Join Dmitri and Tracy Maddux the Former CEO, of AVL Digital and CD Baby as they talk through the fundamentals of what it takes to really start up. We promise that by the end of this episode, you'll have a clear understanding of the critical decisions that shape the future of your business. Whether you intend to sell your company or nurture it as a long-term venture, Tracy's wisdom on capitalization, leveraging personal funds versus investors, and recognizing your strengths and weaknesses will set you on the right path. And if you’re already deep in the weeds with your company – there is still great advice to be learned from these two industry experts.
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Episode Transcript
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0:00:18 - Dmitri
Welcome back to Music Tectonics, where we go beneath the surface of music and tech. I'm your host, Dmitri Vietze. I'm also the founder and CEO of Rock Paper Scissors, the PR and marketing firm that specializes in music, innovation, music and tech, and you know we're doing this. How to Start Up series. You've had us tell you a little bit about ideation, about mindset, about early investment, about how to partner with different organizations for growth, and now I'm excited to have a conversation about the nitty gritty on building a company.
Our guest, Tracy Maddux, formerly served as CEO of AVL Digital Group, which included CD Baby, adrev and Dash Go. Tracy initially joined CD Baby in 2010 and led it through a period of rapid growth as it became a global leader in independent music distribution. In 2019, avl was sold to Downtown Music Holdings, where Maddox served as chief commercial officer from 2020 through 2023, driving Downtown's commercial licensing efforts as well as leading Downtown's acquisition practice, which included the additions of Fuga, foundy and Curve Royalty Systems. Tracy initially joined CD Baby in 2010, as I mentioned, which, under his leadership, became a global leader in independent music distribution. Tracy holds an MBA from Indiana University and a BA from the University of Texas at Austin. Tracy Maddox, welcome back to the Music Tectonics Podcast.
0:01:47 - Tracy
Thanks for having me back, Dmitri.
0:01:49 - Dmitri
This is great because with that fancy MBA, you can really help. I think startups think through some robust business practices and, of course, all the experience that you've had running companies, buying companies, merging companies will become handy as people are just beginning to set the foundation for what they need to build. So I'm going to dive in here, Tracy when you meet a new startup with a first time founder, how do you explain to them the components of building a company? Are we talking about setting up the books, or hiring people or incorporating? What kind of stuff are you thinking about for a new startup?
0:02:28 - Tracy
Well, I think the first one and I'll borrow this from Stephen Covey is beginning with the end in mind. In other words, you're going to create something. How's it going to end? Are you, as a founder, thinking about an exit where you sell the company? Are you building something that's kind of a forever company, where you plan to hire a workforce, build a business and be around the rest of your life? And I think, more importantly than just what's the end, is you know what's the plan to get there? Specifically, when you're thinking about, you know, starting a business beyond, like, what are you trying to accomplish and how do you exit? What's the first step in capitalizing that business? Is it your own money? Is it investors' money? Because those two questions are very intertwined. You know, obviously, if you're raising money from somebody else, they're going to want it back. They're going to want it back with the return, and so you really need to think about where am I going? Where's this thing going to be for me? Is it a sale?
0:03:41 - Dmitri
Am I going to take dividends out over time? And then, how am I thinking about the people that will own this company along with me, whether that's employees, investors and specifically, how do I get them paid back in a return on their investment investment Interesting? That's very interesting, yeah, I mean I think a lot of startup founders probably start off with. They just have an idea. Right, they think there's a solution to something. They've been in the industry and they're trying to solve a problem, or they just think this would be really cool, let's do it. But you're saying you can't just think through that. You can't just think through the business model and how you're going to actually generate revenue. You have to think about, like are you selling? Are you keeping? Are you building something for revenue? What point are you selling? Like? That's a lot of detail for someone who just gets started.
0:04:13 - Tracy
It doesn't work out too well when a founder just wings it right, going out and raising money. First of all, it's hard to convince people to lend you money or to invest in your company or your idea unless they understand kind of the economics of it. So kind of really thinking through again what's my investment and then what other investment am I going to need to attract to bring this thing to life. That's really where it starts.
0:04:35 - Dmitri
Okay, so kind of got that like really keeping the end in mind. That's super interesting to make sure that's early on. What are some of the most common things you wish startups would do sooner or at all to set themselves up for success down the road?
