How You Survive an Unprofitable Business

I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M and A deals. In this episode, Sean Peace tells a captivating story about selling and exiting an unprofitable business in a unique niche. Sean is the founder of two companies, Songvest and Royalty Exchange. We discuss his experience with Royalty Exchange from the initial start to how it ultimately faltered. He shares what he would do differently in hindsight. Here's more from Sean. You know, when we talked a little bit, you mentioned a couple things and I was just looking at your LinkedIn in terms of some exits and I guess what caught my interest was that you went through an exit or you were going through some rounds of funding, but didn't bridge a gap between rounds of funding and found a way through to exit. And when I looked at your LinkedIn, I saw there was two companies. There was a Songvest and then a Royalty Exchange. Were those two totally different unrelated or related businesses?

They were somewhat related. I mean, songvest didn't have an exit. We just kind of shut it down and at some point it could resurrect itself again. But that was the precursor to Royalty Exchange. So songvest was all about selling music royalties as memorabilia. So we were the first folks ever to package up music royalties to begin with and sell them. But the first venture was selling them as like the ultimate memorabilia where you get a gold record to hang on the wall and handwritten lyrics and you get to tell your friends, hey, I own a piece of that song. What we found was that it just wasn't scalable because people didn't want Preston Glass version of I miss you like Crazy. They wanted Natalie Cole's so the fans could care less about the songwriter. And so if a songwriter was selling a piece as memorabilia, they didn't want the songwriter's version. Right. Even though that is like what the song is. They wanted the artist's version even though the artist may not have had any, you know, say in writing the song at all. So because we couldn't scale that and we couldn't get artists to to get on board. We did get some, but they were low level artists. You know, the business just kind of didn't go anywhere. But it didn't stop me from thinking about, well, you know, it seems like there's an opportunity here because all of these songwriters definitely want to monetize their royalties, so what else could we do? And then when I started looking at royalties in general, I saw that there's energy royalties, oil and gas royalties, and all these other royalty streams out there. And I said, well, we, what if we created a different kind of platform and package these up as a true financial investment instead of memorabilia? And that's what started the royalty exchange.

Okay, can you tell me a little bit more about royalty exchange and I guess your timeline with that company?

Yeah, sure. So I guess we started that maybe back in 2013. Let's go back and look and see exactly when we started it. But we ran it, I guess about a year to two years before we got our investment. And basically it's a marketplace that allows anyone with a royalty stream to come to us. We do kind of the first level vetting to make sure it's a valid royalty stream, that it can be packaged up, that it can be sold. There's no encumbrances. So we do all the due diligence around it and then we would put it on our website and allow investors to come and prime buy that loyalty stream. In the initial offerings, it was always one to one transactions so that it wasn't considered a security. And then once we started the company and got funded, we did look into splitting that up into multiple pieces as another way for investors to reduce their risk. So we spearheaded the first asset backed security model of music royalties. But I ran that, like I said, probably about two years. We probably had just over $100,000 in Reven when we got our first venture capital investment of $2 million.

Nice. I guess from there did you deploy that capital towards growth and I guess what did you do for that?

Yeah. And this goes back to lessons learned. Our assumption was that if we had capital to market to songwriters, since we already knew they were out there and they were willing to sell on the platform, our assumption was, okay, well we can hire some salespeople, do some targeted marketing, really fill up the funnel. So we spent a good chunk of that money building infrastructure to make sure that we could support it, and hiring sales reps in the field and marketing. We also knew that we wanted to change the model and not limit ourselves from one buyer to one seller. So we took maybe almost a fourth of that money and put it into legal to try and find a securitized method for us to carve these up in smaller units and sell them. And we did find a way to do that through this asset backed security. So the issues started to arise when we found out that having seasoned sales reps who were Very in the music industry were not able to generate the lead or the deal flow that we had anticipated. So we pivoted multiple times to try and figure out how to get the deal flow to increase. And that was probably the biggest stumbling block of all from the company is maybe we waited too long before we jettisoned the sales reps and didn't look for a pivot sooner than we should have to try and conserve cash so that we could figure out the right way to address the market. Because the market is there and it's willing. It's just if you look at songwriters, most people are one hit wonders. They may have had one, two or three hits and they're probably not even in the music industry anymore. They're like selling real estate. So your normal marketing means don't reach those people because that's our target market. And so if they're not reading Music Monroe magazine anymore, they're not reading Billboard, then our advertising and keywords and everything else won't get to them. Because a lot of this is a latent pain. They're getting paid 10, 20, $30,000 a year and it's supplemental income to them. And so they didn't know that they could monetize it. They didn't know they could get an advance or things like that or actually sell a piece of those royalties. So that's kind of where we spent a good chunk of money. And where things started to kind of go a little sideways is maybe not pulling trigger to change the model a little bit sooner.

