🎧 Believe IPO - Music Distribution for the Digital Age
Overlooked #72
Hi, it’s Alexandre from Eurazeo (ex. Idinvest). I’m investing in seed & series A consumer and consumer enablers startups all over Europe. Overlooked is a weekly newsletter about venture capital and underrated consumer trends. Today, I’m covering Believe’s IPO which is a French tech startup that has contributed to reinvent music distribution and promotion for a digital and social first world.
I've already written a couple of times on the music industry in this newsletter (on the audio industry, on the Warner Music IPO and on collectives).
Today, I'm adding another brick to this work on the music industry covering Believe's IPO. It's a French startup founded in 2005. It is backed by Xange, Ventech and TCV. Believe has become a leading player in online music distribution and promotion generating €441m in sales in 2020. Last week, the company successfully raised €300m at €1.9bn valuation on the French public market.
I divided this paper into the following sections:
Believe's positioning in the music industry
A quick history of Believe
Believe's future
Personal learnings as venture investor
Believe's Positioning in the Music Industry
You need to have in mind key recent shifts in the music industry to understand Believe's positioning.
The internet has reshaped the music value chain: artists are going direct to consumers, streaming has replaced physical sales, the barriers to create music have massively decreased, social medias have become a key promotion tool, artists want to own their recordings, etc.
The three music majors used to dominate the game but they are loosing ground. Universal Music, Sony Music and Warner Music controls the music industry with a combined market share of over 65% for both music publishing and music recording. Nonetheless, they are loosing market shares year after year to independent artists and independent labels.
Streaming has saved the music industry from piracy and declining physical sales. The music industry reached its apogee in 2000 with €25.2bn recorded for music revenues. From 2000 to 2014, the rise of the internet, music piracy and declining physical sales triggered a contraction of the music market, ultimately collapsing to €14.6bn in sales. Since then, the music industry has recovered at a strong pace mainly driven by the rise of music streaming. In 2020, the industry generated €21.5bn in sales (85.3% revenues of the 2000 peak and 7% annual growth).
The rise of a middle class of music artists. Music is on longer a binary industry. In the past, you could either sign with a record label and try to break as a professional artist or remain a music hobbyist for your own life. The barriers to entry to produce, distribute and promote your music have never been as low as they are today. Moreover, the paths to become a successful artist have multiplied and you no longer need to sign with a label.
Believe has built its success by challenging the domination of the three majors in the music industry.
The internet has democratized both music creation and music distribution. Majors used to provide artists with a physical studio to record their albums as well as with an industrial and retail expertise to distribute their CDs. Today, artists can record and publish a song over the weekend from their bedroom.
Promoting an artist in a digital-first world requires skills that majors don't master. Majors used to have a strong expertise in convincing radios and TVs to add the major's hits in their programs. Now, you need to convince social streaming platforms and social networks' algorithms.
Artists are no longer second class citizens. Majors used to sign artists over long term contracts (5-7 albums) and to get the intellectual IP of their recordings. Today, majors don't add enough value to artists to justify these terms.
Believe focuses on distribution and marketing with a strong digital expertise with a mix of automated solutions and tech-enabled services.
It breaks down its business between premium solutions (92.7% of revenues and 87.6% of EBITDA) and automated solutions (7.3% revenues and 12.4% EBITDA).
It doesn't touch the production piece of the music value chain because nowadays most artists are self-produced and want to keep the ownership of their recordings.
Believe wants to be the best partner for all artists from amateurs who are uploading their first album on Spotify to top artists like Jul and PNL. It offers modular solutions depending on artists' maturity and willingness to work with third parties.
For emerging artists, Believe offers automated solutions (via Tunecore) which are solutions to automatically distribute audio and video content on streaming platforms and social medias. It also collects all artist's streaming and advertising revenues. As an artist, you can either pay a $69.99 annual subscription (+ 15% commission rates on revenues) or individual credits ($9.99 per song or $29.99 per album) to be distributed and collect revenues from over 50+ platforms.
For established artists, Believe offers premium solutions which are tech-enabled services to distribute, promote and finance digital content for both artists and independent labels through revenue share agreement deals (with a payment rate to artists between 60 and 90%). Believe is using scouts and talent managers to find and collaborate with artists. These services are augmented with data and technology. For instance, Believe uses data to identify and sign distribution deals with promising artists. It also uses data to offer the best possible financing terms for artists who want to fund their next project.
A Quick History of Believe
2005: Denis Ladegaillerie, Arnaud Chiaramonti and Nicolas Laclias cofounded Believe to help artists and labels distribute their songs and albums online. Streaming platforms were not born yet and people were buying songs and albums per unit on iTunes, Virgin or Fnac.
2007: Xange invested in the company. As of before the IPO, Xange holds 8.06% of the capital.
2008: Ventech invested in the company. As of before the IPO, Ventech holds 20.34% of the capital.
2010: Believe started to distribute on streaming platforms (like Deezer and Spotify) and launched Backstage which is an interface for labels and artists to manage, promote and analyse the performance of their music on the platforms served by Believe.
2015: It was a transformative year for the company with a large fundraising round with a top tier consumer fund and two key acquisitions which were the start of an ambitious build-up strategy.
Funding round: $60m raised with TCV - a $10bn crossover fund who invested in consumer companies like Airbnb, Facebook, Spotify, Netflix and more recently Klarna, Millie, Nubank or Trade Republic. As of before the IPO, TCV holds 49.64% of the capital.