0:04:52 - Tracy
Well, I think founders are kind of a rare breed. They rarely suffer from lack of self-confidence. They are overcome with a belief in themselves and their ability to build something, and so that can be both a benefit to a company's success, but also it can be a huge detractor. So the thing that I would advise a founding CEO or a founder to do is to figure out what's my role. And then what are the things I'm actually not that good at where I could utilize the expertise of others, and and how do I see that role maturing as the the company grows, as the product launches, as, as you know, as we start to fulfill client needs, whatever the purpose of the company is. And so, really thinking about, you know what is my role, what hats am I going to be wearing here? And then I think it creates, you know, got a fertile ground for the next thing, which is you know what kind of people am I going to surround myself with, who do I need to hire?
And then you know, the kind of fruit of that fertile ground is culture. Right, like, what kind of culture do I want to build? But it really starts with what? Where am I in this business? And this kind of realization that I can't do it all and I'm going to need to surround myself with experts. So you know, how do I see my role as founder maturing? Am I going to be somebody who is kind of an investor or an ideas person who is building a team to lead this thing forward, or I'm going to lead the team, or am I going to lead the team for a while until we get to a certain point and then hire somebody? So, really, kind of thinking through, you know what are the roles and hats that I'm going to wear as a founder?
0:06:41 - Dmitri
Interesting. Yeah, I'm curious. Does that advice for building a company in terms of team change based on whether a founder is a technical founder or a non-technical founder?
0:06:52 - Tracy
I don't think so. I mean, I've seen some really excellent technical founders that are good at identifying talent and really good at the soft stuff really good at the soft stuff and I've seen some, you know, really kind of you know founders with more of a leadership and organizational design and HR background, just dreadful at inspiring people, and so I think it really is dependent on where somebody's coming from and also an honest assessment of their ability to inspire others to be productive. That's a rare thing, but I don't think it's specific to either technical or non-technical founders.
0:07:33 - Dmitri
It's funny. I think I was expecting to hear like first hire this role, then hire that role. Make sure you take this into consideration. You can outsource this or outsource that. And I'm getting a much like deeper, almost like soul searching type responses from you where it's like you got to understand what your company culture is, you got to understand, you know what your end strategy is, and I'm like oh, but I do you have thoughts on on like specific, like team team building, in terms of like who's your terms of who is your first hire?
0:08:08 - Tracy
Well, they might teach that in business school today and perhaps I'm just unlearning the experience I had 25 years ago when I was an MBA student. But the fact of the matter is we all bring different strengths and weaknesses to a business. Businesses vary in terms of what they need, and so it's really difficult to kind of prescribe a cookie cutter. But I will say you know a founder or a small group of founders, you know, starting with kind of a skills and strengths and weaknesses assessment will lead you to kind of better understand where to fill the gaps. And so if a founder has a highly technical background and can serve as the writer of the code or the builder of the servers for the first year or two of the existence, it saves a tremendous amount of expense trying to outsource that.
Another example I'll throw out there is if somebody has kind of a finance or business background or mind and can do the books themselves, what you know why run out and hire a finance team. And so you know, regardless of what those skills, strengths and weaknesses are, I think the assessment of that in the founder group is really the first thing to start when building an organization. And then I think the second question and this is really where millions and billions are made are like what kind of culture, what kind of company do we want to be? In other words, is culture important and how are we going to build it so people are really passionate when they come to work? Because getting those first hires right is less about role and more about passion, more about am I in, am I invested, am I really? You know ready to? You know, along with these founders, you know, go all in and build something special.
0:09:51 - Dmitri
So I want to. I wasn't planning to ask this, but I'm thinking about based on that response. You know, obviously you have to either have revenue or investment to hire somebody at first. But you also have looked at a lot of deals as an investor, as a potential acquirer of companies. When somebody's seeking investment and they're saying here's the budget, here's our plan, are there things that you look at in terms of the hires that are in that investment plan that either make them more investable or less investable? Like we're going to spend this money on X and that X includes building out a team. Obviously, a lot of times it's building out a technical team, but are there other things that you're looking at as well?
