MSIN0047 Entrepreneurial Finance - SNAFU

records
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Company Overview
Snafu Records is the first full-service record label using Artificial Intelligence and Analytics to
identify and sign under-valued or undiscovered music artists. The company was founded in
March 2018 in Los Angeles with 30 employees as of 2021. This was due to the talent-scouting at
major labels being based on an old school word-of-mouth process where gatekeeping new artists
is common (Desai, 2022).

Global Music Consumption Market Share of New

Market Share Releases per year
1%
Major Labels - Major Labels -
30%
Universal, Universal, Sony,
Sony, Warner Warner
Other Labels / Other Labels /
70% Independent Independent
99%
Artists etc. Artists etc.

Figure 1- The problem with major labels artist discovery (Musicweek, 2021)

The major labels account for 70% of all paid music consumption but only 1% of new releases
per year demonstrating that 99% of the artists releasing new songs each year have a high chance
of going undiscovered.
Snafu’s business model is based on predicting which artists are likely to be popular and
acquiring their undervalued rights. The company then looks to amplify their music through
marketing investment and playlist promotion leading to the monetization of their content getting
paid through licensing the artist’s music and royalties every time the artist’s content is consumed
on platforms such as Spotify or Apple Music. Snafu integrates the promotion and distribution of
the artist’s music by digitalizing the entire process looking to disrupt the traditional business
model followed by major record labels.
The ideal customer profile would be independent artists publishing music on online platforms
with some form of positive online traction.
Use cases include music duo ‘Joan’ as they were discovered and signed on day 2 of their first
song release have now crossed 45 million cross-platform streams (Stassen, 2020). Similarly, Jazz
artist ‘MishCatt’ who was signed early has now reached the top charts in 3 countries. (Stassen,
2020).
Snafu currently has 50 artist deals with 200 million streams and 18 million monthly listeners
(Desai, 2022). Revenue is confidential and so we can estimate this to be $1,230,000 (Appendix
Section 1).

Team
 Name Title Date of Joining
Ankit Desai Co-Founder / C.E.O. March 2018
Carl Falk Co-Founder/ Creative March 2018
Director
Anthony De Waver Finance Director April 2018
Subik Sheerazi A&R Director April 2018
Felix Bender Head of Engineering March 2018

The hiring plan includes growing the tech team by hiring more software engineers and
programmers as Snafu looks to expand technological capabilities and ensure its algorithms are
effective. Product designers and UX specialists are also required with Snafu looking to innovate
by offering music artists new ways to create music and connect with talented individuals.
The team at Snafu possesses a mix of technical prowess related to machine learning and vast
experience in the music industry. Ankit Desai was previously head of digital strategy at
Universal Music while having a background in A.I. and machine learning (Desai, 2022).
Similarly, Felix Bender who worked at Telenor was responsible for improving their marketing
capabilities using Machine Learning algorithms while Carl Falk is a world-renowned producer
having written hits for Ariana Grande and One Direction.
The team’s lack of geographical diversity is an issue since Snafu uses algorithms to scout talent
all over the world. Most of the team is based in Los Angeles or Stockholm and with a small
group of employees, it could prove to be very challenging having to fly to destinations such
Egypt or Australia and offer undiscovered artists deals.

Product
Snafu’s main product is its proprietary algorithm which analyzes over 150,000 unsigned artist
songs a week by scraping across music and social-media platforms and providing a
recommendation list of potential artists. Machine learning methods including neural networks
and sentiment analysis are used to analyze if any of these artists are undervalued based on future
projections of earnings which are formed through analysis of thousands of genre-specific
successful songs.
The future involves Snafu launching a host of new products which aim to democratize artist
recognition and song production. This includes ‘Blurry’ - an artist collaboration platform where
songwriters and producers can anonymously connect and make songs together. Artists using
Blurry when launched would be charged a subscription fee and any public releases of songs
made on the platform would see Snafu earn royalties (Desai, 2022).
The algorithm strengths include its ability to recognize a high volume of unsigned artists in a
week based off positive online traction to identify talent which would be humanly impossible to
achieve at this scale. However, artists with the potential to go viral due to their talent will be left
out of the algorithm screening if they are not able to obtain online platform traction which would
result in Snafu missing opportunities.

