We Study Billionaires - The Investor’s Podcast Network - TIP419: How Art Performs During Inflation w/ Scott Lynn

Starting point is 00:00:00 You're listening to TIP. On today's episode, we have Scott Lynn of Masterworks back on the show, fresh off of his recent $110 million fundraise that valued Masterworks over $1 billion to discuss how art performs during periods of inflation. In this episode, we also discuss why Masterworks is choosing to stay private for the time being, what the $110 million they raise will go towards, Masterworks' overall impact on the art market, the most compelling research they've uncovered to date, which artists might have the first billion dollar piece of art, Scott's evolving thoughts on NFTs and Web 3,

Starting point is 00:00:34 decentralization disrupt Masterworks, and a whole lot more. I love having Scott on the show because I always learn a ton. I'm becoming more and more fascinated by the art market and more impressed by what Scott has built. So with that, please enjoy my conversation with Scott Lynn. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast. I'm your host, Trey Lockerby, and today I'm super excited to have back on the show,

Starting point is 00:01:20 Mr. Scott Lynn of Masterworks, welcome back, Scott. Thanks for having me. First of all, I need to congratulate you because since we last spoke, Masterworks has grown considerably and has now surpassed the unicorn status with a valuation over $1 billion, which, you know, that's got to feel good. You raised over $100 million for a Series A, which is, you know, staggering. What will that money be going towards? So the core business today is profitable.

Starting point is 00:01:51 We're growing like crazy. We're hiring 20, 30 people a month. I think we'll be over 300 people by year end. I can't remember the last time I was on. I think it was over a year ago. This year we'll buy over a billion dollars in art. So we've quickly become the largest buyer in the art market. So when we think about how do we deploy capital?

Starting point is 00:02:10 Some of it's just balance sheet capital needed for purchasing paintings. Some of it is operating expenses, hiring people, building out teams. We're investing heavily in research. We're investing heavily in data analytics, understanding different dynamics in the art market, where we think it makes sense to invest. So really, really across the board. But we're just super excited about the opportunity ahead. I mean, our belief continues to be that this is the largest asset class that's never been

Starting point is 00:02:37 securitized. And for the very first time, we're making an investable. So that's a huge scope of work. Now, talk to us a little bit about what that fundraising process looked like. You brought it to market. How did you bring it to market? Who got in on it? What did it look like for you?

Starting point is 00:02:53 Yeah, it's not my first rodeo. So I've done this several times before. You know, we have the good fortune of having tons of investor interests. So we really took a handful of firms that were interested in the business that I knew. Personally, hired Goldman, I think start to finish. It took, what do we count? I think it was roughly 40 days, which is unheard of. So, you know, it was a super, super fast, very, very selective process.

Starting point is 00:03:22 And the investors that came in, are they looking at Masterworks as a play on the art market itself or on the fractional ownership collectibles market? What was the angle that they, you know, what was the appeal for them exactly? I think the really high level thesis that everyone is very excited about is if you, if you subscribe to this notion that venture and private equity is roughly a three and a half trillion dollar asset class and you believe that art is one and a half trillion, but there's 9,000 firms that help people allocate to venture and private equity and there's only us in the art market, you just immediately see what a, what a huge opportunity that

Starting point is 00:04:00 is, and almost to a certain extent become valuation agnostic. And I think that's how a lot of people approached it very, very early, which is, I think there's a lot of data to suggest that this is literally the largest asset class that has no investment products left, right? Every other major asset class has been securitized, and there's lots of competition. So this is, this is one of the few where we're still in the very, very early days. You touch on an interesting point there about the valuation and the fact that there's so much money in private equity and VCs. When you're getting above that threshold of a billion dollars, I'm always curious as to why owners choose to stay private instead of going public. You know, that said Sotheby's was once public, for example, and then chose to go private.

Starting point is 00:04:45 Masterworks seems like its model would make for a great public company or constantly raising capital to buy art and things like that and having access to those markets. walk us through the decision to continue to stay private and maybe if there's aspirations to be public one day in the future. It's an interesting question for us, right? Because we are the largest filer of public offerings with the SEC now. We file one about every five and a half days. I think where we are today, we just don't have the bandwidth to be a public company, but we do believe that this fundamentally will be at some point in time. So it's really probably more of a prioritization thing with us right now than anything else. You know, on that note, I'm curious about the, you mentioned securitizing all the time.