0:10:33 - Tracy
Almost every acquisition that I was involved in at downtown or ABL or before, really had to do with teams of people rather than products. And you know, team a functional team, a high performing team equates to capabilities, the ability to build something, to deliver something that could just be excellent service. And so the thing that is most important you know in that thread is you know who's leading the team. Is this team likely to persist after the investment, the acquisition, whatever that is, and what additional resources can we add to make the team go further? It is really that simple it's not to say it's simple to build a team or make a team perform at a high level, but when evaluating an investment, an acquisition, it's really about what's the team that's in place, or what are they capable of and are they likely to continue to succeed in doing these things?
0:11:32 - Dmitri
Yeah, got it. Okay, all right. This has been a great start to this conversation about how to build a company as a startup. We have to take a quick break and when we come back let's get into some of the financial tools and processes. We'll be right back.
You might have noticed that the Music Tectonics podcast is a little different lately. We're still bringing you interviews with the most thoughtful music innovators out there. What's changed is how we're organizing our episodes to make it easier for you to find interviews you're going to love. Starting right now, music Tectonics will alternate between four series. How to Start Up is a series for music tech founders and dreamers. Get expert advice from advisors and investors. Listen to the whole series to get a masterclass in starting up.
The Big Picture features interviews with executives and high-level thinkers. They share their 10,000-foot view on music and innovation. The Big Now breaks down the latest music industry news and rising trends in adjacent industries. Tristra, Neuer-Jager and I sniff out the stories you might have missed. Colossal Futures is about the cutting edge. Tristra or I get sci-fi with the innovators who are imagining and building musical futures that the rest of us haven't even imagined yet. You can catch up with each series on our website at music tectonicscom slash podcast. Subscribe to music tectonics on your favorite podcast app to choose between all our episodes, as they drop weekly, and drop us a review, so other innovators in music can find the podcast too. Okay, we're back Tracy. I want to ask you what are some of the financial tools or processes a startup needs to put in place to build a company? And then are there metrics that a company should establish when they like, when do they need to lead by the numbers, let's say. But let's start with those financial tools and processes, sure?
0:13:23 - Tracy
you know, investing really heavily and bringing in an analyst or a financial expert to build out a multi-year model, and that's useful, particularly if you're raising money, but it's not really necessary. What's more necessary is a believable plan that you understand. You know the inputs, so how much money am I investing? Who am I hiring? You know what's the product or service that I'm delivering, what's the cost of delivering that product or service, what's the cost of acquiring clients? And at the end of the year, end of the period, end of the budget year for the plan, what does it look like? Am I going to make money? Am I going to lose money? And if I'm going to lose money, do I have the cash to sustain this after the next period? That's really what's required to launch is a plan. It doesn't have to be overly detailed, but it does have to look forward a period. It does have to understand what the inputs are. So to your point revenue or investment. What the costs are so cost of production, what the expenses are things like sales and client acquisition and then what the bottom line is Beyond that particular tool.
In launching a business, it's really important within the first year or two to establish meaningful KPIs. People call these all kinds of things, but a key performance indicator has always been something that resonated with me, and those are simply indications of the underlying business activity. A KPI can be something like client acquisition Are we growing the number of clients that we're servicing in our business? It can be something as basic as am I producing units on budget? What is my production efficiency versus that which I said I would do? But they generally are two or three key statistics that show the underlying progress against that plan, that financial plan that you established when you were raising money or investing your own capital to start the business.
Wow, so I don't need an MBA, I just need a spreadsheet advantage in starting a business, because what they teach us in business school is really, really complex stuff. You know concepts like the cap, them, the way to value equities. Most businesses don't need that next level of financial and marketing expertise until they're launched. And you know, I find that the MBAs are very useful in a business. But but, but sometimes, you know, the simplest way forward is the best way forward, and MBAs do have a and this is a confession of an MBA we do have a tendency to over complexify things.
0:16:16 - Dmitri
So I hear you know just the idea of kind of having some books for one thing just to keep track of where things are. That's pretty basic process and having a kind of a budget with a plan and then kind of a hypothesis like we're going to try to do this with expenses, this is the kind of income we need to do it. This is our expectation as a result, and then reviewing that on a time basis monthly, quarterly, yearly and KPIs could be what those metrics are, the data you're measuring there. Are there any other kind of clever processes or tools that even you know a basic startup might want to consider in the financial planning and tracking there? Maybe a reporting system? What else comes up there?
