⚠️Announcement ⚠️
Since I am one day behind schedule on publishing this one, I’ve decided to donate €50 to Article 1. I’ve been meaning to donate to this non-profit for a while, so I thought it’d be a great occasion.
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(s/o to Gonz Sanchez from Seedtable inspired this move, as he’s been donating $100 per missed day of his daily European tech trends megathread)
Today I wanted to discuss the changing landscape of Art and the companies reinventing the way we trade, discuss, and look at it. In many ways, I also feel like art and tech have in common the fact that they challenge the world we live in their own way. An elaborate way of saying: “ArT iS DisRuPtiVE”.
Let’s dive into it.
Art is a difficult market to grasp, but let’s give ourselves some figures and stats to think about how big an opportunity it can be, if further eaten by software :
The global art market* is was a whopping c.$64bn in value as of 2018
The top 3 global markets* for art are the US ($28.3bn), then the UK ($12.9bn) followed closely by China ($11.6bn) and the rest of the world ($11.6bn)
*Note: here the market value is expressed as the total revenue of all art products exchanged in a specific zone, not the revenue made by intermediaries.
Other characteristics of this market include :
Relatively non-digital but ripe for disruption. The market is still very early in moving online. The online art market is a mere $5.8bn by UBS’s estimates. Roughly one third of surveyed art buyers state the internet is their preferred medium, while half does not have a fixed preference, so there’s definitely interest
Massive cost of intermediation. Think about it: when you buy a multi-million dollar artwork at an auction house, the average commission is 15%. On top of that goes expenses like loss and damage insurance policies, high-end shipping and other ancillary fees that can drive up the intermediation costs upwards of 25% of the price paid
The online opportunity lies mid-market (for now). Pre-covid, the distribution of transaction volume online is skewed towards the middle, while most of the high-value sales still happen offline. Just 1% of the >100k€ artworks are sold online, yet make up for 23% of the value. It’s unclear how the travel situation will affect 2020, but 48% of high net worth collectors have used an online medium to buy before. Not their preferred channel, but they’ve considered it.
Social drives traffic and sales. Many verticalized contenders in the art marketplace and listing space, including higher end websites, drive >10% of traffic through social media. Instagram makes up around 70 to 75% of that traffic
Financing skewed towards high-end. Looking at recent data from Crunchbase and CB Insights, roughly three fourths of the investment goes toward the higher-end marketplaces and startups, targeting the affluent 1.0%. Fine arts remains a market with deep pockets but limited width, which is in my opinion why VCs like Benchmark chose to invest both sides of the aisle: luxury with 1stdibs, affordable craft arts with Arts.com (extinct).
Predicting the pace at which art galleries and big dealerships will move online is a difficult task, so I thought I’d switch to a bottoms-up, problem-related approach.
Here are some ideas I thought were interesting :
Direct art asset sales through blockchain certificates. Blockchain can be used to issue untamperable certificates that link either to an entire piece of art or divide it into multiple certificates that act like company shares. Those can then be used on marketplaces, to be traded and quoted at their current value. For these businesses, there is of course still a bit of a liquidity problem, but companies like Masterworks are working on trading platforms that would make secondary trades possible and provide more liquidity. This is still not so much of a retail investment play, many platforms will require you to prove your investment is <10% of your net worth.
Online auction space. Non-incumbent start-ups have taken on the art auction market by going full digital. Most start-up initiatives in the space target the lower end of the spectrum (<$20k in value). Other places like Artnet.com are in a dual model: they aggregate public information about the art market and offer auctions on select artworks. I have my doubts when it comes to building a product and a place who wouldn’t depend on an incumbent’s brand name to establish trust and would maintain the same thrill that real-life, live-streamed auctions dominate right now.
Tokenized “art funds”. There has been a number of blockchain driven projects in which founders would launch an ICO, marketing a specific art investment thesis to their investor base (for example, investing in an undervalued artwork class like young japanese creators). Big caveat: most of the projects I was able to spot were taken offline and it’s difficult to evaluate which was a scam or not. Still, it’s possible that once a regulatory framework stabilises, we see more legit and long-term projects around that idea. I also think that tokenized art funds and marketplaces are more VC-compatible than other business ideas around art, because the decentralized exchange model or asset fungibility made possible by blockchain is a playbook many VCs are starting to know well.
VR / AR opportunity for art. Companies like Artland (featured below) have started to roll out VR vernissages that cater to novice investors and art collectors. The idea is to try and kickstart communities around specific art styles, regrouping people that do not necessarily have the resources to travel worldwide several times a year to visit art fairs. Such technology can come in handy with social distancing measures, but it’s certainly more of a democratization, retail-ization play that an attempt to permanently move UHNWI collectors online. Regarding AR, there is a lot of nice use cases you could think of for augmented artwork information, animated artworks in AR to distract kids bored by the immobile Mona Lisa at Le Louvre. Does that make for a great VC investment ? You would have to sell it to a large portion of museums in the world, then make sure visitors actually use it. Difficult play.
In a spirit of actionability and market framing, I’ve done my best to compile a list of the existing art marketplaces that I’ve found. Here’s a very quick mapping to visualize the key players.
Of course, marketplaces are not the only way innovation takes place in the art industry, but the most important industry shifts are, in my opinion, happening in that space at the time. The brutal irruption of blockchain protocols, as I discussed above, has allowed for greater transparency in the way galleries, artists and collectors will authenticate, value and trade art.
Fresco, for instance, has built a decentralized directory in which all participants can access and log their transactions, allowing to trace market value for the assets. In this case, the artworks are tokenized, either as a whole or broken down in shares, and the protocol estimates a market value against prior transactions, and dramatically reduces the transaction costs associated.
