business was floundering.
Marketplace transactions had decreased by more than 50% between August 2017 and March 2018. We were distracted. The hype around the Flow IPO, combined with the regulatory complexities, had sucked up all the oxygen. Our core business was going into decline right when it should have been exploding
Nobody likes to fail. But as it turns out, this failure provided the clarity we’d need going forward.
With a clean slate, we refocused our attention on the marketplace. We took a back-to-basics approach and we initiated a number of smaller experiments. Some of those experiments paid off and directly led to where we are today.
For those interested in a little inside baseball, here are a few of the experiments we ran:
Until early last year, all auctions on royalty exchange were permanent sales. Creators didn’t have to sell 100% of their royalties to participate on the platform, but what percent they did sell was final.
Understandably, many rightsholders are reluctant to part with even a portion of their royalty stream permanently. Forever is a long commitment. So we introduced a temporary sale option we call Term Advance. Under this option, royalties sold would return to the rightsholder after 10 years.
Today, Term Advance is our most popular option. It’s attracted hundreds of new songwriters and creators to the marketplace who previously resisted the thought of selling permanently.
Know Your Worth
Last summer, we launched a free online app called Know Your Worth that analyzes royalty earnings to a) automatically generate an estimate of how much that catalog might earn on our marketplace, and b) provide a report detailing the catalog’s top songs and top sources of revenue, and other useful metrics previously unavailable to songwriters.
This provides valuable information for those using it, whether they work with us or not. It levels the playing field for creators considering an advance, sale, or publishing deal by providing them with a free valuation to compare offers against.
Thousands of songwriters have taken advantage since, using it to not only learn more about their catalog, but also gain access to the funds available on our platform.
Which leads us to our most recent innovation...
Earlier this year, we updated Know Your Worth to provide creators using it not just an estimate of their catalog’s value, but rather an instant offer from pre-qualified investors, bypassing the auction process entirely.
Put in simple terms, the app now connects investors with creators automatically kind of like how Tinder matches potential dates. The video below explains in greater detail.
We only just launched this feature in February to a handful of pilot program users. But it’s already responsible for 5% of marketplace transactions, and as of this writing, investors have over $3 million in offers standing by for rightsholders.
We did a lot of things to turn the ship around. First, we had to learn from our failure and then we had to put it behind us. We narrowed our focus to the things within our control and we refused to stop inventing. All this, on a foundation of old-fashioned hard work, paid off.
I’m proud of our team and what we, together, were able to accomplish. But of course we all recognize that there’s still much work ahead of us. And that work will involve many more setbacks and failures.
In a way, we look forward to the lessons and clarity they will provide because we know that if we’re open to the lessons, there’s a good chance of building something truly remarkable.
So you could say we look forward to failure, but we will try—very, very hard—to keep them smaller and a bit less public going forward.