0:17:02 - Tracy
Yeah, I mean, I think if you go up a level, over and above planning KPIs, there's this level of planning that really encapsulates the intent of the leader to build a business and what they're trying to accomplish. I learned this out of business school at Intel, which is a very, very process-oriented culture and company, and there have been quite a few excellent books in management around this, but again, not to overcomplexify it. Objectives and key results, okrs Again, lots of different words to explain the same thing. But what exactly are we trying to accomplish at a big picture standpoint this year? Is it we're going to launch a product? We're going to sign up our first 100 clients? You know, having some really well-established, easily quantifiable objective or qualifiable objectives that kind of feed into the plan are a great place to start. Sure, is it.
Is it useful to have a financial system? I've seen a hundred million dollar in revenue plus businesses built around QuickBooks and and really that's all you need Like there is a. There's a whole class of salespeople and consultants that are out there to sell you you the founder, you the board what's called an enterprise resource planning system that integrates things like planning and budgeting and forecasting and financials and inventory. If you're making stuff that really is. That's MBA-level stuff. You don't need it as a startup. You can get by with something as simple as QuickBooks for a very long time, until you really need a more professional-level solution.
0:18:58 - Dmitri
What do you think about lines of credit and credit cards for startups?
0:19:03 - Tracy
I think debt in general is a bad idea until there are recurring revenues. I've seen businesses in this last cycle of kind of bank disruption in 2023, you know essentially be unable to repay those lines when they're called because you know revenue is in tracking to plan the economy's down, you know whatever, and that's a point of insolvency where the firm goes away. And so, until the company is profitable or at least generating positive cash flows, I advise very strongly against lines of credit or any kind of third-party debt instrument that may get called. You can get into trouble really fast in a money losing business borrowing other people's money.
0:19:50 - Dmitri
I'm just asking a couple of follow up, real tactical stuff here, just just so that you know people walk away. You know thinking about how, the how the rubber hits the road here. So I got another one for you. What about payroll services, outsourcing payroll?
0:20:05 - Tracy
Certainly in the United States and in the UK, where I have the most experience, you can get into a lot of trouble not administering payroll appropriately. Certainly I've seen businesses who have failed to remit their withholdings to the government in both the US and the UK and the UK and Canada use that money for working capital to pay other expenses only to see significant fines and penalties and even criminal charges. And so having a third-party payroll provider, even if it costs a little bit of money, is a great way to stay legal and to stay safe. You're not tempted to use that money for general operations because you're paying it immediately to a third party. He'll be your administrator.
0:20:50 - Dmitri
Cool, yeah. So this kind of leads us into my next question, which are the legal foundations of building a company. What are some considerations for startups about those types of considerations?
0:21:04 - Tracy
Well, the beautiful thing in the Western world is, if you incorporate whether that's a C-corp, S-corp, LLC and we can get into the differences between the three you're getting some level of liability protection, and that includes protection against creditors in the event that things don't work out or the protection against potential litigants if you get sued. And so the first thing that I would advise is figure out which corporate type is optimal for you and your partners and then incorporate. Don't wait, Don't do this just personally, even if you're investing your own money, because the protections afforded to you by our beautiful legal system and capitalist approach to these things in the West are significant and are real at preserving your wealth and your mental well-being.
0:22:00 - Dmitri
And some of them offer different types of tax benefits as well, to consider, yeah.
0:22:07 - Tracy
Correct. And this is where you really should consult with your attorney or tax advisor before you incorporate, because some of these decisions can be unmade, but it's expensive to unmake them. So things to consider are what are the tax advantages of the type of corporate structure that I'm electing, electing An individual S-corp, for instance? From my understanding and again I'm not go seek your tax advice, I'm not a tax advisor but you're essentially not going to get some of the same tax protections as a C-corp. The income and expenses of the company will pass through your personal tax filings and you and you know you will have a lot. You know personal liability, you know to the IRS. Not so with certain types of companies, like a certain types of LLCs and C-Corps, where that entity has its own tax filing and you're not. You don't have to pass those results of the business onto your personal taxes.