Market
There is no specific geographical or age segment as the algorithm scan artists irrespective of
these factors instead, focusing on the audience perception of them (Desai, 2022). Using a top-
down approach based on the ideal customer profile to find our T.A.M. we first obtain that the
global music market in terms of recorded music and publishing is worth $25.9 billion as of 2021
(IFPI, 2021). Using the data from the company overview, we know that 30% of this market
represents the independent artists and labels equating to $7.7 billion. Snafu’s strategy is entirely
digital hence we must consider earnings from streaming itself. This was 47% (IFPI, 2021) of the
total market size in 2021 and when applied to independent artists, this equates to $3.62 billion as
the S.O.M.
The global music industry experienced growth of 18.5% in 2021 driven by the rise in paid
streaming subscriptions which increased by 21.9% to $12.3 billion from the previous year (IFPI,
2021) as consumers were granted easier access to music through streaming platforms. The
number of independent artists globally grew by 27% in 2021 (Paine, 2021) presenting Snafu with
the opportunity to capitalize on the digitalization of the music industry and growing number of
independent artists by deploying its algorithms.
Snafu’s competitive advantage is based on two key aspects which are its in-class algorithms and
scalable creative network (Desai, 2022). No other record label can scout at the scale and quality
of Snafu due to its proprietary algorithms while its creative network consists of the top
performers and producers in the world which enables artists to be paired with them. Snafu’s
integrated business model enables them to pay back 40% to the artist compared to 20% in the
traditional business model by major record labels (Desai, 2022).
Snafu will face competition from the major labels for signing artists who will focus on adding
more value for the artist through increased distribution and marketing capabilities. The
company’s main competition from independent labels comes from Amuse who are more tech-
driven by supporting artists to maximize their distribution potential through data analytics. The
company was founded in 2015 and has received $15 million in funding to date with 100
employees (Crunchbase, 2022).

Funding History
Snafu records have completed 2 rounds of funding raising a total of $8.9 million with a dilution
of 15-20% as of the latest round of funding and a pre-money valuation of $5 million (Desai,
2022).
Table 1- Snafu Funding Rounds (Digital Music News, Smith, 2021)

Name Amount Date

Seed Round $2.9 Million February 2020
Series-A Round $6 Million September 2021

Table 2- Investors of Snafu Records (Crunchbase, 2021)

Investor Name Details

Truesight Ventures Venture Capital Firm
Samanta Hegedus Stewart Angel Investor
Nicolas Shekerdemian Founding Partner of The Venture
Collective
Savan Kotecha Academy-Award winning songwriter
Day One Ventures Venture Capital Firm
Agnetha Faltskog World-Renowned Songwriter
(A.B.B.A.)

The board consists of Venture capital firms and founding partners allowing Snafu access to
expertise with regards to the challenges that a start-up could face due to previous investments
while also having the ability to make follow-on investments enabling Snafu to accelerate growth.
The addition of world-renowned song writers adds reputation and credibility for Snafu Records
which could attract other investors and provide more contacts in the industry to scale the
company’s creative network. Snafu gives up ownership in exchange for this capital and so there
could be conflicts of interest if all the board member’s vision for the direction of the company is
not aligned. This would subsequently affect the decision-making process and threaten Snafu’s
ability to make the correct one.

Investment: Deal Facts

The next round is expected to be a Series B round for which the total size of the round to be $7.5
million. The pre-money valuation using the amount raised so far and size of the Series B round
would be $30 million resulting in a dilution of 25% which is standard for a Series B round. The
post-money valuation would be $37.5 million. I am looking to invest $2 million based off the
estimated revenue figure and so my post-round ownership would be 2/37.5*100 which is 5.33%.

Investment Thesis
Snafu’s ability to pay the artist back more than major labels while being able to distribute their
music through online platforms which increase in popularity give it the potential to completely
disrupt the industry through digitalization. With the team and board’s experience in the music
industry and technology, Snafu possesses significant capabilities to help the undiscovered artist
grow exponentially while acquiring their rights at a low value due to the algorithms
demonstrating its profitability potential. The people leading the company are qualified with a
significant creative network which would prove crucial for upcoming artists to succeed.
Major labels still possess significantly greater resources than Snafu or any independent label
which could result in them investing to adapt their strategy for digitalization. The success of this
would depend on the infrastructure and adaptability of the organization but threatens Snafu’s
appeal if major labels allow themselves to scout better and offer the artist more in return. Snafu’s
algorithm has also yet to identify a global superstar such as Justin Bieber or Drake who is
unsigned which could raise concerns if the algorithm itself can spot an artist of this caliber.

