This Week in Startups - E1087: Democratizing art as an asset class, indicators of a rapidly appreciating piece of art & more with Masterworks CEO & Founder Scott Lynn

Episode Date: July 24, 2020

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entrepreneurs. Level up your hardware today and save up to 43% by going to Dell.com slash twist. Hey, everybody. Hey, everybody. Welcome to this week in startups. It is July of 2020 and we are still in the pandemic. And we're still producing episodes of this week in startups. We're still investing in companies, but we're wearing masks and we're social distancing

and we're hoping that treatments and cures and vaccines keep making progress and that the world comes back to normal by the end of this year, maybe, early next year, who knows. But we are carrying on because entrepreneurs need to keep making companies that create jobs so that people have something to do every day. and we don't hit 20% unemployment or stay at 15 forever. And so for those of you out there who are wondering what we're doing at our little company, we're still investing. In fact, things have gotten busier for us.

There are maybe a third of investors who are saying we're not going to invest in 2020. There's a third that are saying, we'll invest selectively, probably, you know, circling the wagons and protecting our own investments. And then there's a third of us, which our firm launch is in. the syndicate are included in where we're actively investing. So if you're looking to join our accelerator, you can go to launch.com or just go to launch. com to launch.com to syndicating deals at the syndicate.com. And if you want to read my deal memos, you can apply there.

And if you want to pitch us on being in the syndicate, you can do that as well at the syndicate.com as a founder. So today on the program, I've got a really interesting cat who I met when I was in New York. And his name is Scott Lynn, and he's got a company called Masterworks, which you can visit at masterworks.io. And just like startup investing became more democratized, not fully democratized, but more democratized when Angelus Seed Invest and Republic started doing SPV special purpose vehicles, which meant that many investors could invest in one startup that was private, not a public company, but

you know, Uber when it was private, not Uber when it was public, or Netflix or Amazon when they were private. Imagine you could have invested in those companies. It's a pretty cool idea, right? And so we've been working on that. We've done 130 or 140 deals with our syndicate. It's got 4,000 people who are members of it. It's actually the largest syndicate in the startup space. But Scott is doing something different with Masterworks. He's taking an even more opaque, even more confusing, confounding, and difficult to wrap your head around as a neophyte. category of asset, and that asset is art. And he's going to talk to us today about what he's trying to accomplish by democratizing the art world. Welcome to the program, Scott Lynn.

You heard my opening there. What did I get anything wrong and explain to us what Masterworks is? And the domain name is I.O., right? Yeah, Masterworks.com. Got it. So explain to us what you belt. Yeah. I think that opening was right. So if you if you look at the art market today, the total size of the asset class is roughly $1.7 trillion, $68 billion in art sales every year. But the only way that you can invest in it is if you have millions of dollars to buy a painting. So to us, it just felt like this natural asset class that needed to be democratized. We were the first company to securitize a painting. So you can go to masterworks.io. You can look at individual artworks and you can invest in paintings by buying shares. And then you can trade

shares on our secondary market. So, you know, it's very similar to how you think about startups, but we just think about art as an asset class. Okay. How is art different than a startup? Well, I think if you look at the asset class, you know, there's a few characteristics that we find really interesting. So one is that if you look at art overall, what we define is, I guess, the blue chip segment, which is roughly 62% of the art market. It's art created by the top 100 artists. that segment of the market has outperformed the S&P for the past 20 years, but it also has relatively low volatility. So I think one of the differences between the asset classes is within startups, you sort of

had this dynamic where one company winds up being a home run and that sort of serves to generate returns for the portfolio overall. You know, Art has a much lower standard deviation in returns, so it's a bit more predictable. So we think that's really interesting. And we think there's a role for it in any portfolio, but you can't really allocate to it until it's securitized. So that's really why we started the company. Now, when I was in New York City in the late 80s going to college and hanging out in Soho and living in West, West, West, West, West, Chelsea on 26th on the West Side Highway, we would go to art openings. And art was kind of this, you know, like, interesting little community and Keith Herring and Andy Warhol and these pop artists, basketball.

You know, we kind of had just lived through their careers, I guess. They were in recent history. People knew those people. But art wasn't that big of a deal. And then something changed in the 90s or the early 2000s. Am I correct? And art became an asset class, not just like a pursuit or something people were passionate about in terms of buying art, but it became a big business. Am I right in that outsider's view of the market? I think you're right. So we, you know, so I've been collecting art since I was 19. I have a top 100 collection of the U.S. I know the market really, really well. And the thing that I recall changing, which is maybe not surprising, is the internet. So historically in the art market, when you would go to a gallery and you'd ask a dealer,

hey, how much does this boss get cost? They would say, well, it's, you know, it's a $3 million or a $3 million painting or it's $2 million painting or whatever it was back then. But you had no real way of verifying that. So until the advent of a company called ArtNet, which really tracked auction price records for artists, there wasn't any transparency in the market, which I think made it hard for anyone who really looked at it from an investment perspective to get behind it because you really just had to trust insiders on what things were worth. So for the past 20 years now, we've had, you know, we've had a world where the entire art market has been digitized, for lack of a better word, and there's a massive data set that the majority of the art market trades through

public auctions so you can get, you get data on, you know, over half of the sales. And I think a lot of people have just dove into that data and realized it's an interesting asset class. When did it become a major asset class that drew in, you know, hedge fund, managers, billionaires and that kind of group? You were a dot-com or you were an entrepreneur when you got into it, correct? Yeah, I mean, it was definitely after I got into it. So I would say it was probably somewhere between 2005, 2010, you know, right in that range. is probably when you heard about hedge fund guys coming into the market.

You know, today you hear a lot about the $100 million plus paintings that sell. It's definitely changed. And why did those money people come into it in your estimation? Were those big finance individuals enamored by the art itself, the commerce aspect of it, the asset class or was it ego? What was it that drove them to want to run up the prices? in art and to allocate some significant portion of their wealth to it. I mean, look, you know a lot of these guys.