Starting point is 00:05:31 I mean, I'm curious about some of the paintings that you currently carry your own or are listed. And if possibly you would spin those off to be their own publicly traded entity at some point, I mean, just the art itself. I mean, some of these are entering stratospheric valuations on their own. Is that something that you could see being viable in the future? You mean actually having the paintings be exchange listed. You can certainly see a world where that makes sense for very expensive paintings. Probably makes more sense for a fund type product that's publicly traded.

Starting point is 00:06:03 But yeah, I mean, we definitely think the liquidity is one of the key challenges with the asset class. So I think any additional mechanisms or features to make the asset class more liquid just allows it to be more accessible to any type of investor. And obviously you guys are kind of building that marketplace, which I know is incredibly valuable as well. But are there other aspirations to potentially bundle up some of these pieces of art and to say like exchange traded? Yeah. I mean, we're right now working on fun products that will give people broad exposure to all paintings on the Masterworks platform. So investors don't have to pick and choose paintings. And that I think will be very, very well received. We're testing, you know, slow rolling some of those products in the market now. So I do think that's interesting.

Starting point is 00:06:49 Now, an ETF is an amazing product that we would love to bring to market. It really requires us to have each underlying painting be very liquid. And although we have a secondary market today where investors are trading shares and all of these works of art, you know, the liquidity is not like an exchange traded security where you can get out of a position in second. So I think, I think that's a ways off, but that would obviously be the holy grail type product. What about the idea of, you know, mentioned these VCs getting involved? It's making me wonder if Masterworks itself would then one day have a venture arm, for example, for say, aspiring artists in their early days, helping them get off the ground.

Starting point is 00:07:28 You're giving them incredible exposure. You could see how you could kind of exacerbate their success very quickly. Yeah, it's a really interesting question. This weekend I was actually at a family event. And a friend of the family was talking about how her son is an artist and how, you know, how difficult it is to be an artist. And I was talking, you know, I was telling you some of the stats on the art market. Like, for example, 61% of $60 billion that sells every year in the art market is from the top 100 artists, most of which are deceased. So you very quickly understand

Starting point is 00:08:00 just from that stat alone, how difficult it is to build a career as a new artist. I think one of the cool things about what we're doing, which isn't, you know, isn't totally appreciated today, is that if we're able to bring billions of dollars into the art market, and as we start to allocate to more emerging artists, it does really make it much easier for new artists to enter the market if there's kind of active people like us buying up, buying up those paintings. So we don't, you know, we don't, we don't have that product today. It's more of a speculative product for emerging artists, but, but at some point I think that's an interesting, interesting product that I'd love to roll out. That's awesome. So last, last

Starting point is 00:08:40 Last year, I think you bought something like $400 million worth of art, you know, being you being Master Works. And you're on track now, as you said, to purchase over a billion dollars this year, which obviously sounds like a ton of money. But talk to us and kind of remind us about how that compares to the overall art market as a whole. It's a good question. So it does sound like a ton of money in the art market in particular, right? Because there's really nobody like us buying at scale, that sort of scale. But the art market today, the estimates vary, but it's roughly a $60 billion a year transaction volume market. So a billion dollars is still, you know, it's significant, but it's not, it's not overpowering by any means. We are also starting to consider artists who are our modern

Starting point is 00:09:28 like Picasso, impressionists like Monet, this year as part of our buying strategy. So we expect to increase the number of artists that we bring to the platform beyond the 55, that we're going to that we focused on historically and then also move into some impressionist in modern categories, which we haven't been in. Now, you mentioned that Masterworks is profitable already. I'm kind of curious. I don't think it's something we really went into on our first episode together, which was episode 349.

Starting point is 00:09:55 But talk to us a little bit about where and how MasterWorks makes money in the process of people buying those fractional shares of the art itself. Yeah. So our management fees are really very much like private equity or, hedge funds. So we make 1.5% per year on asset center management and then we make 20% profit when we sell the painting in the future. So that's our fee structure very, very broadly. I'm curious about that second point there about selling it in the future. So say, for example, a piece of art goes up on the website, it's auctioned off, we all own this fractional share

