Thanks to pandemics and the looming economic crisis, ArtTech startups turn from market pariahs to the most lucrative investment target - both for existing art companies and for professional investors. The former will behave quite simply: talking of a strategist (a large market player like Hauser & Wirth mentioned already), they will either buy the project out together with its team, or they will participate in the equity, becoming a majority shareholder with the right to exclusively use the technology. Smaller companies (galleries or auction houses of second tier and less) may subscribe to the new service and rent our virtual viewing rooms or the equipment to set up exhibitions on a monthly or yearly basis. In both cases, we see a startup offering a ready-made tech solution. But what shall the startupers do if they hadn't had a chance to come up with a product before the lockdown, but are still sure that their revolutionary idea is ready to disrupt the art market? They have to trod a more difficult path: approach the investor and try to produce something in a short timeframe, then come back out into the market and try to sell the technology to a strategist (if they have avoided the basic mistakes and their selected niche is not yet occupied) Therefore, you need to grasp what are the criteria that an investor uses to assess a startup.
According to the Deloitte Art & Finance / ArtTactic 2019 report (page 177–179) out of 100 startups in all areas, which climbed from the idea stage to real business, only three make it that far. Accelerators can help to improve the survival rate - these are special companies which develop startups by means of educational programs attracting mentors, professionals from all walks of life (teaching things ranging from design to financial models), who can make an expert assessment and push startups to become better. Many accelerators also serve as venture funds, either financing starups in the initial rounds or gathering investors in the end of the acceleration program to pitch projects of their fledglings. As a rule, the accelerator gets a 7-10% share in the startup if it joins the program. The word 'accelerator' itself supposes that the progress startups usually make on their own in 1,5-2 years is accelerated to only 2-3 months thanks to the offered program allowing them to save time, money, surpass the competitors, and quickly see their weaknesses and possibilities to improve. What is even more important, the startups undergoing acceleration survive 8 times better: out of one hundred 25 will move on . The investor also knows the stats.
However, one should exercise caution when dealing with accelerators capable of assisting ArtTech startups in making them more attractive and leading to an investor's deal. Globally in the begining of 2020, there were more than 3000 acceleration programs , out of which only 3 were niche: LACMA Art + Technology Lab, by the Museum of Contemporary Art, Los Angeles, and two New York companies: NEW INC by New Museum and Fuelarts. Museum accelerators, on the other hand, are more about curatorship, social and humanitarian projects, whereas a business oriented Fuelarts which appeared in autumn 2019 rescheduled their physical enrollement to an unidentified time and probably will start mentoring online. As far as large global 'general admission' accelerators, such as Y-combinator or TechStars (who led into this world such names as Uber, AirBnb, Tinder and many others) are concerned, as soon as an art project ends up in their nets, they will be offered to change the underlying business idea to something more appropriate to the accelerator itself and its mentors, since they know very well how to produce a dating app, but how to produce a new Art Basel — no yet.
However, if you read the Fuelarts report regaring the ArtTech market in the said Deloitte paper, you will see, that such startups fresh out of acceleration, exceed their counterparts from other sectors (financial, industrial, medical) by a number of indicators:
• initial funding: out of 100 ArtTech startups with product prototypes 50 got investors' funds exceeding $100 thousand (other startups get 25 out of 100 investors to cash in);
• subsequent funding: out of 50 ArtTech startups 23 get to move to a new investment round raising more than $500 thousand (in other markets - 15 out of 25);
• exits: out of 23 ArtTech startups 8 were succesfully sold to a business strategist (other companies get 2 successful exits in 15 cases).
Even though the statistics is scarce (the amount of young enterpreneurs in the art and tech sphere is ten thousand times smaller than the overall number of startups) we still see that ArtTech startups are more robust when it comes to investment attractiveness. The succesful exit ratio is even more telling: the number of sales transactions for art-companies is 4 times higher than the market average (8 vs. 2) There are couple of reasons explaining this phenomenon, and not all of them are purely financial:
• first, investing into art-related technologies is like investing into art, there are social implications behind the deal. For an investor it is like an entry ticket to the art-market, opening doors to the new circle of contacts that might be of use in solving buiness-related issues. At the same time, funding ArtTech startups is cheaper than buying a full-fledged collection, but it achieves similar results: you get VIP cards of international fairs, invitations to 'collectors only' parties, participation in industry fora and other perks of the newly acquired status.
• second, collectors and dealers who keep in touch with an ArtTech startup can stay in the know of the art market, it's an opportunity to stay abreast of the news and trends in the industry. Let's recall that 10 years ago it were Larry Gagosian and David Zwirner who first recognized Artsy's potential, - isn't it the reason why they are well armed against the crisis today with their online viewing rooms?
• third, and it may come as a surprise, when strategists exit ArtTech startups, they don't always preserve their art orientation: out of 8 successful exits, four companies had their core idea turned around by a strategist - they started catering for financial, sports and even oil&gas industries. Why is it happening? The thing is, the strategists are mostly attracted not by art technologies or the market, but rather the team creativeness; in other words, they are looking for out-of-box thinking. That is why, when a strategist buys a conditional online art auction, it starts trading not so conditional oil, and the solution for art indices starts showing sports bets (real examples). Although, the founders and first investors of such an ArtTech startup can earn a lavish return and can start a new company all over again.