I know a lot of these guys. I think initially, definitely it was for investment. I mean, you know, you look at even people like Steve Cohen who have billions and billions of dollars in art, you know, he's not a guy who does it just because he likes it. Right. It really is the performance of the asset class. And which artists are performing? So if I wanted to own a Picasso, which you own a Picasso, right?

Is that true? Yeah, Masterworks doesn't have one. I don't have one. I have one Picasso in the past, but not currently. So, you know, a Rembrandt, a Picasso, a Warhol, and then up into today, I'm wondering which one would accelerate the most, because when I look at my type of investing, the place where my entry point is, you know, in the first year or two of the company. And that's when we get the highest multiple.

So the multiple on, you know, an Uber or a Google or a home run like that can be 500x to, you know, low 1,000 X, 2,000,000 X, 4,000 X. And then the next group of people are looking for, you know, a 200 to 500x. And then after that, companies go public and people looking to double their money every two years. Is there some sort of pattern like that between an artist who's making art the last 10 or 20 years, the Basquiat, and then before that the Warhol, and then all the way back to the Picasso and the Rembrandts? Yeah, it's a really good question. So one of the things we did when we first started Masterworks is we created this proprietary data set of returns in the art market. And for those listeners that are familiar with like Kay Schiller for real estate, it's a very

similar way to construct art market indexes within the art market. So we could understand performance by segment, performance by artist. And one of the very first learnings, which I think is fascinating. And most people in the art market still don't understand or appreciate this is that returns in the art market tend to follow research. meaning if you look at an artist like Rembrandt, you know, and you buy $10 million rent today, there's one for sale next week for $15 or $20 million, that painting will probably appreciate somewhere between 1 and 2% a year.

So it's a store of value in a way. It's a store of value in a way, you know, maybe I don't even know if you can necessarily argue that. It might be depreciating asset with, you know, when compared to the dollar or other, you know, you know, stocks, equities, yeah. Could it be over time. So then you sort of fast forward to art that's more recent. And if you look at art created after 1970, just as an entire bucket, that segment in the market returns about 11% a year.

Ah. So there's clearly a trend where returns follow recency. Now, obviously, the more recent something becomes, the more volatile it is, the more speculative it is. Sure. But there's, there's, it's very, very, very difficult. to earn double-digit returns in today's world for art created before World War II. The only exception of that is probably Claude Monet. But it, you know, it's...

Why is Monet an exception? You know, Monet sort of stands out from other Impressionists. He's the largest selling artist out of any artists last year he sold four or five hundred million dollars. He just really has a separate market on his own from other impressions. for whatever reason, I guess just global demand. But yeah, I mean, if you're investing in art today, you definitely want to think about art created in the last 50 or 60 years. Okay.

When we get back from this break, I want to understand how COVID has hit the business, if at all, and also globalization, because I know that real estate was severely impacted on the upside from the Japanese, the Russians, and then the Chinese getting involved. I'm wondering if there's a pattern there as well with the art world. when we get back on this week's startups. Listen, you all know LinkedIn Jobs is amazing, but I wanted to start today's ad read with an amazing story from one of our founders

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All right, let's get back to this amazing episode. Hey, everybody, welcome back to this weekend startups. I'm your host, Jason Kalakannis. You can follow me on Twitter at Jason. And there's a link in my bio where you can click and see all the different things. do. Our guest today is Scott Lynn, and he is Scott Lynn on the Twitter, two T's and L-Y-N-N. And he founded Masterworks, I think, two or three years ago. And I'm not sure how many paintings. How many paintings so far have you securitized, Soul Chairs in Ballpark?

Yeah, I think we're on 18 or 19. At this point, yeah. And before we went to break, I was curious about globalization and the pandemic. These are two, you know, huge black swans, I think. We did. know Russian oligarch money, Chinese money, would become such a factor in the real estate market on the upside and now maybe perhaps the downside in New York and San Francisco, certainly. Is that why the market's gotten so big, hedge funds and then maybe money from international places? And then what about COVID? Yeah, there's no question that China has positively impacted the art market. So China used to be, you know, get these numbers precisely wrong, but I think 10 years

ago, China was close to zero percent of the art market. Makes sense. Today it's roughly 25 percent. So there has been a huge influx of capital from China. You know, it's interesting in terms of COVID. So we, there's a couple of dynamics that we've noticed from COVID. So one is we had a big question going into COVID, whether or not our prices would be affected.

We had done a bunch of work with Citigroup at the end of 2019 to look at correlation between art and other asset classes. we concluded the correlation between art and the S&P, for example, was 0.14, essentially uncorrelated to almost every other asset class you can imagine. So our hypothesis was that our prices would not be affected, but this is a black swan event, and we didn't really know. So what we've seen now, after the past two weeks have come and gone, auctions have started up again.

Two weeks ago, there were 20 artist records. set. Prices were higher than they've ever been. Volume did come down. So we obviously saw volume decreased because auctions didn't occur as much in the first half of the year. Galleries were closed. So volume came down, but prices were definitely, are definitely still increasing. The second dynamic that we saw, at least from a Masterworks perspective, is more interest than ever in diversifying away from the stock market. So, and I think a lot of online investing platforms have seen this where investors now are finally saying, I have to do something else to have money other than just keep it in the market, and they're looking for other alternatives. So we've seen

just a huge influx of investors coming to the platform, looking for other ways to allocate alternatives. This makes sense because if you look at where you could put money, I've been talking about this on CNBC and on the podcast and with smart people, certainly people who are smarter than me, about what's going on in the market. And as best as I can tell, You probably don't want to own dollars when there's a money printing machine running at high speed. And you may not want to own commercial real estate when everybody's working from home. Government bonds, municipal bonds, when cities might go bankrupt, sound like a dicey bet. And so therefore, equities in companies that will exist in 10 years seem like a good one.

And then alternative asset classes, whether it's startups or art, that also seems like an interesting one. if you've got a 10-year horizon, what should the, that's just my personal, you know, a thesis, and you get what you paid for there. It's a free show. So you paid $0 for that advice, so take it for what it's worth. But what do you think of my general thesis there about what's happening in the market just as an investor yourself? And then what do you think the holding period should be and my expectation if I am buying art? Yeah.