Okay. And then I guess at what point did you get to the point where you had to really shift your whole strategy and direction altogether?

Well, definitely when the, you know, when the sales numbers aren't coming in, which it's difficult just in general to forecast an auction marketplace. Right. Because you can have stuff. And not only that, we had two issues in forecasting revenue. One is we're dealing with songwriters that can change their mind in half a second because they're not business people. First, we had a very unreliable customer base. Then we had a very unreliable auction base. Because in the beginning we're balancing both sides. We're trying to get people to sell and then people to buy. We had a lot of auctions where, you know, you can't predict whether that auction is going to sell at that particular price. So we had things going against us and being able to predict the revenue. And that of course affected, you know, our ability to message back to the board, message back to the investor, the main VC investor. And so you know, I think that once cash started to dry up, you know, initially the VC was like, hey, don't worry, you'll never run out of money. Well, that should never, you know, I mean, that's a fallacy, right? I mean, you'll never run out of money until you run out of money. And, you know, it was kind of a given that, oh, well, of course, you know, if things are going well, I'll go out and find more VCs and we'll pile more money in and, you know, everything will be great. But the reality is, you know, if you're not hitting certain revenue numbers which, you know, every VC I talk to after that is if you're not doing a run rate of a million dollars a year, then, you know, second rounds of funding are going to be few and far between. In addition to that, we're a fintech startup in the Southeast, and a fintech startup dealing with entertainment in the Southeast. So, you know, our pool of available people is even smaller, you know, because people aren't, you know, there aren't a lot of fintech investors at all who want to look at companies down in the Southeast. So that's when we, you know, that's where things started to turn. Now, the. The good thing in all of that is I just didn't sit there and do nothing. We had a piece of technology that we started brainstorming with that automated kind of like Mint, if you're familiar with Mint with Intuit. So it basically automatically logged into all of these royalty websites and pulled down the statements for the songwriters, because songwriters, today's environment is like the environment when the first iPhone came out. All of a sudden you get 200 page AT&T bill and you're like, oh, my God, what is this? That's what the music industry is going through to streaming. So all of a sudden, people just used to cash their check. Well, now all of a sudden, there's all this data that they could look at and analyze and try and do something with, but nobody was prepared and still mainly isn't prepared to allow you to analyze any of that data. So that's what our tool did. It logged in, it grabbed all this information, and then that helped us to be able to analyze the data and say, how much we'll give you in or sell your royalties for. And then it dawned on me while we were building that out, I said, well, here's our route to market, because now there's a reason for somebody to want to give us their data. Like we're Providing them a service. So our first kind of foray was, well, let's get this out to the market now. We were getting that out to the market in January, right when our cash was really starting to dry up. And then in addition to that, we said, well, we can further get to the market, because the only people that know where all these songwriters live are the people that pay the songwriters. So we were getting ready to roll out, right when the cash did dry up, a new version of that product that would allow all of the publishers, publishers are the ones that pay the songwriters the ability to use our tool internally to report, to give all of their songwriters this reporting functionality. And there's some reasons behind that, but, you know, we never got to that space. And that was our pivot, Right. That was like, okay, this will allow us hopefully to get to the market.

So you ended up selling the company to two different buyers.

Correct.