The facts and figures quoted here can serve as a valid argument for an ArtTech startup to start a conversation with an investor. To make the conversation even more solid, here are a couple of questions every founder should ask himself or herself before looking for finance options:
Stage 1: I've got an idea. From the very outset it is important to identify who is the person or the company that you will come for money to. Ask yourself: who is interested in your idea? If it is just you, you are a lucky person, you should become a novelist. If somebody else is interested in the idea, then your next question should be: can it be commercial? If yes - you are an investors case then. If the idea is not commercial (does not monetize well), there are two options: if the idea offers PR opportunities - find a sponsor, if it does not - look for a patron. Experience shows, that if you target your message wrongly, it can negate you further progress. In other words, don't go knocking on investors' doors with a charity project, as you should never bring a financial model to a patron.
Stage 2: I've got a commercial idea. Ask yourself: does your idea solve a current market problem? To put it simply, can a potential collector sleep well at nights without your solution? If your answer is: the idea doesn't satisfy the need, it creates it - congratulations, you are either a Google or a Tesla. Only a strategist can conjure needs out of thin air and set trends, considering their financial strength and the number of followers. If your solution does satisfy a need, your next question should be, is it cheaper than analogues? If yes, move to the next stage. If no, try to answer the following question: does it add value. If the value it creates is conceptual, the best outcome for you is to sell your idea to, say, the Venice Biennale board. Investors are mostly interested in different kind of values - such as new technologies, your team and the speed of your future product. If you tick all those boxes, you can move next.
Stage 3: I've got a commercial idea, that has value. Look around and ask yourself: who are mine competitors? If there are none, expect the following question from an investor: who then needs your product? Should there be competitors to your idea, try to figure out the following: are they direct (making similar products) or indirect (they only partially substitute your product however they do cater for your target audience)? If the competitors are indirect - we need to move to the next stage. In case your competitors are direct, your next question is: how are you better than them? If you are not, and they have been around for a long time, I am sorry, it is too late for you. But if you are, if your solution is better (faster, cheaper, leaner) - the investor will be ready to proceed.
Stage 4: I've got a competitive commercial idea, that has value. As we see now, by stage four, your idea has developed hefty arguments. But the next question the investor is going to ask might not be in your favour: did you test the idea in the market? If not, it might not be to late, so do it! If the idea has been tested (surveyed, questioneered or prototyped) you are going to be asked: did you accumulate first followers (potential customers, convincing the founders in the fact, that the idea is worth a try and they will buy it as soon as it is officially out). If there are none, in best case you will be offered to revisit your value and come back, in the worst case the conversation will be over then. However, if you have your first followers 'on paper', the investor will ask you to take prepayments from them, to check the real market interest. If there is noone willing to pay in advance for a non-existing product (even with a small discount), brace yourself for a target audience review or a value revamp. If people award you with hard cash, the investor will be ready to continue listening to you.
The checklist can go on and on, but the four points mentioned above are compulsory for a startup to prove the feasibility of the idea.
All the forecasts today regaring the future of the ArtTech startups market boil down to the following:
1. Investors who buy high risk assets (including startups traditionally) today are looking towards hi-tech projects, mainly related to remote access and control functionalities. You need to understand that ArtTech startups who base their business ideas on technologies have got new competitors coming out from other spheres: mainly from healthcare and smart-city domains (remote administration of governmental and social services). The investor's interest to fund art projects is mainly proportional to what we have discussed before - the social returns he gets enhancing his total worth, in particular the attention that such marriages of art and technology get from the media.
2. In better position now are those companies who managed to obtain funding and produced an MVP (minimum viable product) before 2020, they can now try to evoke interest in the market players: large - for potential merger (exclusive use of technology), small - for selling them the subscriptions (non-exclusive licenses).
3. ArtTech starups in search of an investor today, lag two steps behind: first step - finding such an investor and convincing him to fund the project, second step - creating the product, considering a high demand (and costs) for technical experts today. Companies at the development stage today are not without advantages, though: they can make decisions and change the path of the project subject to the rapidly changing demands of the art market.
4. Like we remember, ArtTech startups are divided into four conditional categories: transactions (online auctions, e-galleries), information (databases, indices), research (online eduction, machine learning), collections management (logistics, storage, insurance). Two thirds of young companies want to enter the transactions niche: it looks lucrative and accessible. However, with the pandemic and subsequent crisis upon us we forecast the development of other, less technologically advanced niches such as: market research projects, opening of new regional frontiers and artists, logistics, insurance and VR. In other words, everything that is related to reducing costs for the art sellers and buyers, preserving the international nature of the art-market and keeping it in the spotlight.
Denis Belkevich,
Founder, Fuelarts
telegram: @dbelkevich
This article was first published in Russian on ARTinvestment.RU