I mean, look, I personally struggle with prices of public equities right now. It doesn't make any sense to me looking at everything's going on around us. It's not makes sense to anybody. I think every smart person says that. So, yeah, I mean, it's difficult to figure out where to put money. I mean, if you look at some of these artist markets that we track, you know, they range anywhere from 8 or 9 percent of historical returns to 30 percent plus. We tell people that investing in art is sort of like buying a car.

call option on the ultra wealthy for better or worse. Like art prices are going up because the top 1% is getting wealthier. So if you believe that trend continues, then you probably believe that art prices go up. In terms of hold period, you know, what we tell every investor on the platform is to think of a whole period of at least three to seven years. It's very hard to buy a $5 million painting in today's world and sell it six months later at a substantial gain, very similar to how it's hard to buy a company and then flip it very quickly for substantial gain. So returns really do require whole periods. That being said,

one of the things we've done, which I think is super cool. And it's one of the core focuses of the business is launch secondary markets. So we now have people trading shares and paintings pretty frequently. And it's building more and more activities. Really? That's fascinating. Yeah. So we see a world where people can trade in and out of these paintings, just like, traded and not a company is, which works, you know, much better, obviously, for smaller retail investors. I'm surprised it's a three to seven year horizon. I would think it was more like a decade-long horizon, but that's just how my mind is

programmed to think from my own experience of, you know, startups because the great stuff seems to happen plus seven years, you know, seven to 15, kind of, right? Well, and I think, you know, we, so we have two different risk buckets that we've created and we focus on. One is sort of this blue chip bucket. So household name artists like Bosquiat, Warhol, et cetera. And the other is what we call our B bucket, which are mid to late career living artists, important artists like Gerhard Richter, Alex Katz, Cessley Brown, people who, you may not necessarily know their name, but in the art market, they're selling $50 million, plus a year.

They're big, they're important, but they're not necessarily household names. Those artists, you can argue, you could require a longer whole period for just because they have more room for price appreciation. And I know this is kind of dark, but is it that when an artist dies, their portfolio doubles overnight? That's just an outsider's, I've heard that as an outsider in the industry where when somebody passes, their music catalog goes up in value, which is because it becomes finite. Is that true or not? Yeah, you know, I get this question all the time. So the way that I would think about it,

one of the amazing and characteristics about art as an asset class, unlike I think any other asset class is you have continuously declining supply. So during an artist's lifetime, they make a bunch of paintings. When they pass away, those paintings are then owned by collectors. And collectors eventually donate them to institutions and the supply declines. So the best example, example is Jackson Pollock. If you look at Pollock's drip paintings, which I've owned two of in the past, so I know it's market really well. There's 21 drip paintings left in private collections. And you sold your two? And I've sold my two. Yeah. What did you buy your two for and when? And then when did you sell them? Let's get the pain out of the way. You have to tell us. Come on.

I don't want to go on that. When did you sell them? Ballpark. When did you sell them? You know, so I own two different examples. You know, both sold within the last 10 years. years, probably five to ten years ago. Okay. So you did well on them, but now do you have sellers regret on those two pollocks? You know, I would say no. I think I think I sold those. I sold those well. I said this was the right time. But, you know, so going back to my example, so there's 21 left in private collections. None are great examples. There's maybe one or two that are great examples, but generally not are great examples, but they're still selling for $20 to $30 million. Wow. So the scarcity

factor really drives returns over time. So when an artist dies, the only thing is happening, there's nothing magical about them dying. It's just that they can't produce work anymore. Right. And the scarcity dynamic begins at that point. And that takes 10, 20, 30 years to play out, something like that. Even longer in certain cases, right? Like, Monet is still going out of circulation whatever 100 years later. What is the most valuable piece of art in the world right now? Even in an institution, like the Mona Lisa, is that the most valuable piece of art? You know, it's a great question. I don't know what people would consider the most valuable piece of art in the world today.

I mean, obviously, most of your listeners have heard of, like, the Da Vinci that sold for $450 million. That was the most expensive painting effort to sell. Was that the little tiny one that recently, that was that Leonardo DiCaprio's father or something was involved in the sale of it or something? No, it was, I think it was a friend of Leo's, but who really? orchestrated that sale. But yeah, I mean, that was an interesting painting because obviously after that painting sold, there's lots of controversy around authenticity, who the painting was owned by. Right.

You know, in today's world, it's very typical for us to have $100 million painting sale, I think. So if the Mona Lisa, would that be a billion dollar painting? I think that could be a billion dollar painting. And I do think we will see in the next 10 years. I mean, this is hard to think in the context of COVID today. But I do think in the next 10 years, we'll see a billion dollar painting sell. What? A billion dollars for a painting. That is extraordinary. What painting would that be? Do you think? If you had to place a bet on it,

would it be a Monet? Would it be a pop artist? Would it be a Warhol? I think it could be someone like a Pollock. I think it can be a decooning. You know, it really depends. But I do think, I mean, I do think what happened. The idea of a $450 million painting selling 10 years ago, I mean, people... I mean, people... That's just insane. People would have said that would never happen. Okay.

I'm going to ask you a question that I want you to think about when we throw to a commercial. We call this a cliffhanger. Okay, that's a little tease here. Why would the... Why wouldn't a institution like MoMA or the Louvre securitize the Mona Lisa for a billion dollars and use it to buy a billion dollars in new art under the condition that it must live forever? in the Louvre when we get back on this week and stars. Hey, everybody, I want to tell you about Republic's new product.

