Due Diligence Questions and Answers
The Leadership team
Rob Snyder has brought two tech businesses to exit, a visionary with the savvy to have brought in an implementor to make the vision real. He’s been doing this as a dedicated hobby for six years.
TTISI Management assessments of competency, motivations, communications, and behaviors show a balanced and well-developed team in Rob Snyder, Adam Pressman, and Jay Slonaker. Adam uses his two decades as a business coach and the EOS Operating System to structure and operate the business to be effective while small, and able to scale as efficiently and instantly required without major changes to staff, structure, policies, or plans.
Rob, Jay, and Adam have founded and sustained businesses in the past. All three have documented (tax forms, etc.) business revenue success over the last decade
We have advisors in the investing, tech, music and media industries on our board. Their connections and competencies help to reinforce the executive team’s relationships and provide those relationships that may yet be needed.
- Advertising Sales, radio focused
- Artists/Publicists relations
Technology, IP and Product Roadmap
The three on the executive team have held multiple roles in technology companies that are related. These include: Internet Streaming, Web and App Development, Music retailing, Radio, Marketing and Advertising.
Two of our revenue channels leverage strongly patented IP owned by our partners.
We’re already bringing in small revenue from marketing our app that nets about 70c per download and our affiliation with Gig Worker Solutions which pays us about $20/participant per month. As partners provide both revenue streams most of the risks are in their hands not ours.
We will within the quarter debut the subscription site that is in testing now. There are risks in functionality and scale though with the use of AWS for infrastructure and the most common membership management tools in the space, risks of problems are mitigated and time to recover short.
Simultaneously with subscriptions will be merchandise branded with Masters Radio offered. We have several options being explored for either facilitating or redirecting merchandise orders for artist merchandise depending upon whether the artist has a fulfillment method or not.
About a year after the subscriptions are underway, we will market our ability to (developed for internal content creation) provide sound and visual recording, studio time, venues and even tour support to artists who may need such to support their new music.
When revenue reinvestment allows, we’ll use a proven approach and registered crowdfunding portal provider to establish a service where each Masters Radio Member Artists page can connect contributors to a crowdfunding portal for funding tours, albums, and other needs for which the artists may seek patronage.
The biggest risk is encroachment into our niche by established businesses close to our focus. Spotify could do what we’re doing but doesn’t, is making lots of money and so probably wouldn’t change. Though specific technology methods and providers are in use to deliver our value proposition, they are commodity services and can be replaced to scale without much cost and little to no rework.
Our tech stack is modular to allow for software as a service providers to give us both ease of onboarding and also an easy exit path to better such services as they emerge. Our value proposition is as a community of artists and their fans, not particularly at risk of being adversely affected by future tech.
Regulatory Strategy
For general business regulatory risk we have counsel on our advisory board to ensure issues like HR, taxes, etc. don’t obstruct plans. We work with license rights management organizations, using their low fee tier for streaming. Upon meeting specified revenue targets we’ll update the licensing to support downloading of licensed content as well as playback as we are currently licensed
We’re deliberately not allowing downloads to keep the regulatory costs low until a clear revenue demarcation indicating costs are outweighed by the revenue enhancement occur.
We leverage a Partner/Supplier Compliance process to ensure upstream operations of ours are sanguine for regulatory requirements.
There’s a risk we could be “legislated out” of one of our revenue channels as it becomes clear to the content owners this until now forgotten segment of the music industry is profitable after all. That would still leave us with our own content, advertising, events, merchandise and benefits commissions.
Customer Need and Go-to-Market Plan
The Go To Market plan is an inclusion in this document. In keeping with the progress so far of setting reasonable goals and exceeding them we have leveraged conservative assumptions that have been validated by prior efforts of similar businesses. The plan only has a two-year duration as we don’t feel we can, with the same degree of certainty plan more than two years out. For us a proforma that’s three years out or more is like a weather forecast that’s three years out…barely believable.
See the plan details in the plan above where the first-year pipeline appears and there is a link to the full financials. Our sales goals are very conservative considering our 275k per month engaged audience. For the three cases we need only from a tenth of a percent to no more than 4% to attain the case revenue goals.
