Sean Peace has a captivating story to tell about selling and exiting an unprofitable business in a unique niche: a fintech startup dealing with entertainment in the Southeast. In 2013, he founded Royalty Exchange, an auction marketplace selling music royalty streams as memorabilia to the highest bidding fans.
After two years and $100K in revenue, the company landed $2 million in venture capital financing to accelerate their growth – or so they thought.
“Make sure you have enough runway, especially enough to slow down,” is Sean’s big takeaway. Venture capitalists aren’t interested in slow growth. “The VC wants you to grow, grow, grow, as fast as possible. That may not be best for the company.” They were deceived by the investor’s claim that if the money ran out, they could go for another round of funding. Naively, they hit the ground running. Looking back, Sean says, “That’s a fallacy.”
25% of the capital was used for legal counsel when shifting their 1:1 buyer-to-seller model to smaller pieces. This adjustment allowed multiple winners at each auction, which reduced risk. The rest of the funds were used to scale up the platform’s infrastructure to accommodate 100,000 users. In addition, Royalty Exchange invested in marketing and sales representatives. After six months of trying to stir quick growth, the new model didn’t meet expectations. The user base was closer to 200 than 100,000.
Royalty Exchange attempted to pivot their expensive marketing strategies to acquire the right customers. Sean realized a large portion of their target market – songwriters who could act as auctioneers – were one-hit-wonders and no longer in the music industry. This made them incredibly difficult to track down. “Our normal marketing means didn’t reach those people. . . . Our advertising and keywords didn’t get to them.”
As Sean’s company pivoted, they realized the only people who know where songwriters are, is the people who pay them. “We were getting ready to roll-out – right when the cash dried up – a new version of the product that would allow all of the publishers (the ones that pay the songwriters) the ability to use our tool.” In hindsight, Sean wishes they had pivoted and changed the model sooner.
“Know where your line is and don’t cross it. As soon as you cross it, you lose your negotiating powers.” He recommends working with your CEO or comptroller to identify the loss cutoff point. This point is where you’ll pay down the debt and reduce to a skeleton crew. For Royalty Exchange, when their cash flow hit that critical point, it was too late. The company performance was not enough to get another round of funding, so they initiated their exit planning.
“Know where your line is and don’t cross it. As soon as you cross it, you lose your negotiating powers.”
Perhaps the most brilliant part of the deal process was Sean’s decision to pick not one seller, but two. He split the company into a technology portion and a website component, helping him recoup more of their losses. He took his time to contact creditors and repay as much of their debt as they could prior to closing the accounts. This worked to his advantage. Sean discovered AMEX could have legally pursued his personal assets had he not paid off the business debts.
When asked if he would fund another startup through venture capital, Sean’s answer is yes. In fact, he is starting another one right now. But this time around, he plans to bootstrap for a lot longer and establish a sustainable, positive cash flow before accepting any outside investments. Even then, he will fight the pressure to grow too quickly and invest money more wisely – as though it came from his own pocket.
Subscribe to the podcast here.
DealRoom is a secure, cloud-based M&A due diligence management platform that replaces overpriced data rooms, email clutter and manual spreadsheet trackers.