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And you can see that at Republic.co. Now, as I've said many times, I believe that angel investing is a great thing for society and that everybody should have at least the opportunity to do that. And the team at Republic has launched this new, very unique profit-sharing security token. Okay. And this lets investors share in the upside of companies that raise money on Republic. And Republic has over 700,000 members now. So when a company chooses to raise money on the Republic platform, Republic receives an investment, basically upside potential in that company. We all know how that works, or you should. Well, if they do have

an exit, then they're going to distribute some or all of that cash to the Republic core. That's the technology hub of Republic. And they're going to give that back to the holders of the Republic note. Well, more than 200 companies have already raised money on Republic using regulation crowdfunding. And one of our company's balloon, which went through our accelerator, and that we syndicated and we put money in. Republic fell in love with that company as well, and they put some money in. So we've done business with them before, and we love the team over there. They're really in it for the right reasons. And right now, on the accredited side, they've raised money for companies like Robin Hood, Carda, and Relativity Space, right? These are names you've heard of. For now,

it's only accredited investors, but non-accredited investors can also right now make a reservation and reserve their spot for, you know, if they are able to do a public sale of these using Regulation A, which I have a sense that they're going to do at some point. So whether you're accredited or non-accredited, I think it's worth checking out at republic.com slash note. And as always, terms and conditions do apply. Congratulations to Chuck and Ken. I know you worked really hard on this for a couple of years now. And it's great to see it come to fruition. And I'm always super open to new ways to fund these companies and new ways for people to participate in the funding of companies. And so great job getting it launched.

And I will be participating and you should check it out. I can't tell you to participate, but I can tell you you should check it out and get educated. Republic.com slash note. Okay, let's get back to this amazing episode. All right, everybody, welcome back to this week and startups. I'm your host, Jason Calacanis. My guest today is Scott Lynn of Masterworks.io. Very cool company.

and when we left our hero Scott for commercial break I gave the cliffhanger which is if you succeed and it feels like you're on your way to succeeding I know you've got like over 50,000 investors on the platform and you've done now getting close to two dozen pieces of art

eventually if you build the stock exchange for art which I think you're on your way you may be 1% of the way but I think you're on your way why wouldn't MoMA or the Louvre start putting paintings on, or pieces of art on Masterworks.I.O. or another platform, whatever, or securitizing them under the condition that they live where they live because custodia, nobody wants these things to be in a, you know, a closet somewhere. They should be enjoyed.

Could you see a world in which the Mona Lisa was securitized and people could trade shares in the Mona Lisa and then they could build another Louvre based on, you know, the Mona Lisa or put, you know, a million French students into art class for the next 50 years to create the next great artists? Yeah, I think, I mean, I think that's a, it's a great question. It's one that we've thought about a lot. The reality is these institutions, they're sort of balance sheet rich and income poor, right? Yeah. So anything that they can do to raise capital from their balance sheet or effectively their art, I think they're interested in doing. So it is, it is something that we've thought about. We've had,

frankly, very small institutions approach us about that. That makes sense. I can see a world where we're, you know, we're living with these assets, these individual assets that are effectively securitized and tradable on platforms. We think it's really interesting. It would seem to me that these colleges, colleges own a lot of art, and they're up against it right now. Oh boy, you know, with students, you know, and some of them need endowments and they own art and their only choice is to let it go. But to be able to sell 50% of the artwork and keep 50% of the appreciating asset, that makes total sense. Have you had people who wanted to do some kind of hybrid like that, take their entire collection, you know, if they have 100 pieces of art

and put it into a portfolio in, you know, one offering, you could have Harvard's entire collection of art and, you know, they don't need the money. But, you know, pick another college that maybe did, or another institution that did, a collection and an index of art? Yeah, we've definitely had interest in that. I mean, I think the challenge that we have with that is that usually those portfolios wind up containing things that we just consider not investment grade. So we, you know, we like to pick and choose paintings that we think are the best investment opportunities. But, you know, at some point, we will do portfolios and paintings. We just haven't, we haven't got there yet. Yeah, Rally Road is another, you know,

interesting person we've had on the podcast. I'm sure you're aware of them. They were taking cars and then auctioning them off. And they're also in New York, right? They have a gallery in Soho. They have a gallery in Soho. Yeah. And we know those guys as well.

I mean, they're super smart and they have a great product. And so the life of the painting or the car after you've taken custody of it, are you going out and buying these in advance and then offering them to folks? Or are you buying them like with the agreement that if you're, if you hit a certain threshold from the person selling it, that you'll be able to close the deal? How does that all work? And then what do you do with the art?

Is it in your apartment or in your office or do you loan it to a museum? Because that's scary to own a $10 million piece or a $5 million piece, isn't it? Yeah. So there's a regulatory requirement that makes us buy the paintings with balance sheet capital. And then we turn around and we effectively sell them off to investors. So before we take a painting public, we have to identify it. And then we are, you know, we're actively working with institutions to take these paintings on permanent loan. We really don't want to be in the business of showing paintings.

I mean, as you mentioned, we have a gallery in Soho, so you can come by the gallery and see the paintings. But, you know, when we start thinking about a world where we have tens or hundreds of paintings, it's not really practical for us to continue to display them. Or you could become the museum. I mean, that's the other possibility is that Masterworks could become the Disneyland of Art or the Disney World. of art or, you know, the Museum of Ice Cream, you know, kind of where people pay for a ticket. Is that realistic or is that just a crazy idea? I think it's a bad business.

Yeah, selling tickets to art, like it's maybe not going to work. And the idea that somebody might want to pay to house it, that's not realistic either, is it? So prior to COVID, we did have a lot of interest from real estate developers and potentially leasing paintings for new condo buildings of their building. You know, obviously all that interest has gone away with COVID. But I, you know, I think maybe there's something there. It doesn't strike me as a huge near-term, near-term opportunity. What about young artists?

It would seem to me, you know, I'm in the business of young artists getting in there in year one, year two. Could you not create an open-ended portfolio, maybe for your most elite clients where you said, hey, we're going to have an opportunity fund for Masterworks. It's $10 million. you can be part of it. Every 100k is 1%. I would like to be part of something like this. And we will then use our algorithms,

use our expertise in the art market because you have now all this insider information. You have all this, maybe that's the wrong word to use, but you have all this knowledge from the history of art. And could you not create a $10 million fund where you set your experts,

your curators on, you know, just buying, let's call it 100 paintings for 100K each and we really go along. Yeah, so I mean, we definitely want to do that. We think that's obviously, as you mentioned, one of the more interesting segments in the market from an investment perspective. I talked about those risk buckets we have, sort of the A bucket, the B bucket. This would really be a C kind of very speculative bucket. We have to be a little bit careful.