Acquisition n°1: Tunecore - a US-based automated solution for artists to distribute their music online on music platforms and social medias. Tunecore had €110m in sales in 2014 at a time Believe was generating only €70m. With Tunecore, Believe doubled its customer base to 250k artists.
Acquisition n°2: Musicast - a French music distribution house specialized in urban music. Musicast was distributing online and offline French rappers who were not able to work with music majors or did not want to. Musicast was generating €7m in sales and was already working with Jul and PNL. For Believe, Musicast was key to build a reputation in the urban music market and to complement its digital distribution with a physical arm that remains necessary if you want to build a one-stop shop for artists.
2016: Believe acquired Naive for €10m which is a French label founded in 1998. It was specialized in classical music at the time and has now expanded into Jazz, Pop and World music.
2017: Believe launched the All Points label both in France in in the UK. It has an offering that is much more modular and artist-friendly compared to labels. All Points is working with artists like Oxmo Puccino, S. Pri Noir, Youssoupha, Naps, etc. It also acquired Soulfood which is a German distributor.
2018: Believe acquired Nuclear Blast (a metal label in Germany), a 49% stake in Tôt ou Tard from Wagram Music (a French label) and Groove Attack (a German independent distributor specialized in hip hop).
2019: Believe acquired Venus Music Private (a music catalogue mostly composed of Bollywood songs) and Entco (an Indian music events organiser).
2020: Believe acquired DMC (a label in Turkey) and SoundsGood (a suite of digital marketing tools for artists).
Believe’s Future
Believe has reduced its IPO ambitions.
It was initially planning to raise €500m at valuation beyond €2bn. Believe ended up raising €300m at a €1.9bn valuation. I imagine that the declining sales growth (from 66% in 2019 to 12% in 2020) and the negative EBIT margin in 2020 were hard to pitch to potential investors. Moreover, it must have been hard to brand Believe as a tech company when you see its gross margin and long term EBITDA margin (5-7% in the long run) profiles.
Believe highlights three growth levers in its IPO prospectus.
International expansion. Over the years, Believe has developed a playbook to expand into a new geography (start a local team focused on a specific music genre > test the market for 18-24m > if the country is worth it, further invest by growing the local team and/or acquiring local players). It will replicate this playbook to open new markets in the coming years. Believe will also expand the geographical presence of its automated solutions that are now only available in 14 countries.
External growth strategy. Believe will dedicate €100m per year to make selective acquisitions over the 2022-2025 period and will use its serial acquirer expertise to integrate them in the Believe’s platform. It has three categories of targets: (i) services to labels and artists, (ii) digital marketing and distribution expertise in the music industry, (iii) music catalogues.
Product and tech development. Believe will build additional tools for both its automated solutions and premium solutions divisions. The prospectus talks about: automated music creation tools, data & marketing tools to source and support artists, tools to improve Believe's artists referencing on music streaming platforms & on social medias, etc.
Believe should be cautious with its positioning.
They claim to build a new paradigm for artists in a post majors-world but when you dig, you discover that it also has in-house labels and it has been buying music catalogues. I'm sure that artists like PNL and Jul are not super happy when they read articles in the press saying that "Believe grabbed PNL and Jul when it acquired Musicast back in 2015." When you arm the rebels against music majors, you should not behave and be perceived like them. Otherwise, I can assure you that these artists will stop working with you as soon as they have a better alternative.
I'm bullish on the rise of a middle class of music creators.
Believe has been a pioneer in spotting this trend and building tools and services to serve these creators with a new paradigm which is fairer, digital and social first. Automated solutions for emerging artists to create, distribute and promote their work make a lot of sense. When you see the current Tunecore's platform, I think that Believe still has a lot of room to grow in this space building consumer-grade experiences for artists, reinventing financing for the music industry, building an education and a community of artists around its brand.
Personal Learnings as Venture Investor
Three of the most successful French startups in the entertainment category (Believe, Voodoo and Jellysmack) are ovnis to venture capitalists.
Voodoo is a mobile game developer and publisher specialized in casual gaming while Jellysmack helps brands and content creators to grow their audience and their revenues on social medias. Many VCs passed on these companies because they were too different and did not tick the boxes of scalable and recurring revenues businesses. I think that we should recognize and value uniqueness when we see it because a common trait of many successful startups is that they were able to create and dominate a unique category. As an investor, it means that you need to be open-minded and empathic to understand a startup idea that is beyond what you have ever come across.
It takes time to build a successful business.
Believe was founded in 2005 and waited for 16 years to go public at a targeted €2bn valuation. You cannot expect all the startups to reach a multi-billion valuation in less than 5 years. Moreover, after a certain scale, some startups are creating value at an exponential rate. We need more evergreen venture funds (vs. 10-year traditional funds) to maximise value creation.
You can create a tech giant by being a serial acquirer.
Believe made 18+ acquisitions in the past 6 years to grow in new geographies, in new music genres as well as to add additional products and services to its platform. I think that being able to acquire an integrate 2-3 companies per year is a secret skill that needs more recognition. European growth startups like Hopin, Bloom&Wild and Tink have adopted a similar playbook. I think that it will become much more common with the growing maturity of the European tech ecosystem.
It's powerful to participate in the disintermediation of an industry.
Music labels used to make or break the music industry. The internet has reshuffled the deck in the past 20 years. You no longer need labels to create, distribute and promote your music. You can retain the ownership of your music IP. You have much more choice on how you want to develop your career. In the end, it's a much better world for artists and the internet has given rise to several tech giants in the music industry including Spotify, Kobalt and Believe.
Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