Starting point is 00:10:31 of it. Who then determines how it sells again? I mean, we're obviously, it's kind of publicly traded now and we're just selling shares on a secondary market at that point. But could someone actually feasibly come in and buy up the whole painting again theoretically? We restrict the total ownership. So the most anyone can purchase is actually 20%. So that technically could not happen. But we decide when to sell the painting, right? So we have full discretion as the manager when to sell. And that's really important because the art market tends to be very event driven. So when an artist sets a price record, for example, tends to be a great time to sell into that market because there's a lot of hype around the artist. When there's a retrospective covering that artist's work, you know,

Starting point is 00:11:12 again, there's a lot of momentum around that artist. So it's a good time to sell. So we found that just generally, the ability to act quickly, respond to the inbound inquiries or otherwise is really important. So when I went on to the Masterwork site recently, I was actually surprised by the lack of offerings on the site because, you know, you would expect it to be kind of flourishing with a bunch of different options, but there weren't really, which, you know, tells you a lot, I think about your rigorous process to get listed on your platform in the first place. So talk to us a little bit about what goes into getting listed and how many you kind of expect to even list in, say, a year.

Starting point is 00:11:53 Yeah, it's pretty cool. So now is the biggest buyer. We just get, we get offer basically everything in the art market. So when you take, you know, if you look at individual artist markets, George condo is a great example. I was going through the state of the other day. I think we've been offered around 250 George condo paintings over the past couple years. And to put that in context, I mean, if you're a collector and even if you're one of the biggest George condo collectors, you might get offered six George condos a year, 12 George condos a year. You know, you're never getting offered a couple hundred.

Starting point is 00:12:25 So we've purchased now, I may have this wrong, but I think we purchased four. George condo paintings. So the amount of work that our acquisitions team sees, reviews, analyzes, frankly rejects, I think speaks to the quality of offerings on the platform. And I fundamentally believe that there's just no better way to invest in art or get exposure of the asset class outside of what we're doing today just because of that dynamic alone. It's just not possible for any individual or even a small team to review the volume of work that we're reviewing. But to your point about they're not being a lot on the platform,

Starting point is 00:13:03 like the other dynamic that we're seeing is the paintings are just selling out fast. So we have one, $2 million paintings sometimes that sell out in a day or less than a day. We had a $7 million banksy three or four weeks ago that sold out in two hours. You know, that is part of a problem with the platform that we'd like to build some features around like possibly previewing offerings so people can understand what's coming up. in the future rather than just relying on when it launches. Very interesting. You know, this is a very timely discussion because the markets have been just pummeled

Starting point is 00:13:37 this year already and they're down big again today. It makes a lot of investors get, you know, start rethinking their strategies, so to speak. And I've heard you mention that the S&P 500 correlated to the art market is very low. I think you said it was 0.14 at the time. Now, this could be a really good time for investors to start thinking about something like art, not only the markets going down, but the risk of inflation and a number of other macro themes. Now, your strategy, and pardon this comparison perhaps, but it's similar to how Michael Saylor has been using micro strategy in a sense to be stacking Bitcoin on his balance

Starting point is 00:14:15 sheet. Do you consider Masterworks stacking fine art on their balance sheet as somewhat of a similar thesis? You know, it's not a similar thesis, right? Like at the end of the day, we we acquire art and we believe in the asset class because we think it's it just provides consistent long-term returns, right? I think his thesis on Bitcoin is more extreme for lack of a, you know, lack of a better word. But yeah, I mean, we were big believers in the asset class long term. Obviously, we have a lot of skin in the game because we have carry in the paintings. So we're effectively have equity and everything that we're bringing to the platform. And, you know, that is as part of how we think about our balance sheet. And,

Starting point is 00:14:55 and how we think about long-term value of the business. What is Masterworks impact on the art market itself? So say, for example, what's your take on the new liquidity you're bringing into the art market and how it affects the pricing? Does it compress pricing due to the fact that there's more competition, or do you think it creates a premium since there's more dollars chasing fewer goods? What's the overall impact of this much interest going into the market? Yeah, it's a really good question.