Okay, so this is interesting. It sounds like you thought about it a little bit before, so you kind of created some room to be able to think it through and start looking for buyers. Can you tell me a little bit more about that in terms of that point when you really thought, hey, we should look for other ways to salvage our investment or to make means with it. And then I guess how you went about finding those buyers?

So, you know, the board and our management team definitely saw the writing on the wall. You know, I mean, we probably should have planned a little bit earlier, but we did plan with enough cash in the bank and also through a loan that the VCs gave us that we did pay back with the sale to shut down the company appropriately. And that did give us enough time. And ours was a little bit different because we had. We were managing a whole bunch of people's money, so we had to spend a lot of time to extract ourselves from that and get people paid directly. So we're a little bit different than, say, just a software company that says, hey, we're shutting down and we're all done. So we had a lot of stuff that we had to take care of before we could shut the company down. And so we did see plan enough ahead that we didn't all wake up one day and go, okay, we're out of cash. We got to shut the doors. We probably made that decision in April and had everything wrapped up mid May. And then there was enough cash in the bank that allowed me to continue to try and find a buyer up until might have been September or October when we finally closed the deal to sell all the assets so, you know, it was one of those things where like it or not, we knew that we weren't going to get cash and there wasn't any way to downsize to the point that was going to help us because we had some debt. So what would have been nice and normal if we had known that we weren't going to get any more follow on funding that we could have planned ahead, right? I mean we could have. I could have hopefully somehow salvaged. If I look at a lesson learned, there's a thousand of them. But it would have been to watch the burn rate, watch how much cash we had. Don't listen to people that say you're going to get follow on funding and have a big enough kitty to where you can always downsize to, whether it's just you, the founder or your founder and one or two people so that you get to keep the company. Because that's probably the saddest thing out of this is that ultimately I had to sell the company and I didn't get anything for it. We didn't. This was not an exit that anyone made any money, including the VCs, they got their loan back, that they made us to effectively shut down the company correctly. But that was it then in terms.

Of actually finding or identifying these parties that ended up buying the transaction, was that you or did the board help with that?

No, that was me. And what we did, ours was a little bit different model. So we already had a whole bunch of investors that liked the platform. So we didn't necessarily want to scare anybody off because we didn't want to ruin the potential buyers opportunity to continue to keep the company going. But we solicited a lot of our customer base and said, hey, listen, we're in this particular situation, we're looking for a strategic partner or buyer because we could have potentially found a partner that wants to come in and take 50% ownership and recapitalize it. Right. So that's what we did initially. And then I just went out through my connection in the music industry because I knew that I had these two pieces. I never really envisioned splitting them up per se, but I did know there was a lot of value in the technology we developed. So that's what I really pushed in the music industry. And then to find a buyer, we pushed that to our customer base in the financial industry to see if anyone was interested there. And it was just by luck that we had one buyer for the website. And then socan came up right at the end and said, hey listen, we want to buy this technology. And I was able to negotiate both of them. And what was cool, I mean, not that the board really cared. I mean, again, they were just going to get their loan back, but we were able to almost quadruple what we thought we were going to get for the company. So it ended up being good. From that perspective, the two buyers that we had, the buyer for the technology paid more than the buyer for the website. And all of the accredited investor list, the core of the company sold for one fourth of the price that the technology sold for. So I feel real comfortable because that technology has since been purchased by socan, which is the performance rights organization in Canada. And they just rolled out that technology to their customer base and I'm still consulting with them back in May. So it's nice to see, one, that technology we developed is currently being used by some, you know, a heavy hitter in the music industry. And then two, I mean, the website royalty exchange is still doing very well. I think that the model is continuing to be proven. They're having more options than we ever had. And, you know, it's just unfortunate we didn't have the financial legs to just keep it going.

Now, during that process of selling the company, did you work with any advisors?