0:23:10 - Dmitri
Yeah, again, seek your own legal and tax counsel. Here that was more of a like just a business management, like, check it out, make sure that you're getting the right kind of formation of your corporation, based on what you're going to do with tax filing, as well as in terms of what kind of liability protection you need. They're a little bit different, they're all a little bit different. So anything else in terms of like legal considerations, like what are the most common contracts, templates that startups might have I can imagine they might want to have some NDAs that they're using regularly. There may be some employment contracts, some consultant contracts, anything else that you think.
I mean I guess part of it for me is like when I started my business, like hiring a payroll service was like an obvious in a way. I was like, well, I'm going to screw that up pretty quickly. It seems worth the expense. But then when you start talking to lawyers, like find out they're 500 bucks an hour and they sit down with you and you're like, ok, I have a business. I have no money at all, no business, nothing in my bank account, and now I have to pay you thousands of dollars to incorporate and start every contract I do? Do I have to run it past a lawyer? What's your advice in terms of those other legal foundations?
0:24:24 - Tracy
There are a ton of providers of stock documents, like Zoom Legal, that you can use for basic things like contractor agreements and sales contracts, and you don't need a lawyer to draft them all from scratch, but you do need a lawyer. And one of the things I would advise any startup to do, regardless of whether or not they plan kind of a DIY approach to use, you know, a third party forms provider like Zoom Legal is just to have a relationship one and, to be clear, I don't have the budget to pay you $6,000 to do this very simple sales agreement, but you know, I would like you to do the corporate formation documents and make sure that they're appropriately filed with you know my state or country of incorporation, because this is something that you want to get right. It is more expensive to get it wrong and not have a lawyer do it than to pay a lawyer to do it and get it right on the front end. The other thing that I would just say in this kind of broad category of service providers, whether it's accountants, payroll firms or lawyers is have a relationship with an insurance broker and think about insurance more broadly.
Every business needs insurance. Even if you're a sole practitioner or consultant. You need an insurance policy and what you're protecting against are things like cybercrime. Somebody hacks into your system and steals all your client personally identifiable information. You have liability. You may get sued. Either way, you're going to want an insurance policy in place or you may just get sued. In this course of business. You give some bad advice and so, thinking about the complexity of the firm, a more complex firm is going to need more insurance. The bigger it is, the more employees it has, the more things it's engaged in. It will be a permanent fixture on your profit and loss statement, but having a good broker that you trust and understanding the limits of coverage that you're entering, that you're paying for, are really critical to any successful business.
0:26:28 - Dmitri
Yeah, no, absolutely. And even having on the calendar, like once a year, to do a call with your broker to review your coverage and see what's changed, because I think you know your business, the evolution of it kind of sneaks up on you. And then you realize, oh, we hired employees and we never even told our insurance company, or we, you know, we now have an office and we never, you know, talked about. You know whether it's a lease, a condo, a purchase, whatever, there's all these other implications, or we've taken on a new business line that has higher risks. We need to get some sort of professional liability umbrella on top of our existing insurance. All those things. Yeah, the thing that's painful about insurance is it costs you money and it feels like you're sort of being shaken down for every little aspect of what could potentially happen, until it happens to you. And then you're like, oh my gosh, thank goodness we had some coverage on that and it can make or break a business. Really 100%.
0:27:27 - Tracy
One maybe better way to think about all of these engagements is relationships. If you have a lawyer, an insurance broker, an accountant, a third-party accountant or tax person that you trust and is intimately familiar with your business, this is what they do for a living. They're pros for it, in fact. They have insurance and professional certifications that they have to check the box on every year. Check the box on every year. It's a much easier thing to do as part of a plan and as part of a business practice than as a remediate step where I've had some kind of incident. I've had a driver wreck a car or an accident on the shop floor and suddenly I've got a claim. That is not the time you want to be establishing a relationship, because that's you know, without a relationship, you are much more likely to get shaken down and to have, you know, really kind of a bad outcome to what could be a manageable situation.
0:28:20 - Dmitri
Okay, so you got your payroll system, your service provider, you've got your insurance broker. We haven't talked about bankers. What kind of relationship should startups have with bankers?
0:28:35 - Tracy
Well, unless there's debt financing as part of the capitalization of a startup, I would say having a bank account that is, a separate business bank account, not your personal bank account, is critical Knowing somebody at the bank.
