Financing new creative enterprise through blockchain technology: Opportunities and policy implications

• Author: R Owen,M O'Dair
• Date: 01 January 2019
• DOI: http://doi.org/10.1002/jsc.2242
• Published date: 01 January 2019

RESEARCH ARTICLE

Financing new creative enterprise through blockchain

technology: Opportunities and policy implications

M O'Dair | R Owen

Faculty of Arts and Creative Industries,

Middlesex University, London, United

Kingdom

Correspondence

Marcus O'Dair, Faculty of Arts and Creative

Industries, Music and Innovation, Middlesex

University, The Burroughs, Hendon, London,

NW4 4BT, UK.

Email: m.odair@mdx.ac.uk

Abstract

Blockchain technology represents an emerging source of venture capital crowdfunding for crea-

tive ventures, specifically in the music industry. Although music streaming is often portrayed as

a success story, the internet has in fact been something of a false dawn for the recorded music

industry—particularly for emerging musicians. New music ventures might obtain alternative

entrepreneurial finance through token sales or Initial Coin Offerings. Policymakers can play a

role in developing this form of seed finance for the creative industries and beyond.

1|INTRODUCTION

Token sales, or Initial Coin Offerings (ICOs), are a novel means of

using blockchain to raise seed finance for new ventures. Neglected to

date are the important questions token sales raise for the funding of

new ventures in the creative industries, for instance the music indus-

try. Ten years after the Global Financial Crisis (GFC) of 2008, the

financing landscape globally remains difficult for new ventures, due to

the credit rationing and retreat of banks and venture capitalists (VCs)

from early stage venture finance where there is a lack of proven busi-

ness track record (Lee, Sameen, & Cowling, 2015; Wilson & Silva,

2013). Many new types of finance, including various forms of crowd-

funding, incubator/accelerator, asset finance, online public feeder

investment markets, and social funding have emerged (Block,

Colombo, Cumming, & Vismara, 2018). Arguably, however, they have

had limited impact on creative sectors and notably the recorded music

industry—the focus of this paper.

New ventures experience information asymmetries (IA) relating to

an imbalance of market knowledge between themselves and potential

investors (Carpenter & Peterson, 2002), making them particularly vul-

nerable to investor agency failures. The seed investment market is lit-

tered with such failures: Akerlof's (1970) so-called “lemon”

investments. IAs may be most critical for the most innovative and cre-

ative new ventures, because this is the most difficult market for inves-

tors to understand (Fraser, 2011). Traditionally, this has been

overcome not only by independent record labels but also by smart,

hands-on, industry expert angel investors (Mason & Harrison, 2015).

However, a problem here is the relatively limited availability and

access of angel finance: only a small proportion of individuals have the

high net worth, time, and knowledge to invest in this way. In part, this

problem has been overcome through the emergence, post-GFC, of

crowdfunding, which enables a greater number of people with smaller

amounts of disposable income to invest. However, despite the prolif-

eration of new forms of seed venture funding, the creative sector and

recorded music industry in particular remains relatively poorly funded.

This paper focuses on the music industry, where the evolution of

the internet has offered something of a false dawn to new musicians.

While high profile platforms such as YouTube offer new musicians the

opportunity to showcase their work, they have also contributed to the

notion and proliferation of free music and undervaluation of recorded

music. Furthermore, in such a highly competitive market, it remains

very difficult for new artists to gain recognition. While online music

streaming has halted the typical annual decline in global revenues for

recorded music, with recorded music revenues increasing from $14.3

billion in 2014 to $15.7 billion in 2016 (IFPI, 2017), the successful

financing of new ventures has tended to favor existing artists with

track records. Ninety-nine percent of streaming income reportedly

goes to the most popular 10% of tracks (Krukowski, 2018). As such,

the music industry remains pyramidal, with a relatively small number

of established artists, often signed to major labels, earning the vast

amount of industry income while the vast majority earn little or

nothing.

A major problem for emerging types of finance is the establish-

ment of a trusted network channel of information between the new

venture and the investor. Lerner (2010) and, more latterly, Lingelbach

(2015) have discussed the importance of stable institutional, legal and

regulatory structures to encourage equity investment and the same is

likely to be the case for all forms of crowdfunding—particularly equity

JEL Classification Codes: G23, G28, L24, L26, L82, O33.

DOI: 10.1002/jsc.2242

Strategic Change. 2019;28:9–17. wileyonlinelibrary.com/journal/jsc © 2019 John Wiley & Sons, Ltd. 9