No, we didn't work with any advisors. Our independent board member had been through a couple of these before, so he was just great in assisting. You know, here's all the things we need to look at, what we need to do. And he was local, so that was really nice. So we're still in touch and still friends. And, you know, he really helped out to make sure we were doing everything correctly. And I would say that's the biggest thing that we did that. I don't know how other people do this, but we really took our time. We made sure that we reached out to every person that we had any kind of debt with. We made sure that we had a kitty to pay, the accountants to close out the books to do the taxes. So I think we pretty much thought of everything from a contingency plan, Made sure every single person that we had any kind of debt with knew exactly what was going on. You know, here's the potential settlement, you know, or basically it's, here's the money we can give you out of what we have left. You know, I got a lot of comments back from vendors who were very appreciative of that. Of course they didn't like it, but they were still like, you know, thanks for letting us know. Thanks for at least giving us this. And we really appreciate that. And being upfront about it, that's good.

Kind of kept things a good face with everybody.

Yeah, exactly. Now, I will say one. Probably the biggest thing that folks should know about is American Express is on your personal credit. So if we would have just shipped the company, you know, we probably had, I don't know, 20, 30, $40,000 in, you know, regular American Express bill, and if we would have run out of cash and we couldn't have paid that, that would have been on my personal credit. I mean, literally, they would be coming after me for it. So I would say that's one big lesson learned to anyone that might read this is don't use American Express. Never use American Express.

So even though it's a business card, with Amex, it's still under your personal.

Yep, yep. Found that out because we went and got on that and some other things, you know, engaged a bankruptcy attorney, was like, okay, so what's the deal here? And they were all like, no, unfortunately, you know, that's the way Amex works. So definitely always try and get some kind of Visa, MasterCard and make sure that you're not held personally liable for it, I guess.

Were there anything surprises that came up during this process?

Well, Amex went surprised. I think the other thing is just little stuff like, well, what do you do with the furniture? What do you do with the computers? Well, I guess someone's got to buy those things, right? Backing up. You can't just walk away from all the documentation either. Do you have a copy of everything in Dropbox? Do you have a copy of everything that you use DocuSign for paper documents? Where are you going to store those? Because it's not like you take them down to the dumpster. And if something happens, God forbid, someone needs to come back and look at anything. So making sure that all that stuff is kind of taken care of, I think was something you just don't think of. I mean, all the way down to the router. I think the other thing that was interesting was there probably were ways that I could have kept the company if I really would have pushed it. And I think one thing is to know that the VCs really don't care at this point. I mean, like, they're done, right? I mean, they invest in whatever, 100 companies, and if we're not one of the top two, then they lose interest really fast and they just want to get done and get out. So I think there were several opportunities that we probably could have negotiated something with the VCs to get the company back, you know. So I would say that would be one thing that you could share with other folks is don't just think that all of this should be sold and just go away. You know, I think there is a huge negotiating opportunity for folks to, you know, whether the VCs keep some warrants or something like that, you know, just in case things come back. But I would say try and negotiate with your VC just as much as you might try and negotiate with a buyer, especially if there's not a buyer on the horizon to keep the company, you know, or keep some, at least keep the company going. Now that's if there is a company to keep going. Like, I mean, we did have a company that could have kept going. I mean it is going. Right. So we're a little bit different than maybe someone else that is just like now, you know, I mean, we're just kind of dead. But I would say that would be something, you know, to let folks know about is, you know, there are options for you kind of at the end.

Right. I think that's a good point. Is really opening up and exploring all the different possible angles. Even though slim or none shots.

Yeah, I mean, because at that point they've lost. Right. So I mean, it's not like they're kind of done if you come in and say, hey, can I buy my stock back for a dollar? You know, I mean, maybe not a dollar, but there could be tons of different options that they might look at because they potentially, they just don't care anymore. Like, you know, I just want to leave. So, you know, they need to go as soon as you're done. Like they need to go focus on somebody else who might be that, that one or two. Right. I mean, they have no interest at all in a slow growth company.

Now, other than going back and negotiating with the VCs, were there other things that if you were to do it again, you would have done differently?