I mean, we do take retail, retail money. We do people investing from IRA accounts. So, you know, we're cautious of things that are speculative today, but I agree with you. I think it's definitely an interesting segment in the market that we should give people exposure to in some way at some point. And you're allowing 100% of Americans to participate, correct? This is like a public offering. What is the category you do this under? Yeah, so this is a reggae public offering.

So if you go on the SEC.gov website, search for Masterworks. You can read, you know, the offering statements. And it's actually super cool. I mean, we were the first company to securitize a painting. It took us a year and a half to get the first vehicle through the SEC. It reads just like an Uber S-1, right? But it's a painting going public where we securitize it. And then we sell shares and there's risk disclosures and everything like that that you would expect.

Is there a possibility that this would be on the public markets and traded like on E-Trade and Robin Hood? Or is it better suited for these more small, you know, offerings? Yeah, I think for individual paintings or paintings that are less than, say, $25 or $50 million, it's hard for them to be exchange traded just because of the expenses involved with exchange traded securities. Oh, right. That costs millions of dollars a year to have accountants and appraisals and all that stuff, yeah. But you could see a world where there's a fund that's exchange traded that gives people

exposure to these underlying vehicles or a pool of assets at some point. In an average painting, I think your median would be $2 million or $3 million your paintings? Yeah, I mean, it's going up. It's probably, you know, I would say now our range that we're focused on is sort of in the, you know, two to $10 million range. So our average now is probably $3, $4 million. Okay, let's pick $4 million. How many individuals participate in a $4 million offering on average ballpark? Well, you know, I would say the average investment right now is somewhere around $4,000 or $5,000 per painting per investor. So we leave in this weird world where we're not, our investors are not necessarily very small, kind of a couple hundred dollar crowdfunding like investors, but they're also not very large, $100,000 investors. We've sort of found this sweet spot in the middle.

And then we're, you know, we're seeing people invest in multiple vehicles. So our average investor might be investing $25,000 across a number of paintings. That's exactly what we see at the syndicate.com. the average investor, depending on the deals, $4 to $6,000, which I always tell people, and we're only accredited. But for an accredited investor, that's basically like a business class flight for them.

And then sometimes you have people who, you know, have a little more money, they want to put $20K into a deal or even $50 or $100. But for them, it's probably like that's the cost of their Christmas vacation or whatever. Yeah, that's interesting. So we, I mean, we definitely seem to be, have a larger check size than most online investing platforms.

Yeah. We've never really been able to figure out why that is. It's got to be because people who are interested in art are just probably a little bit more successful. I would think so. Like if you were serious, I think the Raleigh Road investors, you know, probably have a little bit of a smaller ticket size because they're selling, you know, cars, which are, you know, accessible to a much wider aperture of investors or just, you know, the community's wider, right? Baseball cards, you know, are going to be traded like this event. eventually and that'll be really super interesting. Okay, when we get back from this final break,

I want to know what are the characteristics that you look for in artists or art or segments? If we were to break it down, that signal to you that there might be appreciation in the future. When we get back on this week, start on it. Hey, everybody, are you ready to upgrade your workstation? It's time, and I can get you up to 48% off right now if you go to Dell.com.

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for decades as well as running a great company and providing this great support to the founder community that's part of this week in startups. It really means a lot to me. Okay, let's get back to this amazing episode. All right, everybody, welcome back to this week in startups. If you love the podcast, thank you so much. Go to this week in startups.com slash love and we will beg you for a review on various platforms. We're not above begging. When you review the podcast, it moves up the ranking, so that's great. And if you want to join our super secret Slack group, where founders help other founders grow their companies, you simply go to this weekinstarups.com slash Slack. And I hang out in there. It's a great way to meet me. I'm in there all the time.

We have a book club in hashtag books and all kinds of founders helping each other, different regions. We have a bunch of people from London, Japan, Australia, Africa, and all different startup communities forming there in the Slack. So it's a lot of fun. And it's a little bit expensive. We charge zero. dollars like everything else here. We make our money like Scott investing for the future. Scott, what is it that you look for or your team in specific artists or art that indicate that it's going to hit that 11% or greater, whatever, you know, I know you can't make any promises here obviously, but you said there was like an 11% average or something. What are the indicators

that somebody might be a strong artist or art category in the future? Yeah, so I guess there's a couple different ways to think about this. One is in an established artist market, someone like Monet, which I mentioned earlier, there's so much data, right? So there's been over 100 years of public auction sales for Monet. You know, now he's selling more than four or five hundred million dollars a year. His standard deviation in returns for your finance savvy listeners is about six or seven percent. So hugely predictable return pattern if you invest in a Monet. He's actually one of the best risk-adjustive returns, even though his absolute return is lower in the 8 or 9% range just because it's so predictable.

So for someone like that, you know, we just look at the 100 years of data, you know, draw, draw a line and kind of predict where he'll be in the future. For younger artists or what you think of a startup artist, it's a much more difficult question. And there's a handful of things that we look at. So we generally group these into what we consider cultural significance. And cultural significance is usually defined to us as what gallery represents the artist. So mega galleries tend to influence artist careers in a huge way. And there's a lot of people that simply buy artists that certain galleries represent because they know those galleries have the machinery behind them to make that artist's career and increase prices.

We look at what institutions own an individual artist. So the more institutional support an artist has, we like to think the more sustainable that artist market or their artist's career is. Then we also look at who else is collecting that artist. So are major influential collectors buying that artist. And those are the three things that are early signals that help understand where an artist's career could go. But as you mentioned, it's complicated in the art market because there's lots of, you know, it's a global asset class that spans multiple countries from thousands of collectors and as controlled, you know, in lots of different ways by big galleries and big institutions. So

sometimes it's very, very hard to predict. An interesting data point is if you look at the top 100 artists over the past 20 years, there's only been three artists, Damien Hearst, Murakami, and Jeff Coons that have actually had negative returns. Is that because Coons made too many pieces of art? Is that like just a supply thing? It was too much supply? With Coons and Hearst, I mean, both of them have such commercial markets where, you know, I mean, they pre-sell the work, they, you know, they sort of manufacture prices in the work, that investors support the market. There's a lot of, uh, they maybe overplay their hand. Let's just leave it at that, right? A little, maybe overplay their hand, yeah.