Starting point is 00:15:23 And it's a question that we have thought a lot about from a research perspective specifically. And we think less about these things in the context of today. Like today, I don't really think we're impacting prices in the art market that much. But if we're raising $5 billion a year in capital and we're buying $5 billion year in art, would we be impacting prices? And I think the answer is probably yes. And then obviously that begs the question of, is that a bad thing? And I think our view is that, you know, art,

Starting point is 00:15:53 very similar to Bitcoin and the analogies that you just used, the supply is not really increasing generally on an individual artist market level, right? In many cases, it's decreasing because people are donating paintings to museums. So if you bring in more demand with supply that's either fixed or decreasing, then prices will go up. We don't really think that's a bad thing so long as new investors are coming into the market, right? So as long as we're exposing new investors to the asset class, who are allocating to it as part of an investment strategy, we think that's a healthy way to build an ecosystem that drives prices up over time. When you do list a new piece of work and you securitize it, how many shares do you

Starting point is 00:16:38 start with when you're in the initial offering? It's really just the price divided by $20 per share. So every IPO that we do is a $20 per share IPO. And that's actually a great way if you go to secondary markets to understand how paintings have appreciated just based on how, you know, how they're trading versus versus $20. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every

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Starting point is 00:21:09 Has MassWorks ever securitize a sculpture piece of work? like a Jeff Coons, for example? You know, we haven't. I mean, we, those, those, you know, like a balloon dog is something that we've thought about historically. Coons' market has been one of the more challenging markets just from a, from an investment perspective. So, you know, we haven't, we haven't done that yet, but we definitely would look at artists like Jacometti, for example, who's always worked in sculpture, artists like Calder, they do

Starting point is 00:21:39 mobiles. So it isn't, it isn't something we've done, but we certainly would. Now, you mentioned this earlier, but MassWorks does spend a ton of resources on research. What research have you uncovered most recently that's really surprised you? Well, if I just think about the past couple of weeks, we tend to, we try to release one research piece, at least internally, if not externally, on a weekly basis. So last week's was really about how art responds during inflation. And, you know, it's a hard question because one of the, it's a hard question because one

Starting point is 00:22:12 we look at most of the data we have in the art market, at least statistically significant data, it goes back to the early to mid-1980s. So we don't have great data from the 70s into the 80s, which was kind of prime inflationary time in the U.S. So it's hard for us to conclude one way or another. I think our position today is that art is inflation neutral, meaning that historically it's always outperformed inflation, but we can't exactly call it in inflation hedge, although I think a lot of people would say that real assets generally are inflation hedges, but we haven't technically been able to conclude that at this point in time. Now, that's obviously more external research you're doing, meaning outside of the platform

Starting point is 00:22:59 you've built. I imagine you're doing a number, a lot of research on the platform as well. I mean, talk to us about how you kind of allocate between research going from how the platform is performing to just general market research in the art market? Yeah, I guess when we think about the platform, we tend to think about what are the business analytics around how, you know, how are people effectively investing? We look at onboarding metrics. We look at investing metrics.

Starting point is 00:23:26 You know, one of the things that's really fascinating about the business, which we, I didn't personally expect and we have come to just take as belief at this point in time is when someone invests a certain amount of money, let's say $10,000. We know that that person, almost certainly over their life, will invest roughly $90 per month thereafter. And we've now, for three years, we've at least an aggregate seen that trend continue. So we continue to see really, really good repeat investor behavior. And I think a lot of that is just people starting with small allocations as part of an overall portfolio, becoming more comfortable with the performance of the investment vehicles and then just growing those allocations over time.

Starting point is 00:24:06 Going back to the inflation hedge kind of piece, if someone were to go into the art market now, say to diversify for inflation or something else, it would seem almost natural that they'd want to go into something kind of blue chip like a Rembrandt or something. Now, these pieces are only gaining maybe one or two percent, I think, on average annually. So it's not a huge return, but it seems like a flight of safety, so to speak. So talk to us about the risks there and how common it is for someone to actually lose money on, say, like a blue chip piece of work. Yeah. So, you know, one of the things that I want us to do this year from a research perspective is figure out how to better communicate risk in the asset class. And there's a few

Starting point is 00:24:48 things that I find particularly fascinating about, about the asset class personally. One is that, and you sort of alluded to this, but one is that if you look at the performance of art by segment, and you go back in time, what you see is the contemporary performs at 14% a year, modern, Impressionist Modern performance between 6 and 10% a year. And then you roll all the way back in history hundreds of years and old masters appreciate at call it 1 to 2% a year or roughly that of inflation. The thing that's so fascinating about that analysis is that you don't see a particular segment of the market in entirety that depreciates. So you see these appreciation rates decline over centuries down to inflation like rates. And then the asset class exhibits basic store

Starting point is 00:25:32 value characteristics. We don't know why that is. And we find that, we find that really, really fascinating from a, from a research perspective. So that's, that's one of the things that we want to spend time on is to learn why does the asset class, at least an aggregate by segment, not depreciate. And then from an investor perspective, how do we better communicate the appreciation potential and the, the downside risk potential? To get back to your, to your more specific question, You know, we don't see paintings sell for losses that often. And when we look at the data, what we look at is when a painting is purchased a public auction, then that same painting is subsequently sold.