Appendix
Section 1 – Revenue Calculation
We first must make 3 strong assumptions to calculate this
1) There is no data on the geographical distribution of Snafu’s artists and so we calculate
royalties based of the U.S.A. Spotify royalty stream rate.
2) This rate itself is an estimate and is done using Music Gateway (2022) which calculates
the estimated earning of royalties based off the Spotify streams.
3) For the purposes of this estimation – we will only consider music streaming service of
Spotify although there will be others.
4) Each artist contract in terms of licensing varies considerably. On top of this only some
artists will be selling merchandise through which Snafu will earn a share. An estimate of
$15,000 dollars per artist every year on Snafu’s current roster and can be made based on
the information provided by Ankit (Desai, 2022) however, this could range from $2,000
to $80,000 (for select artists who have reached a considerable level of success).
Thus, Snafu currently has 200,000,000 streams which converts to $800,000 in royalty
payments from Spotify out of which the company keeps 60% resulting in $480,000. Snafu
has 50 artists contracted and so $15,000 * 50 artists results in $750,000.
This gives Snafu an estimated revenue of $1,230,000

Appendix Section 2 – Evidence

Reference List
1) Desai, A., 2022. ‘Snafu Records U.C.L. Interview’. Interview by Dhrish Kanar [Zoom],
10 March 2022
2) Stassen, M., 2020. ‘AI-enabled’ indie label SNAFU Records launches with $2.9m venture
capital backing - Music Business Worldwide. [online] Music Business Worldwide.
Available at: <https://www.musicbusinessworldwide.com/ai-enabled-indie-label-snafu-
records-launches-with-2-9m-venture-capital-backing/> [Accessed 23 March 2022].
3) Markets, R., 2021. Global Music Recording Market Report 2021-2030 Featuring
Universal Music Group; Sony Music and Warner Music. [online] GlobeNewswire News
Room. Available at: <https://www.globenewswire.com/news-
release/2021/09/16/2298162/28124/en/Global-Music-Recording-Market-Report-2021-
2030-Featuring-Universal-Music-Group-Sony-Music-and-Warner-Music.html>
[Accessed 24 March 2022].
4) Musicweek. 2020. Independent Artists vs Major Record Labels. [online] Available at:
<https://www.musicweek.com/labels/read/midia-research-indie-sector-and-self-releasing-
artists-lead-streaming-growth-in-
2020/082825#:~:text=Independent%20labels%20and%20artists%20strongly,2019%20to
%2065.5%25%20in%202020.> [Accessed 24 March 2022].
5) IFPI. 2021. IFPI Global Music Report: Global Recorded Music Revenues Grew 18.5% In
2021 - IFPI. [online] Available at: <https://www.ifpi.org/ifpi-global-music-report-global-
recorded-music-revenues-grew-18-5-in-
2021/#:~:text=Figures%20released%20today%20in%20IFPI's,at%20the%20end%20of%
202021.> [Accessed 24 March 2022].
6) Crunchbase. 2022. Amuse.io - Profile. [online] Available at:
<https://www.crunchbase.com/organization/amuse-io> [Accessed 24 March 2022].
7) Paine, A., 2021. The growth of independent music artists. [online] Music Week.
Available at: <https://www.musicweek.com/labels/read/midia-research-indie-sector-and-
self-releasing-artists-lead-streaming-growth-in-2020/082825> [Accessed 24 March
2022].
8) Smith, A., 2022. AI-Powered Snafu Records Officially Completes $6 Million Funding
Round. [online] Digital Music News. Available at:
<https://www.digitalmusicnews.com/2021/09/22/snafu-records-6-mm-raise/> [Accessed
24 March 2022].
9) Crunchbase. 2021. Snafu Records. [online] Available at:
<https://www.crunchbase.com/funding_round/snafu-records-seed--13c02b92> [Accessed
24 March 2022].
10) Music Gateway. 2022. Royalty Calculator | Music Gateway. [online] Available at:
<https://www.musicgateway.com/royalties-calculator> [Accessed 24 March 2022].