I mean, a cynic would say that it's a rigged game with some of those artists, perhaps, right? And there's players who are playing the game at a higher level with better information than you and I, or certainly me, maybe not you. Yeah, and there's no question of that that does occur, but I mean, at the end of the day, it's a, it's a 68 billion dollar market. You know, it's a 1.7 trillion dollar asset class. So it's not, it's not obviously only an insider's game. But it is, I think it is interesting that once you reach a certain level as an artist,

it's very hard for you to kind of fall out of that position. It's really rare. Right. So do artists create art? for the money and how savvy are they in today's world in terms of the value of their art. It always seemed to me like if these artists were just amazing at what they were doing, why would they not go direct, you know, and why do they even need a gallery at a certain point? Do they go direct?

And then does that create an opportunity for Masterworks? Because an artist could say, you know what? I could just put my next 10 paintings on Masterworks and pre-sell them through your platform because you have 50,000 people there. Yeah, you know, I'm friends with lots of artists. I'm trying to choose my words carefully. So, you know, I think that our approach from an artist's perspective can be very interesting, right? because an artist, artists generally don't start, they don't become a career artist for money, right?

Like the odds of becoming a successful artist in today's world are very, very low. I mean, it's one of the worst, it's probably one of the worst career paths. Like being a musician or something? It's like being a musician. So they're not, they're going into it because they love it, because they believe they can make an impact. And they're not generally doing it for money. And obviously is they become more successful?

I think we've seen lots of examples of artists. that are in today's world very, very commercially focused and very money driven. But, you know, one of the things about our platform that I think is interesting, it has this conversation with a lot of artists, is if you really believe in a world where you're making work for it to be experienced, then you don't want to be selling paintings into, frankly, ultra-wealthy households scattered across the world. Like, you want it to be experienced by the general public.

So you can, through a structure like this, theoretically sell work, but then sits, as we talked about before, in a public area, in an institution, somewhere where people can see it every single day, which I think is kind of the best of all worlds for an artist. So this is interesting because I, when I started to make some money, I started getting some artists hitting me up, you know, like, or people who are artists, friends of artists, whatever. And they were like, hey, can you buy this and then donate it to this museum? And I was like, what? You want me to spend $100,000 on that and then donate? They're like, yeah, you know, we have a commission, whatever. I don't understand exactly how it works, some tax break or something. I've never done it.

But you're right. They want to see it displayed. So like smart contracts, and we've, you know, talked about that for years on this podcast, probably one of the most interesting things about crypto is smart contracts. A smart contract could be made where somebody who's an artist could say, you know what, I'm doing 10 paintings this year. two of them are going to be on Masterworks, eight of them are going to be available to private collectors,

and the condition of those two that are available on Masterworks, these new pieces of art, is that, yeah, you can own shares in it, but it has to be in public view 99% of the time or whatever, or 100% of the time. And what does it matter to the person buying the shares? The shares are worth more if they are, I would think, on display because people could enjoy it more.

Am I wrong? Yeah, I think it's right. I think it's right. I mean, obviously, the painting is prominently displayed, particularly a great institution. It's good for the painting. It's good for the artist. It's fascinating what you're doing. How do the galleries think about your existence? You seem a little disruptive, and they don't like disruption. So, you know, the great thing about the art world, and I mean this in a nice way, is that, you know, I spent the last 20 years in tech working with some of the smartest people in the world, right? like people that I feel like I struggle keeping up with. Don't I know it? The art market is just not like that, right?

I mean, it's this really large, generally unsophisticated market. So there's not that people just don't think much about competition. They don't think about differentiation. Got it. It's not that sharp elbowed yet. Yeah, I think nobody's really tracking us, frankly. That's interesting. And what does a big collector,

do with their collection when they die. And, you know, these people who are, you know, there are a number of people. You said there's like a thousand people who are, you know, own some large percentage majority of the art that's being transferred back and forth. What is, is this like some way to hand down inheritances or what is the end game for somebody who builds up a huge collection? You know, I mean, the reality is most people today that have $100 million, billion dollar, billion-dollar-plus collections, donate it when they die. If they don't donate it,

they usually get sold in an estate sale at auction. That's a, that's a huge portion of revenue for the auction houses. But, you know, I would say a lot of very large collectors are not, they're not actively trading. They're really buying and holding. It seemed to me that because you're doing this, a lot of the shenanigans with people buying paintings and, you know, money shifting hands. This is all going to be much more transparent and on the up and up. That's a good thing for the art market, right? We think it's a good thing. And it's interesting. There was actually a new law introduced in the EU, which now is coming to the US, I think later this year, next year for K.C for the first time in the art market. So dealing

with intermediaries, people are required to disclose the in-buyer, sorry, the in-seller, which has never really happened before. That in itself is very disruptive to the art market because there's lots of intermediaries. So I do think transparency is a good thing. I mean, we talk about it all the time. I mean, these are SEC registered offerings, right? Like, it's the highest standard for an investment product there is. And it's the only way you can really invest in the market in a way that you know is totally

transparent and everything's disclosed. You know, we have a lot of similar experiences because I am always thinking about I need to make sure I diligence and make sure that if I'm going to invest in a company that I make a good investment because I have LPs in my fund and then the syndicate, I'm sharing it and, you know, it's their decision to make. But I want to make sure I'm putting up that I'm investing in great stuff for myself, my money and my LPs and my funds. And I want to make sure if I'm sharing it that we've done as much as we can with a really volatile, very risky, put one percent of your money into it if you're rich, maybe 5 percent of your rich is what I would tell my rich friends

if they asked, like keep it small, you know, and hope for the best, only invest what you can afford to lose. You don't have that exactly because there is a bottom, I think, for certain artists. Like a Monet is never going to zero, right? I mean, it's, it'd be hard to imagine a world in which a... If a Monet goes to zero, we got bigger problems.

It's a zombie apocalypse. Yeah, I mean, so we look at loss rates for all of our artists. We publish loss rates, and then we publish magnitude of loss as well. So, you know, loss rates for... What's that happened like, yeah? Loss rates for Blue Chip artists, are usually around 10% right.

