Selling royalty rights to the highest bidder

dranii@newsobserver.comJuly 14, 2013 

— RALEIGH The founders of The Royalty Exchange recognized that convincing people to invest in a startup venture isn’t easy, so they were prepared for a long slog when they went into fundraising mode.

But their business, an online marketplace that auctions off royalties for music and other forms of entertainment, proved to be especially enticing.

The first venture capital firm they met with in March, Grotech Ventures of Vienna, Va., was receptive to their overtures. Late last month, Grotech agreed to invest $2 million so that the Raleigh-based company can expand its sales and marketing capabilities in hopes of converting its potential into a thriving business.

Things accelerated so quickly with Grotech, said Royalty co-founder and CEO Sean Peace, 45, that they were able to scrap their plans for a full-court press on potential investors.

“It was like hitting the lottery, basically,” said fellow co-founder Wilson Owens, 28.

Most of the royalty streams that Royalty Exchange auctions off are in the music and entertainment arena. For example, Edmund Clement, co-writer and co-producer of hit songs for artists such as Usher and TLC, is auctioning the rights to the royalty payments he receives from Universal Music when his songs are played on the radio or streamed over the Internet, or when those songs are purchased, whether on a CD or digitally downloaded.

Bids start at $55,000.

“We view it as eBay meets Lending Tree for royalty streams,” said Don Rainey, a general partner at Grotech. “It enables royalty holders to get … liquidity for their assets.” Rainey is a former partner at Durham venture capital firm Intersouth Partners.

Rainey is optimistic that Royalty Exchange could become “a very large business.”

“There are a lot of royalty streams out there,” he said. “This is a welcome service for rights holders.”

The inspiration for Royalty Exchange came from Peace’s previous startup, a company called SongVest that auctions off “high-end memorabilia”: the rights to a piece of the royalty stream of hit songs from the past. The biggest rights of all are the bragging rights.

That business, which still exists, never took off. But Peace became convinced that expanding beyond songs into other fields, especially movies and TV shows, and appealing to investors rather than the nostalgia crowd could be a winning combination.

To date the company has sold $756,000 worth of royalty rights via more than two dozen auctions. Royalty Exchange’s take from the auctions ranges from 5 percent to 12.5 percent of the auction amount from the seller plus 2.5 percent from the buyer. Going forward, it also receives a 2.5 percent management fee whenever a royalty is paid.

‘A good value proposition’

The largest auction to date: $250,000 for the rights to the background music that composer Brian Tarquin wrote for hit television shows such as “Seinfeld,” “The Simpsons,” “Grey’s Anatomy” and “Sex in the City.” Whenever those shows appear on either a cable or broadcast channel, the owner of those rights is owed a royalty payment.

“It’s a good value proposition for all parties, which is the way business deals are supposed to work,” said Rick French, founder and CEO of Raleigh communications firm French/West/Vaughan and a member of the board of trustees of the Rock and Roll Hall of Fame and Museum. French also serves on Royalty Exchange’s board of directors.

The auctions enable the artists to convert future revenue into cash right now. And there’s flexibility as well. “If you decide you want to sell 17 percent of a hit song, you can keep 83 percent of that song,” French said.

For the investors, there also is what Peace refers to as “the coolness factor” combined with what can be a steady revenue stream for properties that are typically more than a decade old. Each Royalty Exchange auction lists the average royalty revenue generated over the last three years. The Edmund Clement song catalog, for example, has paid an average of $29,457 per year.

“Especially with music, it is really all about what it did recently,” Peace said. “What it did five or six years ago doesn’t necessarily have a bearing on what it is producing right now.”

There’s also the potential for considerable upside if, for example, an artist goes on tour and generates interest in his or her back catalog, or if a vintage song appears in a hit movie or is used in a commercial.

Founded in the summer of 2011, Royalty Exchange was bootstrapped by its three founders -- Peace, Owens and Reggie Calloway, the West-Coast-based co-founder of the popular techno-funk band Midnight Star and a five-time Grammy nominee – until they obtained a $100,000 bridge loan in November.

The trio held down other jobs and worked nights and weekends on Royalty Exchange until December when Owens, the director of marketing, became the first full-time employee. The new infusion of capital from Grotech is enabling Peace and Calloway to devote themselves full-time to the business as well – along with four other employees it just hired.

‘It’s about awareness’

The new hires are mostly marketing and sales personnel. “It’s all about awareness,” Peace said. “It’s all about getting ... as much supply as we can for the marketplace.”

The company has been working from HQ Raleigh, formerly HUB Raleigh, an incubator for startups on Hillsborough Street. But it’s outgrown that space and is planning to move into 1,500 square feet of office space near Crabtree Valley Mall.

The company also is striving to make its auctions appealing to smaller investors by offering “royalty units.”

Rather than sell rights to one investor for, say, a minimum bid of $250,000, the company could sell 50 units for a minimum bid of $5,000 each.

“Then people can buy and sell … royalty units, just like you would with stock,” Peace said.

Ranii: 919-829-4877

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