With four revenue channel models we have a mix of both. While our content is certainly a want rather than a need, our benefits commissions channel and to a lesser extent revenue from events and artist merchandise sales (these artists have to eat) allows a balance. We are clear that our competition is Starbucks or other targets of disposable income. With our content all coming from musicians with decades of hit making history we can leverage that quality and the resulting fan loyalty to drive “want” toward “need.” To that end we’ll foster demand by ensuring we are selling something fun to buy. With our content all coming from musicians with decades of hit making history we can leverage that quality and the resulting fan loyalty to drive “want” toward “need.” We advise our advertisers to think the same way. Our Market Analysis above indicates that just the streaming music portion of our business is a growing $25 billion market. We’d be very happy to convert 0.07% of it to our customers.
Moving from free to $5 per month will lose us some listeners. We know that. We feel we’ve only a certain amount of time to show the industry that putting the artist first is better for their bottom line before they respond. We feel we have a two-to-three-year window to really dominate before either some saturation weakens our play or an acquisition of the brand occurs, which is our exit strategy. We need less than 0.1% of the market and only about .2% of those listeners we already have to pay monthly. Sales cycles are immediate though in any subscription model you will have attrition. We’ve factored in a very low audience conversion rate to address that reality.
Uniqueness and Competition
With the unique content we’ve developed, being focused on the interaction of the Masters we play and the fans that love them, we offer a more fully formed value proposition than just the stream of new music with which we started. Our video interviews, unique events, partner provided technology to enhance the music experience and our playlists take use beyond the scope of other streaming services. Our support by the artist community is a hard-won reputation and would be difficult to duplicate.
We have a program to compensate an advisory board so that we can draw from the wisdom and connections our board has. The founding team will leverage this to keep us ahead of our sector as a competitive advantage and to help us remain agile in how we spend our marketing dollars, our operational capacity and our product and service roadmap to be always ahead of what has always been a pretty slow to adoption industry. With advisors in the radio, recording and distribution, media and music industries we will always look to them for quarterly check in conversations about what the leadership team must start, stop and continue to ensure they are always at an effective value providing and competitive level.
It’s always hard to get people to pay for music they like in an online environment. It’s the biggest reason we deliberately expanded our revenue producing efforts so that we’re not relying on a fickle market. We also deliberately did not seek funding until we hit the milestones, we have to assure investors we have a strong marketing awareness and now, with 100 million pairs of eyeballs on the site we are 40% ahead of the next closest social platform, Rolling Stone. Like them, we’ll see a dip as we transition from all our unique content being free to being behind a paywall though our pricing puts us in an advantageous place compared to other streaming services. We can charge less to subscribers and give more to artists because of our other paths to revenue and our extremely low costs. Sales cycles are not really a concern beyond our building into our projections a six-month buildup of ad buys and subscriber onboarding as people learn who we are.
Market Size and Market Opportunity
In the Market Analysis section the first paragraph is a top-down and the next paragraph is closer to a bottom up assessment of our likely market. In that we can see the actual size of our audience, not just the industries and we’ve established not only a conservative conversion rate but one validated by the historic performance of similar businesses.
See # 1 above.
The risks of developing this market lie in the non-proprietary value content for two of our revenue streams. Yes, people can find the same music from Masters artists on multiple platforms. All of which, at present, charge more than double our proposed subscription fee. That can have an impact on our advertising and subscription revenue models. With our lower than typical ad rates, ability to provide custom and leading-edge media options and support by the artists community (Our masters are willing to record voice and audio content for our advertisers as just one example) we believe we’ll develop our market beyond our estimation. Our competitors charge much more than we do and cannot develop, only distribute, advertising content. Subscribers are likely to have more than one option in the music they want and will find value in ours by the way we identify, curate and present content they are less likely to find, though they could, on other platforms.
Our other two revenue paths, our monthly benefits commissions and the transactional revenue from merchandise and event ticket sales are at a much lower risk from competitive pressures. Even in a recession where people spend less of their disposable income, they will continue to pay their healthcare premiums so that addresses the risks of economic pressures on our market as well.
Financial Projections and Funding Strategy
Our Financial Plan folder contains no balance sheets as we’re a startup though we are tracking the expenses in our Dynamic Equity plan as they are being paid by the partners personally. Masters Radio will open an operating account. The projections including a version with and without potential revenue from a short term benefits commission program appear in the folder identified above. Access to the Financial Plan is by request at our contact form here.