So 10% of the time people lose money. When they do lose money, it's 20, maybe 30% at most. So, you know, again, the date on the asset class is really interesting for certain segments. Is our, what do they call them? Counterfeits. Is that a thing in art? I know there was like a case of this guy I knew in the 90s. I forgot his name, but he was making fake paintings or something.

something in China or whatever. He was part of the pseudo.com crew back in the day. And they were doing fake paintings and then selling them. Is forgery like a thing in paintings that people have to look out for? Or is it really an edge case? Yeah, I'm on the board of an organization called the International Foundation for Our Research, which is actually the leading art authenticity nonprofit. So we deal with it.

We deal with it all the time. It definitely happens. I would say it happens at the lower end of the market. I mean, there are certain examples. that you hear of a million-dollar-plus forgeries, but they're pretty rare because most of the time you know, you're buying a million-dollar-plus painting, $5 million-dollar painting, $10 million painting. There's pretty good exhibition history, provenance, you know, it's been at museums. It has a long track record. So, you know, from time to time it does happen, but it's pretty rare. Yeah, you'd have to be

somebody who on the other side was unsophisticated or greedy, where they're like, oh, you know, here's a VHS machine and then some of you buy the box, you get home, it's filled with rocks. That was like the scam in the 80s and 90s when I was a kid. Buy a CD player of somebody in Times Square and you get home and it's an empty box. Yeah. And interestingly, it's in the art market. Most of the time that those large frauds have occurred, it's because there's two people that trust each other implicitly. And the buyer doesn't diligence anything.

They are very wealthy and they pay $10 million for something. It's just not real. It sounds like there are no. I mean, we had our own out here. where people didn't deal with diligence. The right investors, my understanding was they had asked to diligence, Theronosis Technology. And, you know, we had John Carrier, we were on the program at the beginning

and the end of that saga, or what is the relative end of it going away? We don't know if she's going to go to jail or not. But he said, like, people just, she wouldn't let people diligence it. So the people who were investors in that company were people who literally didn't diligence the technology in a billion-dollar company, which when you think about is crazy, right? Like, who does that? You have to lush your mind.

What kind of training do you give people when you're onboarding them? I'm asking this because, you know, we've recently had a lot of people who are signing up for our syndicate, and I've watched you. We do an onboarding call. I send them, we encourage them to watch our podcast. How do you think about educating people on, you know, when you're running a platform like this? Obviously, people can do what they want with their money.

They bet on sports. They bet on stocks. They're going to bet on art. They're going to bet on sports. and it is a bet. You're picking what you think is going to be the winner. It's your choice as a consumer. But I think you and I both share that we want people to make educated bets as best we can.

How do people learn and how do you educate people? There's really two ways. So we found that since the asset class is new to frankly almost everyone, we really require that everyone speak to our team to onboard them. And that's just a conversation about what is your investment objective, what is your risk tolerance, what type of painting should you be investing in? how much you think about allocating. So that's just one thing that we've learned is really a requirement for new investors. 10 minute, half an hour onboarding call? Half an hour onboarding call.

So that has a serious cost to you. You're spending money because you're doing that whether they invest or not. It has a serious cost to it. I mean, we have a team of 15 people now that do that every single day. Wow. So you might get somebody who's like, yeah, I'm betting my entire retirement and you can say, hey, pump the brakes. That's not a good idea.

Right. And we really have an obligation to in those scenarios. The second thing that we do, which is really cool, and it's the first time this has ever been done, is we had a team. When we first started our research group, we took a team of 25 interns, and we went out and we literally purchased auction catalogs from 1950 through 2020, 70 years. And we had kids go through these auction catalogs and find every single time that a painting was purchased and then sold publicly. and how much money that collector made or lost on that individual transaction. And we found 80,000 paintings that we have returns on. So now you can go to the Mass Works website.

You can click on Price Database and you can search by artist's name and see individual paintings and how much money people made or lost when they purchased those paintings throughout history. And it's a great qualitative way to quickly understand the asset class and quickly understand what artist markets make people money and where do they lose. money. What's your goal for, that's an amazing thing that you did, by the way. So we actually have started now, we created a Slack channel for the top like 250 members of the syndicate just to discuss the companies we're investing in and why I picked them. And then we just did a demo day. We call it Remote Demoday.com where we showed seven companies to the investors and four of them

were ones we were investing already, but three were ones who just applied. And we let the syndicate show interest in those. And we said if it breaks 200, it'll be like a community consensus that will invest in the company. Like we're literally making a decision that it's not a Jason Calacanis decision. It's the syndicates decision.

You're voting with your dollars if you want to do it. And so it's a little bit of an experiment for us, but it's worked out pretty well, actually. Have you thought about that where you let the audience say, we want to own this artist, we want to own that arts,

and then you go find it, you know? We have thought about it. I mean, today, to be honest, it's just our investor base is so new to the asset class. We just don't. It was like us 10 years ago. Yeah, most people are looking to us to make those decisions. But over time, I mean, I think that, you know, in particular, as we expose more data to people. I mean, we have people asking us for data all the time because they just want to dive into this asset class that they've never really understood.

And even, frankly, even firms like Goldman, you know, like we've spent hundreds of hours with Goldman. ramping them up on art as an asset class. So in today's world, nobody really understands the asset class that well. You should, you know, what I did was I wrote a book about it, Angel. And then I also host a course called Angel. Dot University. And it's a three-hour course. And we do it for free.