In the event that you start to collect money, both domestically and foreign, and it starts to set off bells and whistles. There's a lot of regulation coming online, particularly in the United States, but historically in the UK and Canada where, if you start to grow really quickly and this is deposits of more than $10,000 in the States you're going to get a call from your banker and they're going to say well, what's the source of these revenues, who's the beneficial owner of these revenues? And you're going to have to provide them things like articles of incorporation. You may have to send a profit and loss statement just so they're compliant with regulators and people in the government. So it is good to have, certainly, a relationship with the bank, have a bank account. It's helpful also to have a relationship with somebody at the bank and that's really all that's necessary for a startup. Unless you get into the habit or process of borrowing money, then the stakes go up pretty considerably.
0:29:56 - Dmitri
Well, and the other piece is if you think you might need to borrow money in the future, it's good to know those people before you ask for it, and it's also good to have a line of credit before you're desperate for it as well. I know you're saying don't go into debt early, Tracy, but sometimes we've had a line of credit at Rock Paper Scissors and never used it. But because we had it, it felt like kind of another measure of security in a sense.
0:30:23 - Tracy
That is a good point. I wouldn't rule debt out for companies that have revenue. A great way to start a relationship with a bank is to say hey, I've had my depository accounts with you for X number of months or years. You can see my revenues are growing. Let's talk about a line of credit. That's a great conversation starter with the banker. They would love to give you a line of credit, which typically includes a fee up front to open the line and an unused fee if you don't use it. So they're happy to take your money for the possibility of you borrowing and paying more money in interest, and so that's a fair point and it's something that, as a startup, matures. I would encourage people to take a look at if that's possible.
0:31:03 - Dmitri
So this has been super exciting talking about bankers and insurance, but we're going to take a quick break and when we come back let's talk a little bit more about investment and also scaling up your business. We'll be right back.
0:31:15 - Speaker 2
Listen, I get it. The news cycle of the music industry, and innovation in particular, is accelerating at such a fast pace it can be hard to keep up, even for news-obsessed people like me. That's why we launched Rock Paper Scanner, a free newsletter you can get in your inbox every Friday morning. Check it out at bitly slash rpscanner. Dimitri and the Rock Paper Scissors team scan hundreds of outlets for you, from the music trades to the tech blogs, from the music gear mags to lifestyle outlets so you don't have to. Lifestyle outlets. So you don't have to. Then Dimitri handpicks everything music tech, including music industry revenue numbers, ai stuff, cool new user tools and the live music and recording landscapes, partnerships and acquisitions basically everything a Music Tectonics podcast listener would want to know. Open a browser right now and type in bitly slash rpscanner to get you to get right to our signup page. Or you know what? Just find this episode's blog post on musictectonicscom and find that link. Happy scanning, but for now, happy listening.
0:32:27 - Dmitri
Okay, Tracy, how does? We talked a little bit about investment early in this conversation, but how does investment fit into building a company? We've got all these other pieces in place, now what else should we be thinking about as it relates to investment for the building of this company?
0:32:53 - Tracy
potentially overcapitalized. What you don't want to do as a founder or a group of founders is to have to spend all your time on the act of raising money. I've seen founders get off track, lose focus on product, lose their businesses because ultimately they spent too much time on something that's really not that productive, which is asking other people to invest in their company, on something that's really not that productive, which is asking other people to invest in their company. And so going in as part of that plan, kind of understanding how much capital you're going to need in the first year and even maybe beyond, raising that capital, banking it, having it set aside for future growth and then focusing on running a business, building product, whatever it is.
It is such a typical negative cycle to get into for founders to continually underperform an unrealistic plan, to run out of capital and to have to go back to the capital markets. And in that cycle two things happen. One, you spend your time on the wrong activities raising money and the money becomes more expensive. The more desperate you become, the higher the expected return from whatever source of capital is, whether it's equity or debt capital. And so really thinking through on the front end, how much capital am I going to need and I use the words overcapitalized or excess capitalization having some money set away, even if it's expensive equity capital in the event that you run out or underperform plan or just run into a hiccup. That's a really important consideration on the front end.
0:34:16 - Dmitri
Cool, good, very helpful, I mean. The other thing that comes up with building a company is the ingredients needed to scale your company and I'm curious how do you move from being a startup to being a scale up?
0:34:34 - Tracy
We don't have to go into great depth here, but at least we want to kind of move towards growth here.