There is an Assumptions tab in each year’s financial proforma that can be adjusted to revise the model making it easy for us to evaluate the impact of variances. Our plans shield us from the negative impact of them and provide some margin for upscaling if growth exceeds our plans. The only non-standard is our increased commission above the industry average for ad sales commissions. We need good people to do great work to get the plan revenue on target so feel this is a worthy increase. For everything else either typical or conservative values were identified for similar businesses and appear below:
Constants | |
20.00% | |
5.00% | |
4.00% | |
3% | |
12.00% | |
Commission for Ad Sales Team | 30.00% |
Artist Salary Fund Investment (percent of revenue) | 10.00% |
Revenue Royalty to Investor | 10.00% |
Unified Communications and Business phone, monthly | $500 |
Executive Compensation Yearly Raise | 14.00% |
GWS commission per user per month | 20 |
Licensing Fee (Percentage of Revenue) | 2% |
General inflation | 3% |
At present Masters Radio has no debt. Should growth indicate a need for more funding we anticipate leveraging a SBA loan or similar credit establishing vehicle with a low exposure and easy repayment as part of the term. With our plan to provide investor ROI only in the form of revenue royalty we preserve our equity and keep our capital table clean. We do anticipate and will plan for an acquisition as our exit strategy. We are seeking in this round of funding our only planned capital formation effort. Capital expenses for this kind of business are on the low side so future financing, if needed would be small amounts and the personal credit histories of the founding team should provide no obstacle to future borrowing if required.
The likely biggest risk from a financial, rather than market perspective would be an unanticipated dramatically large increase in the licensing fees we must pay for the ability to present the artists music on our streaming service. We already pay the lowest fee by not allowing downloads of artists’ music. (We’d rather the fans go to the artists preferred location, often their own website, to download music). Still, the industry could decide to pay artists more than they have been. That’s a change we champion but it would be more expensive therefore for us. It’s another reason we have dramatically increased the percentage of our own content compared to licensed content in the last year. A more macro risk for us is an economic downturn where people spend less on entertainment. Though we’d be affected as would anyone else in the sector the research bears out that during a time that certainly would qualify as economically averse, the Pandemic and recovery, streaming music service subscriptions grow logarithmically as people devoted their disposable dollars to less expensive and repeating entertainment options they can enjoy at home. Another smaller risk is that the way non-employee individuals are provided healthcare and other benefits, from which we derive a commission could be impacted or even negated (for instanced if the US were to become a single payer healthcare nation). Again, we think that would be a great idea despite our losing our commissions and we’d welcome the chance to adjust other benefits we could offer to compensate.
Exit Strategy
When asked by a music business executive about plans to “completely change the music industry” our CEO said, “only a small part of it”. We are committed to proving the point that if you reward the fans and artists more, everyone is happier and wealthier. The three partners all foresee a two-year timeframe to get established to do that. Then, when more established, influential, and moneyed businesses in the space want to adopt our model, which by then will have a large body of artists supporting our brand, we plan to ensure these businesses know it is better and less expensive to buy us than start from scratch. We anticipate an acquisition exit in three to five years.
For an online business like ours a five to fifteen revenue multiple is not uncommon. With our plan for a conservative $16M in the second year in mind we discovered a few acquisitions in the $100M range and a few much higher. The founding team would welcome the ability to stay on in advisory positions post-acquisition.
One benefit of the founding team having an experienced business builder and capital raising member is that we’ve established the business as close as possible to a franchise model, with everything documented, leveraging a proven business growth model (EOS) and incurred no debt and a clean capital table. The Dynamic Equity plan is a sensible way of keeping track and keeping fair all the efforts and expenses of the founding team and makes it very clear and accessible to an acquirer how to get into the deal, how to ensure it works without the founding team and how to get the most out of it.
The company will recreate the entity as a Member Managed LLC or Schedule C in the first months after funding. It is now a sole proprietorship in the name of the CEO. The Dynamic Equity plan and operating agreement are setup to preserve founder commitment and control through the first growth phase of the business. A 51% non-diluted pool exists for them and for future acquisition. A 49% pool of a million shares is available for artists and other stakeholders as well as an employee stock ownership plan in the future. In an acquisition such arrangements are a straightforward conversion to an equity sale.