First Round Capital’s Chris Fralic Tunes into Digital Music Startups

Picking the right startup in the digital media world to back can be a challenge even for an investor with Chris Fralic’s experience in the technology arena. Fralic, a partner at the New York office of First Round Capital, spoke on Tuesday at the New Music Seminar’s tech summit held near Union Square. While he has backed companies in digital media that had lucrative exits, such as display ad tech company Invite Media which was acquired by Google, he also talked about startups that ran out of gas. Putting his experiences in the context of new ideas in digital music, Fralic gave a cautiously optimistic outlook on the future of the space.

“There’s a graveyard of companies that have failed in the music industry,” he said. However, he said demand for music keeps the market alive. “It feels like, after 10 years, the industry has kind of bottomed out and is now coming back up.”

New York is a huge hub for the music industry, given the presence of major record labels, studios, and performance venues in the city. Combined with the growth of local tech startups, it seems natural to see entrepreneurs trying to leverage their platforms and technology to serve the music industry. For example, Fralic said in New York emerged from the ashes of a stalled startup that First Round had backed called Stickybits.

Stickybits was an app that let users scan the barcodes on products to discover related deals and other digital content, but it didn’t catch on, Fralic said. So its co-founders shut it down last year then pivoted to develop, a social platform which lets users discover new music and chat with fans who share their taste.

Some of First Round’s other music-related investments are also showing promise, Fralic said. FanBridge in New York developed software for using e-mail to market to fans of musicians, athletes, and other performers. Jelli in San Mateo, CA, created a platform that lets users vote for songs to be played on terrestrial radio stations. Gumroad in San Francisco is a website that lets users sell their own content such as MP3s of unreleased music they created or the beta version of a video game they are developing.

The transition to new technology and services has not been easy for the media industry—CD and DVD sales have been hit especially hard—but Fralic said there are signs of a revival. “The digital revolution swept through and killed a lot of things and knocked down revenues for a decade,” he said. “Now it feels like things have changed.” With more users able to connect to media through their personal devices, the access to media has increased drastically. That has created opportunities for startups to deliver content, scale up quickly, and attract a critical mass of users faster than the old guard of the technology world.

For example, AOL took about five years to sign up one million customers, Fralic said. That sounds lethargic compared with today’s rising digital content businesses. “Draw Something took ten days to get one million users,” he said. New York-based OMGPOP, the developer of Draw Something and other online casual games, was acquired in March by Zynga. “If you can scale bigger and start a company for less [money] it’s a big disrupter,” Fralic said.

Prior to First Round, Fralic was vice president of business development at social bookmarking website, which was acquired by Yahoo. Though he has worked inside tech companies, Fralic said it can still be a daunting task deciding which startups to fund. He said First Round receives 2,500 to 3,000 business plans each year from entrepreneurs. Out of that crowded field, maybe 60 companies get invited in to First Round’s offices for a closer look by the firm. That is whittled down further to about 25 companies that may get funded.

Even with such a stringent process for choosing companies to back, Fralic said there are some startups he wishes he caught. Prior bias and doubts about the music industry based on the past ten years, he said, may have steered him away from investing in companies such as LyricFind in Toronto, a provider of licensed lyrics from music publishers such as Universal, EMI, and Sony/ATV. The lyrics are distributed to more than 1,000 websites such as Shazam, Bing, and Slacker. “I didn’t fathom how important lyrics could be,” Fralic said.

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