We just ask people to make a donation to charity. And I did it four times under quarantine. So we had 900 people do this class in the last three months. It's been amazing. And, you know, if you have that group of 50,000, some subset of them would probably like to take like a three-hour course in the history of art and really get into it because part of this is the non-financial rewards. It's the excitement of being part of something that you're passionate about, whether it's cars on Rally Road or art

on Masterworks or startups on the syndicate.com, republic, and C-Invest, etc. Yeah, I like that idea. And I think you're right. I mean, we do need to kind of take that one level deeper for bigger investors or even just more passionate investors. It's actually kind of fun. I love it because it's made me sharper at my game because they asked me questions that I never even thought of. Like, you know, what if I want to go really fast? You know, I'm like, I don't recommend it because have you heard about market cycles? Like, what if you put your investment at the peak of the market? That'd be like, you know, there's a thing called dollar cost averaging. Have you heard of it? Like, you may want to think about spreading your bets out over like at least three or four years if you're doing this. Well, this has been great. And what do you think the ultimate end game is here? You will. wind up owning thousands of paintings or indexes or you take Masterworks public itself. What is the endgame here for you personally? What's your vision for this? Yeah, it's a good question. I mean, I think right now we're just thinking about this vision of how do we create investment

vehicles so everyone can allocate, as you mentioned, a couple percent of a portfolio at art. It's never been done before. We think it's an asset class that should be in every investment portfolio. That's what we're focused on right now. And, you know, I think long term, whether that's taking Master's Public or whatever that is, we'll figure that out. But right now we're just trying to deal with the growth and kind of all of the inbound interest from investors. See, that would be the interesting thing if you could just say, I want to just own the next hundred paintings. Here's $100,000, put $1,000 in. Or here's $10,000, put $100 in each one. I just want an index of the next hundred. And then if it traded like a Vanguard fund, you know,

like that would be super interesting if you could just buy the Masterworks Vanguard fund of artists. you'd have like Masterworks, Impressionists, Masterworks, Modern, Masterworks, Speculative, or Masterworks A, B, and C, the way you sort of qualified them. And then I could say, I'm going to put 1% into each class in my wealth front account. You know, it's super interesting. And that's really the product, really, I think, that people want long term. You know, when we started the business a couple years ago, like, we were just trying to improve product market fit. Like, we weren't convinced that people really wanted an investor art. Like, we didn't necessarily know. I think, I think today we know.

that there's product market fit. So we're trying to figure out how do we build some of the products we're talking about. This is what I'm thinking about with, you know, the syndicate is like at some point, you know, we have funds, but it would be very interesting, you know, if these were public vehicles that became evergreen. How do you guys make money, by the way? Yeah, so our fee structure is very similar to probably your guys is, which is just one and a half and 20.

So, you know, we charge a management fee to one and a half percent per year. we earn that by self-deluding the entity, because obviously paintings don't throw off cash flow, and then we earn a 20% carry. Got it. So if you buy a painting for $10 million, it sells ultimately for $110 million, the investors get back their $10 million.

There's $100 million gain. You make $20 million bucks. Yeah. Just like I do. And you know what? Well worth it, because if you're an investor and you don't have access to a Monet or, you know, acom.com, which was the first one we ever syndicated.

Yeah, you're pretty cool with that. I have people tell me all the time, like, how do you find these companies? And it's like, well, I've got 12 people or sell in the company. And I've got a podcast that people watch. How do you find the paintings available? Is it just their private collectors, typically? Yeah, so I mean, it's a lot of work for very similar to how it's a lot of work for you guys. So we have two different, I guess, steps that we go through.

One is our research team using the data that I talked about determines which artist markets we think are accelerating most quickly, which provide the most interesting risk-adjusted returns. That list for 2020 is about 20 or 30 artists. So that's proactive. Now you've got a target, right? Yeah, then we have a target list of artists. Then after we have that list of artists, then we handed off to our acquisitions team, which goes out and finds examples by those artists. So today, you know, I think, I can't remember the last week we had 600 and something. paintings that we're actively tracking within those artist markets.

So you look at the offerings that we're bringing out now. I mean, we have a painting, which I can't mention, that we're bringing out in a couple weeks. It has an appraisal of $4 million. We're offering it at $2 million. The appreciation rate is just about 20%. You know, that's an incredible offering. Yeah.

So it definitely pays to kind of be all across the market, looking at every opportunity, and then just selecting the ones that we, we think are the best. Which is what a capital allocator does in the, you know, at the heart of this job, whether it's baseball cards or public equities, you know, classic cars, whatever it is, you know, municipal bonds, masterworks, what we're doing. Like, it's all capital allocation.

You got you, and the carry structure, people forget where that comes from. This comes from shipping when you would carry in your ship, you know, hall from a far off land in order to get the captain of the ship and the crew to make sure that the bounty came back from the new world. They said you get to keep 20% of whatever comes back. That's where the word carry comes from. I didn't actually know that. That's interesting.

Yeah, it's an alignment. So that number one, you know, like you're incented to make sure you get as many of those spices from the new world back to the queen, you know? and the queen gave you the money to go get the spices and underwrote the ship, and you get a piece of the action, right? So everybody's aligned in their interests. This is one of the things I love about capitalism, right? It's just so beautiful.

I just love capitalism in that way because now that I'm a capital allocator, you really think like, oh, well, what's in the best interest of the LPs? And if I do that, I've automatically covered myself because I only make money if com.com gets bought or goes public, right? We're just perfectly aligned. It's just a wonderful thing. So, hey, continued success with this, Scott. And if you want to learn more, just go to massworks.io.

And I guess you can do an introductory call. Did I miss any important questions? I think that's good. All right. All right. Stay safe. How's New York right now? How's my hometown?

Is it weird to walk around Soho? I heard it's like you can look in all directions. It's like the end of the world. Like nobody's on the street. Yeah. I mean, as I mentioned, so we're probably the first company in New York City to kind of getting people back to the office, mainly because our teams doubled in size since COVID and people haven't met their managers. It's kind of, you know, it's sort of a requirement.

But it's definitely weird. I mean, you know, New York has a strange vibe about it right now. I mean, people are still pretty, pretty on edge. You know, everyone's wearing masks. Everyone's very cautious. Good. Be cautious. Yes. That's the right thing to do in a pandemic is be cautious. Yeah, but the data in the city is pretty good right now. Like, you know, the number of cases of have gone down dramatically. So, yeah. I always loved August in the city because everybody left the city and you can get a reservation every, walk into the best restaurant and just on a Friday, Saturday,

get whatever reservation you want. It was a little hot, I'll be honest. But yeah, stay safe there. Everybody in New York, continued success. And we'll see you all next time on this weekend startups. Bye-bye.