My biggest question mark is: in the gallery, art sale and auction space, why have incumbents and established regional actors continued to dominate ? Few thoughts about this :
The barrier of trust. Intuitively, I’d suppose that the happiness and level of satisfaction one can draw from buying fine arts online highly varies on which type of art you’re buying and from whom. The higher the price tags, the higher the stakes. Large auction houses intermediate transactions and have partly moved their operations online, but they remain the center of gravity for trust. In that regard, thinking that blockchain is a silver bullet and will disrupt the organization of the higher-end of fine art markets can sound a little ingenuous right now. And breathing a sense of legitimacy, trust into a product built by an independent player to kickstart growth is in my opinion the biggest hurdle.
Can there be an art day trading madness ? I’m going to draw an adventurous parallel that I would be very happy to discuss with anyone interested. Looking back at the past weeks and the craziness that has unfolded around the Hertz bankruptcy and the role of Robinhood and day traders, I’m wondering if we could see something similar in the upper-mid market for art. Once artwork tokenization and continuous trading becomes widespread, could we imagine hordes of arty millennials raving on social media about their latest investment into a Warhol or a Monnet ? An art trading bubble is admittedly a very long shot, since these demographics won’t be necessarily preoccupied by pure financial gain but rather virtue signaling.
As I described while introducing today’s issue, I wanted to quickly touch on a few thoughts as to the common traits Tech, VC and tech share :
Renaissance and Enlightenment polymaths, and mankind’s relationship to reality. They absorbed enormous sums of knowledge and were extremely creative. To bolster and serve their creativity, or as a consequence of their ventures, they authored seminal artworks and inventions. The best example of this is perhaps Leonardo Da Vinci, who invented the microscope, the telescope and painted Mona Lisa. Other major inventions were linked to innovation in art: moving pictures, cinema and a lot of the knowledge we have on how we perceive colors and use our eyes stemmed in striving for ever more impressive art. I’ve often found that art, especially the contemporary sort, would point us to a given problem or question in our world, where science, technology and software give practical solutions for them. Yet, both are an expression of how we question reality around us.
Artistic backgrounds make for great founders. In 2016, Kleiner Perkins picked up an interesting piece of data, showing that 20% of the VC-backed unicorns of the time had a founder with some kind of artistic background (architecture, music, fine arts, media arts). Airbnb’s Chesky and Gebbia got into YC ‘09 partly because Paul Graham had earned a post-grad diploma from the same art school (Rhode Island School of Design). Artists are overrepresented in successful tech companies, because of their natural ability to reflect shifts in human culture and habits, and challenge the status quo with weird ideas. With the decade of design just kicking, countless founders with a baked-in dual background in artistic disciplines and technical topics will take the world by storm. Figma and the bustling ecosystem around its platform is just the beginning, and I’m convinced the same kind of tools will emerge to learn how to paint, sculpt, and perform a variety of other actions.
What about VC then ? In early-stage venture, valuation is an art of power, trends, context. In Silicon Valley, pure artists and investors sometimes intersect at exhibitions. Some would argue that the lack of intrinsic weight to measure valuation in the early stages of a tech company is similar to valuing artworks: it’s an agreement between a group of people for which the representation of an idea is worth a set amount of money. Another parallel is the prestige and signal / status games investors like to play in both fields: Is Qatar’s purchase of the world’s most beautiful artworks comparable to Saudi Arabia’s involvement in the Vision Fund ? To some extent, yes.
Artsper. I’ve mentioned Artsper in my landscape section, but I thought I’d go back and distill some thoughts about this company. Artsper is the leading contemporary art marketplace in France, yet it didn’t raise from VCs. That raises the question of how VCs view art marketplaces as a venture-friendly play, but let’s not forget that not taking the VC route can full-well be a founder-led choice.
Masterworks. Masterworks is a really interesting company because it is leveraging blockchain to enable shared ownership in assets that were not fractionable such as hefty premium artworks. The process is quite simple: the team selects top artworks for their valuation, liquidity and value upside (much like any other investment), then structure a SPV and file it with the SEC to be able to to buy it and sell ownership tokens to investors in the end. Much like classical alternative investing, you’ll be required to pay buy-in fees (10% of your AuM, ouch ?), management fees (1% AuM per year) and carry (20% of any proceeds on the sale of an artwork). The company is currently looking at expanding its investor base, by shipping a trading platform that would open for more liquidity in the tokenized artworks.
Artify. Artify was an american company founded around the idea that businesses and individuals could enjoy renting artworks on-demand to display at venues, homes etc. In 2012, it received funding from Peter Thiel in an oversubscribed round and was a great topic for excitement in SV, but was shut down a year later; This sparked me to wonder : why the sudden fall ? The most likely explanation is that finding and funding leads for corporate clients that would understand the value of renting art on demand was extremely expensive and that the founders could not make the growth model work. Both supply (galleries, art owners) and demand (individuals, companies) commitments were tough to materialize at the time. Would something like this make sense today, in a world where a large portion of events where such artworks could be shown are to be remote for a long time ?
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Ressource list :
The Art Market 2020, Art Basel and UBS
At London’s Art Auctions, the Middle Is Where the Action Is, WSJ
The overview of CoArt, Maecenas & Masterworks business models, CoArt team
Une levée de fonds de 305.000€ pour Artsper, le 1er site de vente d'oeuvres de galeries, Communicart.com
Investing in Figma: The Decade of Design, Peter Levine (a16z)
Venture Capital Funding to Art Market Startups Concentrates on High End Retailer, CB Insights
The Serious Relationship of Art and Technology, Widewalls.ch