Well, this is where you kind of get into the question you posed in the first segment, which is it's around who do you hire? And people, and it is generally impossible, even in this time of AI and machine learning, to build and scale a business without additional human resource. Now, certainly, ai and machine learning are making that easier, they're making people more efficient, but, at least for the foreseeable future, ai and computers won't replace people. And so this is where you start thinking about building the organization, and I would advise a startup, particularly one with limited capital, to think in terms of what kind of exponential scaling will I get out of the next hires? And that should dictate, basically, the type of expertise that you bring in and pay for. And so scaling is really about hiring the right people, having a culture where those people will be productive and having incentives in place where those people will respond not just to the fact that they're excited about work, but they're excited about the financial reward.
0:35:41 - Dmitri
When you think about scaling up, what do you think about in terms of marketing?
0:35:46 - Tracy
It's going to take time and money to scale a client base. The hardest businesses and when I say hardest I mean really the most expensive to scale are consumer-facing businesses, where you as the company are successful only if you convince lots and lots of people to use your product. That's expensive, whether you're using kind of internet-based methods of reaching people SEO, ppc, sem or you've got a retail location. All those things are very expensive and you have to think about that cost of client acquisition. So what's the average cost to acquire a client and then you know based on how many clients you want. To add that cost per client times the number of clients you want in the year, that's what you're going to have to spend, and sometimes that's an enormous amount of capital in a retail or consumer-facing business.
0:36:40 - Dmitri
All right. I mean, if you made it through this far into the podcast, you get an A+, because we've gotten through a lot of stuff really quickly. That probably would have cost you a couple of semesters in higher education. I think this has been awesome. I'm curious, Tracy, is there anything else missing from our conversation about what to think about when building a company for music tech startups?
0:37:02 - Tracy
Well, I think the one thing we haven't talked about which is one of the most important things that will occur to you once you've launched is what is your strategy and when I use the word strategy, I'm really talking about it in the marketplace. You probably have a great idea. You probably have great enthusiasm for your idea. You're probably overestimating your ability to execute that idea, which is great. This is how great companies are built, but are you thinking about the market conditions? In other words, are there consumers that are ready to buy? You know, whatever product or service that you're going to launch, is that market big enough to sustain the kind of company that you want to build? Can you actually achieve scale because that market's big enough, or can you change consumer behavior in order to want to buy the product or service that you're launching? The other element is competitive right. Most things that have been done have been done right, and so your idea may be very novel, it may be new, but it's probably occurred to somebody else and there may be a business doing something very similar, and so you have to think not just one dimensionally about you know. How is this company going to exist with the consumer? How is this company and its competitors going to exist with the consumer. What are the potential competitive responses that company A, b or C are going to launch in response to this product or service that I built?
Since we're in music tech, I'll use this as an example. Right? So Spotify is in a very difficult strategic position, right? It competes with the biggest tech platforms in the world, including Google, youtube Music, apple Music and Amazon. Now, these three companies are among the top, you know, 10 largest companies in the world, but they're in the same space.
And so, when you think about a Spotify launch, it was always going to take hundreds of millions of dollars, and really even funding ongoing operating losses, to be able to compete on that level. And so you know, your strategy has everything to do with the appropriate capitalization, your plan for the first year. If your strategy is focused around competing in a mature market or one that's crowded by very large players, the strategy by which you acquire clients or you grow your business is going to be really critical to your long-term success, and it cannot be ignored. And it can't be ignored from the first day. It's almost as important. As you know, beginning with the end in mind, what are you trying to accomplish is what do I expect others, including competitors, are going to do in response to that thing that I'm launching?
0:39:59 - Dmitri
I think that response really speaks to founders being prepared to have some endurance, you know, to really to really know that there's going to be hiccups along the way, to really know that there's going to be hiccups along the way or that you know there's not. It's not the opening move of a chess game. It's like, literally like several, you know, you got to be thinking several moves ahead and be aware of, like you said, of your competition, of the of the context of the market, to really be clear that things might go one way, they might go another way, and you kind of have to be prepared to pivot sometimes or to try different things.