Oh, without a doubt. I think my big takeaways are cash is king. So even if someone says you can go get funding or I can introduce you to a thousand people to get funding. Unbelievable. The VC wants you to grow, grow, grow as fast as possible. That may not be best for the company. So you throwing a whole bunch of money at sales and marketing to try and go from 0 to 100,000 in six months may burn through all your cash and then you're left with Nothing and only 5% of the customers you thought you would get. As opposed to saying, you know what, let's do this a little bit slower. Let's not go out and hire 20 sales reps and spend $10,000 a month on marketing. Why don't we grow into this and let's make sure that we validate the model along the way and then ramp up and ramp up. And then once you have that ramp and you know what's going on, well, of course, then that's when you can go out and you have enough cash in the bank to go out and try and raise a second or third round of funding. But if I had to do it all over again, it would be really, watch the cash. I mean, keep it like it's yours. Don't treat it like it's somebody else's money. Treat it like it's your money. And make sure that you have enough Runway, especially even to slow down. I would say that the other big thing is work with whoever your CFO is or your controller is and say, okay, where's the cutoff point? Where's the cutoff point when we could pay down the debt to something manageable? And I can put this into, you know, a skeleton crew, because as soon as you go past that line, then you have nothing to negotiate with. Right. And you're screwed. Know where that line is and don't cross it. So those would be the. Probably the two biggest things that I would say as far as lessons learned. I mean, there's other things that you could say, you know, like pivot sooner. But I know that's hindsight's 20 20. You never really know it. But it's seems like it's so easy to look at that in the past and go, well, why didn't we get those sales reps sooner? I mean, they weren't doing this, this, and this. Why did we invest so heavily on building an infrastructure that's going to handle 100,000 people, when in reality we're only going to have like 200 for the next three years? So those are some other small things, but I think the biggest one is just cash. Cash.

So, biggest lesson is managing the cash that you get from the VCs and really treating it like it's your own.

Yeah. To me, I mean, that would be the. At least for me, if I were to do this again, which, of course I'm going to try and do it again. Yes. Watch the cash.

Would you start another company and raise money for VCs again?

So I'm starting another one and I'm bootstrapping it myself. I mean, just like I did with royalty exchange initially. I mean, I bootstrapped it all myself. So I think this time I'm going to try and get it to a sustainable cash flow positive. Enough cash flow positive where I would really know for sure because wealthy exchange is still kind of a crapshoot. Give me $10 million and I'm pretty sure, I mean, what I've seen here leads me to believe that if we invest more here, we're going to get to this outcome. I want to get it further right. I'm going to know 100% that if I take somebody else's money that we can get to the goals that we set for ourselves. There's always going to be some risk along the way. I want to try reduce that risk as much as possible and keep it in bootstrap mode for a lot longer than I might have before. Because before it's your first time, you're like, well, I mean, I just need to get this funding. And if I get this funding, everything's going to be great. You kind of lose sight about. Well, actually there's this whole business that has to follow along there too. So anyway, those would be some of the things that, yeah, I'm going to look at in this next company.

No, that definitely sounds like the right approach to go by.

Yeah. Yeah. Well, thanks.

This was good, actually. I liked it. A lot of this stuff resonates with myself really well. Sean, I appreciate you taking the time to do some of this interview and thanks for the time. Thanks for tuning in to M and A Science. I'm Kisan Patel. You just listened to Sean. Peace. We hope this episode provided valuable insight into venture capital, lost cutoff points and exits. If you have interesting MA stories or suggestions to share, reach out to me. You can find my email in the show Notes. For more resources, including links or tools mentioned during the show, visit dealroom.net podcast. Join us next week when we uncover more secrets to successful MA transactions. This podcast was brought to you by dealroom. Dealroom is a technology company that helps corporations on both the buy and sell side minimize risks and maximize value on MA transactions. We take the mess of data rooms, spreadsheets and emails and replace it with one easy to use process management tool. This results in big improvements in collaboration, security and risk tracking. Learn why deal teams are switching a deal room@dealroom.net all views or opinions expressed by any individual in any form of communication on this podcast, written, oral or otherwise, are personal and do not represent the companies, firms, institutions, organizations or otherwise that they are associated with.