Countless musical artists struggle to finance the creation and promotion of their songs. For those who do, their ability to exercise control over their work is limited by their dependence on record labels. BaseNote, founded by Michael Cieslak, Mick Wollman, and Nic Dahlquist in February 2021, is a music investing smartphone app allowing fans to invest in their favorite artists, allowing musicians to retain creative control over their work.
BaseNote is currently primed. The only employees of the startup are the founders. BaseNote is among a number of Web3 startups looking to address the challenges artists face in the creator economy.
Frederick Daso: How does the financing of artists traditionally work?
Michel Cieslak: Excellent question. Most successful artists obtain funding from a label they are signed to, with the contract structure heavily favoring the label. In a typical label deal, the artist and their label agree to split royalties for a set number of albums. The label then provides funds to the artist in the form of an advance which the artist must repay. In talking with artists, we find that this structure leads to four shortcomings: clawback, fixed income sharing, lifetime contracts, and master ownership.
Many artists have a revenue split of around 70% label and 30% artist. And while this already favors the label, artists are frustrated that the clawback only comes from the artists’ revenue share. This means that if the label spends 100,000 on the album, the album will need to earn around 330,000 before the advance is “clawed back”. Until the advance is recovered, the artist will not receive another penny. As you can imagine, many artists feel they should be making money when the label is making money.
Existing contracts do not take into account an artist whose popularity explodes after the release of the project. With a fixed revenue share, the project will continue to pay the label 70% of revenue regardless of the project’s success. This is compounded by the fact that the label owns the work produced, meaning they keep that 70% revenue share forever, regardless of how many times the advance has been paid off. Since the label owns the work, this means that the label also owns the masters, which prevents the artist from having control over how they are used.
With BaseNote, we focus on replacing the existing model with one where the risk is spread across many investors, allowing us to address these shortcomings directly. There is no clawback as we offer a tiered revenue share model, which reduces revenue share as investors are paid back. The tiered model removes much of the stress of pricing an artist’s future value “correctly”, contracts are fixed-term, and the artist owns the masters.
Daso: Why is it difficult for record labels to spot and nurture emerging musical talent in the age of data-driven streaming?
Cieslak: Streaming has made it easier to actively search for talent, but it has also greatly increased the number of new talents releasing their first demos. Overall, this has been a clear win for A&R efforts because they can use data to “alert” to emerging talent.
However, I think the splintering and growth of talent has become increasingly difficult to control, especially with platforms like TikTok becoming the biggest drivers of music discovery. Prior to streaming, labels invested a ton in their distribution capabilities, making it easier for them to get their artist heard by large audiences via radio. Now, with algorithms constantly curating personalized playlists for each listener and viral moments driving trends, the efficiency of the label’s distribution arms is significantly affected.
We see this driving tension between artists and their labels as artists want to focus on their art, but labels are eager to create a viral moment to generate better ROI. For example, Halsey recently had a public feud with her record label so she could release “So Good.”
Ultimately, I think this will be a huge driving force for more and more artists looking to be independent.
Daso: What are the missing incentives to motivate fans to support artists outside of normal fan-artist interactions?
Cieslak: After deciding to focus on funding, we interviewed many fans and artists to dig into this specific question! These conversations led us to create BaseNote. For me, it’s simple: artists do not want and do not seek alms; they take pride in the work they do and don’t want to feel taken advantage of by someone who speculates on their future. This meant that there was no product aligned with artists’ values where they could fundraise. On the fan side, a lot of them are aware that streaming doesn’t pay enough, and they want to support the artists they love. Unfortunately, they can only see a limited number of shows and buy so much merchandise that they have been looking for a better way to support the artists. We’ve found that for a ton of these fans, just allowing them to share the possible benefits is enough to make fans and artists feel like they’re in the same boat.
Daso: How does ownership of music rights change with the ability for BaseNote investors to share an artist’s streaming royalties?
Cieslak: Ownership of music rights has always been a touchy subject for artists, but lately the public has been made aware of how painful it can be for an artist. Most notably, we have Taylor Swift re-releasing her previous studio albums to fight someone else buying her back catalogue. When developing BaseNote, the founding team wanted to make sure we could use BaseNote to change the ownership model. We believe that because fans are looking to support the artists and share the benefits, they are not interested in controlling or owning the masters, which allows us to completely change the rights model. For funds raised through BaseNote, the issuer retains all principal rights after the term of the transaction.
Daso: Does BaseNote essentially provide artists with a “continuous lead” with how the company structures fan investment in supported talent?
Cieslak: It’s a pretty good mental model for what we do. When an artist comes to see us, we encourage them to think about the different phases of the project, so something like production, marketing and touring. Luckily the regulations allow us to close different rounds of funding to align with the different phases of the project, so in the long term I envision this will be more structured in the product.
We also understand that the timing of fundraising through fans and production may not align, so we are offering artists an advance so they can start production at the same time as their raise through BaseNote. It also acts as a flywheel for them to build media and excitement for their project while the offer is live. Eventually, we plan to provide a lot more guidance here to give artists more help on how much, when, and what they should raise capital for.
Daso: How does the relationship between record companies and artists change now that BaseNote exists? Where is the balance of power now?
Cieslak: I think it’s important to note that there are tons of independent labels and independent music professionals that provide services to artists, so it really depends on the size of the label we’re talking about. For smaller labels, I think it opens the door for them to sign and develop more artists because they can get new sources of capital to accelerate artists’ careers. For the bigger labels, they will likely see this as another signal that they need to innovate on their business model in order to retain and attract talent. I think BaseNote, along with other innovations, will slowly transfer power from labels to artists, but in the short term, labels still have moats that keep them in power.
Daso: How has compliance with FINRA regulations shaped the product design and system architecture of BaseNote?
Cieslak: When we started, we heard a lot of complaints from other people about getting FINRA approval, so we were pretty worried about the impact of the regulations on the product beyond what we could foresee. However, we were able to build the majority of the product the way we wanted after working with the FINRA team to understand their feedback. From a product perspective, the onboarding experience and content ranking are impacted the most, but most of the impact is small enough that I don’t think it’s a burden on our product.
On the system architecture side, payment and escrow flows are heavily shaped by regulation. But other than that, there hasn’t been much of an impact. Overall, we value FINRA’s advice, which ultimately serves to protect our investors.
Daso: In BaseNote’s long-term vision, could the startup take the form of a decentralized infrastructure for the Creator Economy?
Cieslak: Absolutely. I see the long term as BaseNote really being the hub of how creatives meet their needs. Today it’s through funding, but in the long term, we want an artist to be able to come to us to meet any of their needs. I would like to see us grow and expand to create an ecosystem of service providers and artists working together to achieve success. I see several strategic benefits here, which include creating a system of trusted partners for creatives, enabling creatives to get comprehensive support that matches their style or the style of a project, and providing a hub for collaboration between creatives.
Written by Xodas.