0:40:37 - Tracy
Leading a company as founder or CEO or both, is an endurance sport. It's not for the week of constitution. It will require you to be able to be flexible mentally the first dozen times you've had setbacks, to bounce back, to emit and radiate optimism to your team even when you're not feeling it, and this is not for the week of the week of heart or constitution. This is hard work. This is probably the one thing that I see founders, in addition to overestimating their, their, their own capabilities, is they underestimate just how hard this is going to be. Even if you've checked every box that we've talked about, from having an insurance broker to being overcapitalized, you will have setbacks. There will be things that come up that you haven't thought about, and how you respond to that and how your organization comes back from that is grueling. It's very difficult to sustain that level of energy over a month, let alone years.
0:41:39 - Dmitri
Not to scare anybody off, but I think actually to just plan for like a large you know, like there's going to be many heats to this race. It's not just the, it's not just the first one. Like you can't get to the first starting line of incorporating, you can't get to the first starting line of getting your first dollar in or even raising money, but expect that there's going to be multiple rounds, You're going to have to regroup and things like that. This has been an amazing opportunity, I think, to hear from you about all these different elements. I know it's been a lot. Some of it's been a little more detailed than other pieces, but I love that you bring it to that broader philosophical and strategic level as well, because I think it's super important.
Having started a couple of companies myself, I've lived through some of these things. I wish I would have listened to this podcast earlier on some elements here and so forth Before I let you go, Tracy. We often ask guests to go big picture with us with trends in music tech, but for this episode I'm curious to ask you to give us a 10-year horizon and answer this question what do you see as emerging that will have staying power for a startup that's thinking about building out their company right now.
0:42:47 - Tracy
Well, the trend that's already started and we touched on it briefly earlier in the podcast is that machine learning, large language models and artificial intelligence are impacting every sector of the economy and those that are dealing primarily in digital goods and services selling online, providing services virtually as opposed to in real life.
So basically everybody but plumbers and electricians. Their business will be disrupted, it'll be impacted in some way. My wife happens to be a corporate attorney working in cybersecurity and she relayed to me I think it was her practice group meeting a few weeks ago where I think it was, the head partner said something like AI is not going to put us out of business, but law firms employing AI may put us out of business. So we have to figure out how AI will impact this business and then adopt it ourselves, and I think that's a warning for every segment of the economy, maybe even electricians and plumbers, because if large language models, machine learning, and plumbers, because if large language models, machine learning and ultimately artificial intelligence can help us do it better, why not jump onto the trend and be early adopters of that technology which makes our lives and our business, and maybe even our potential as founders in the startup, easier?
0:44:18 - Dmitri
Amazing, Amazing Tracy. This has been so great. Tracy Maddox, thanks for joining us once again on the Music Tectonics podcast in our how to Startup series. If people want to reach out to you, what's the best way to connect? Do you have a favorite social media platform?
0:44:37 - Tracy
Yeah, linkedin is a great way to reach me. I've recently kind of started become a founder again. I've started my own LLC, a solo practice called Artes Management. You can find me at artesmanagementcom or you can get me on LinkedIn. It's T-R-A-C-Y-M-A-D-D-U-X. I think I'm the one and only out there on LinkedIn and I'd love to connect with you and no questions too big or small. I really love to have a conversation about these concepts of business. I've also written quite a bit, some with the help of rock paper scissors. If you find something you like or you disagree with, even would love to hear from you. So feel free to engage with me in either path and I'd look forward to hearing from you.
0:45:18 - Dmitri
Thanks again.
0:45:21 - Tracy
Tracy, great having you on the podcast. Great to be here. Thanks again, dimitri.
0:45:24 - Dmitri
Thanks for listening to Music Tectonics. If you like what you hear, please subscribe on your favorite podcast app. We have new episodes for you every week. Did you know? We do free monthly online events that you, our lovely podcast listeners, can join? Find out more at musictectonics.com and, while you're there, look for the latest about our annual conference and sign up for our newsletter to get updates. Everything we do explores the seismic shifts that shake up music and technology, the way the earth's tectonic plates cause quakes and make mountains. Connect with music tectonics on Twitter, instagram and LinkedIn. That's my favorite platform. Connect with me. Dmitri Vietze, if you can spell it, we'll be back again next week, if not sooner.
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The Music Tectonics podcast goes beneath the surface of the music industry to explore how technology is changing the way business gets done. Weekly episodes include interviews with music tech movers & shakers, deep dives into seismic shifts, and more.
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