had a big 2014, with 290 percent revenue growth as the royalty auction platform reached $4.4 million in music, IP and energy-related transactions since launch in 2012. It also closed more than $1 million in funding from its existing investors, and grew to 11 employees.
But hockey stick growth hasn't happened yet.
Like the years it took for peer-to-peer lending via Lending Club and Prosper to take off, it's taking Royalty Exchange time to build a marketplace of buyers and sellers for an investment opportunity accessible for the first time ever online. But to speed things up this year, the startup is getting creative: in funding, product development and marketing. Founder and CEO Sean Peace believes he's finally got the formula in place to take online royalty investing mainstream.
Here's how he'll do it:
Counting on the crowd
To keep the company funded until it seeks a series B round, Peace recently re-upped existing investors Idea Fund Partners
and Grotech Ventures
for $125,000 each (That's in addition to the $250,000 each contributed last September). To fill out a $550,000 round, he's also going to the source of all the momentum—the accredited investors on the platform. They've invested $200,000 so far, and Peace expects to raise at least another $100,000 from the pool of loyal investors in coming weeks.
“What better way to take advantage of the JOBS Act and crowdfunding momentum than going to people using the platform,” Peace says. “I think it shows the strength of the company we’re building, that people using the platform aren’t only using it to buy royalties but to invest in the people creating it.”
Over the next six months to one year, he hopes to begin the growth that could attract larger pools of capital. He'll hire two sales people and a paralegal to join the team in its new office in Morrisville.
A chameleon platform with many viable targets
Having a versatile technology platform has been key for the company. To grow the music side of the business last year, the company introduced multi-unit sales, in which investors can bid on and buy shares of a portfolio of royalty rights rather than the entire package. The goal was to allow investors to diversify by putting smaller amounts of money in multiple portfolios rather than tens of thousands in a single one. Several sellers have taken advantage of the new offering—one made $242,000 by auctioning off rights to a portfolio of 3 Doors Down songs.
Then, when interest in owning the rights to oil and gas royalties peaked last year, Royalty Exchange started the process of becoming a broker dealer to begin transacting those deals online. Unfortunately, when the price of oil dropped to $40/barrel, interest dropped and they abandoned the process.
The timing was good in some ways—registration had to happen in every state in order to transact deals across state lines—by the time Royalty Exchange changed course in November 2014, it'd only spent time and money to secure a license in Texas.
Within days of the change, the team recognized demand to invest in the revenue or tax credits from renewable energy sources like wind, solar and geothermal. They typically pay out annual royalties of 10-12 percent.
For Royalty Exchange, which collects an 8-12 percent transaction fee from sellers and a tiny cut of the buyers' monthly royalty distributions, renewable energy represented larger-in-size transactions (The average music sale is $35,000-$40,000) and more revenue.
A partnership with a Chicago-based investment bank for the energy industry is helping to source and close deals and find buyers. Meanwhile, Royalty Exchange provides the technology platform to list royalty interests for sale and to perform due diligence on potential buyers. The offering is already showing promise—Royalty Exchange recently auctioned off rights to royalty income from a wind farm in Texas in just four days. The sale price was $123,000.
“Some investors love music royalties for the wild fluctuation and the opportunity for a big spike in the future,” Peace says. “But wind is much more constant.. It’s like buying a bond.”
Big Data for musicians
Peace's team also looked within its technology stack and found an opportunity to reach music customers in new ways by repurposing the proprietary software it built to value music royalties.
A new tool, offered free to music royalty owners and for a fee to publishers and record labels, is called ARIA (Accelerate Royalty Insights with Analytics). It downloads CSV or Excel files of data from the world’s licensing agencies and compares it to the findings of research and ratings organizations like Nielsen to create individual reports on the success and profitability of songs.
For example, ARIA can help a songwriter understand exactly how much he’s getting paid per play on Spotify or Pandora.
The mission is to make it easier for the industry to track revenue streams and fix any discrepancies as soon as they happen, Peace says. A perfect case for ARIA happened last year, when Pharrell Williams’
top-ranking hit Happy
was played 43 million times on Pandora and yet, he earned just $2,700 in licensing revenue
. Taylor Swift also notoriously pulled her songs from Spotify last November.
“It’s an archaic process once someone licenses your music to make sure it goes all the way through the system and you actually get paid for it,” Peace says. “For the first time, we are monitoring how songs are being used in the streaming world.”
Built within ARIA is a valuation tool for musicians or labels to see how much their work is worth and determine the cash they'd earn if they auctioned their royalty rights using Royalty Exchange. Peace hopes to present the auction as a viable new revenue stream for producers, musicians and songwriters, continuing the platform's legacy as an innovator in the industry.
"By giving this tool away to all songwriters, we see it as a forced multiplier," Peace says. "The music industry is moving from a "write me a check" kind of industry to a Big Data play and we think we're right in the middle of it."