imeem Founder Dalton Caldwell's Must-See Talk On The Challenges Facing Music Startups

Last week at Y Combinator’s Startup School nearly a dozen of the Valley’s most seasoned entrepreneurs and investors came together to give advice to hundreds of people looking to launch or get involved with a startup. One of the standout talks came from Dalton Caldwell, the founder of defunct music startup imeem who is now running his second company, picplz. If you’ve ever considered launching a music startup yourself, or wondered why so many seem to falter, it’s really a must-watch. We’ve embedded a video of his full talk here, and he’s also given us the slides so you can take your time reading through some of the data points he lists off.

Caldwell kicks off with a brief explanation as to why he was there — after all, his startup imeem “blew up” earlier this year, so he didn’t have a particularly inspirational success story to share. But he does know the music industry cold, and even though imeem may have ultimately had an unfortunate exit, at one point it was drawing 26 million uniques a month. Paul Graham asked him to speak because there are still so many people attempting to build music startups, and he wanted them to know what they were getting themselves into.

Overall, Caldwell’s talk isn’t going to be encouraging for anyone hoping to launch a music startup: at one point early on he says, “Every time a founder does a music startup, a likely-more-successful startup dies”. But Caldwell’s message doesn’t seem to be that launching a music startup is completely impossible. Rather, it’s just incredibly hard, because you have so many things working against you. And he wouldn’t recommend it.

During his talk, Caldwell gives a high-level analysis of some of the more common business models for music startups. The “Tools for artists” route is hard because artists don’t have the money to pay you, it’s already a very saturated market, and it’s going to be tough to make money selling indie artist content with 20% margins. Likewise, download stores are difficult because iTunes is completely dominant, with Amazon and (soon) Google in this space as well. And with ad-supported startups like imeem, you have to deal was a set of unavoidable quarterly fees to pay to the labels, regardless of how much money you’re taking in. Check out the slides above for more details on the problems with each of these models (there are many).

But despite the problems facing music startups, Caldwell doesn’t think the people running the music industry are evil or stupid (which is an easy assumption to make given how harsh some of their terms seem to be). Instead, Caldwell says they’re a victim of the industry’s structure, and the fact that the major labels’ market dropped from $15 billion in the 1990’s to less than half that today. Above all, they’re trying to make sure their employees still have a job to come to (though the structural incentives for short-term gain over long-term growth aren’t helping).

The bottom line for fledgling startups: these record execs need to discover businesses that will generate hundreds of millions of dollars, and they can’t take gambles with a bunch of startups that want to gradually build up a user base and focus on monetization when they (probably never) hit critical mass. They’ve tried that, and it hasn’t worked out for them.

Flickr image by Alexa Lee