Starting point is 00:26:16 What percentage of time is there a loss? And depending on the time period that you look at, five years, 10 years, I think we look at seven years as well, that percentage loss rate is always less than 10%. And then when you look at the magnitude of loss, when there is a loss, it's generally also immaterial. And qualitatively, what you see in the art market is that if someone buys a Monet for $10 million, it's just very unlikely that they turn around and they sell it 10 years later for $7 million. We just don't see that happen that often. So perhaps that's just loss aversion on behalf of very wealthy individuals who are just unwilling to take losses. Perhaps that has

Starting point is 00:26:55 to do with the fact that a lot of these artist markets such as Monet have declining supply. So So as they have declining supply, prices are increasing because demand is constant or growing. You know, we're not exactly sure, but it's a really interesting characteristic. Now, when you were mentioning that the contemporary art appreciates it, say, 14% on average, when you go back to the ETFs, is that how you'll carve it up, so to speak, just an ETF for the contemporary side of things, an ETF for, you know, the blue chips? How would that look? Yeah, I think what we would want to.

Starting point is 00:27:31 to do is we would want to find individual artist markets that we find interesting or investable. And we may even choose to equally weight those artists. You know, it's funny. And in a lot of asset classes, equally rated strategies are generally viewed as less interesting, I think. In the art market, it's always historically been been impossible to equally wait because it hasn't been securitized, right? So if you want to build a portfolio of art, you have to buy a $50 million dollar basquiat,

Starting point is 00:28:00 a $30 million Rothko, you know, $5 million Sessly Brown, a $1 million, a $1 million Gujaford, like whatever the composition is of the size of paintings, but it's always been impossible to equally wait. So now for the first time ever, with us securitizing paintings, people can build equally weighted portfolios on the MasterWorks website. But I do think an ETF product that followed some similar methodology could be interesting. That is super interesting. And to your point, if you backtest things,

Starting point is 00:28:30 And they do exist now, but say even the S&P 500 equally weighted instead of market cap weighted. It's compelling, mainly because if you think about it, the market weight means that, you know, say a company like Apple, that's $3 trillion. I mean, could it go up another $3 trillion? Possibly. But the probabilities are that it's going to be a drag, you know, on the overall index, which is, you know, yet to be seen. But it's really interesting to think about it in a very similar fashion.

Starting point is 00:28:54 How do you think about diversification, more generally speaking, in the art market, especially if you're just getting started in it. I mean, diversification matters. Diversification matters just like any other asset class. I always tell investors to assume that you're going to be investing in 10 paintings over time. I think our research suggests that eight paintings is kind of the minimum that you would really want to invest in to gain adequate exposure. So 10 plus would be great. But we bring so many paintings to the platform now.

Starting point is 00:29:26 Again, one every five and a half days on average, it's better to just wait over time and find the right opportunities. Now, I just came up with a merchandise idea for you, which is a 10 whole punch card. So, for example, Warren Buffett used to say that you should invest like you have a 20 whole punch card and you can only buy 20 companies. So you're saying 10. I'm even more impressed. So maybe you should sell that on your site. We can keep track.

Starting point is 00:29:51 Speaking of Buffett and other billionaires, I know that Steve Cohen, for example, is a big art collector. and has, I think, over a billion dollars worth of art, which is staggering. What would it take for a piece of art itself to become worth over a billion dollars? And are we there yet? Are we getting close to it? Oh, yeah. I mean, I think we're really close to it. So the most expensive painting ever was this Da Vinci painting, which sold for $450 million. And that was, I think, an unexpected result. I don't think really the art world expected the painting to sell for quite that much. But I guess from my perspective, and obviously I'm biased,

Starting point is 00:30:31 but I don't think it would be that surprising for a painting to sell for a billion dollars. Clearly, if the Mona Lisa wrote for sell, that would sell for significantly over a billion dollars. So those paintings exist. I think the thing that's so surprising about the art market, when people hear that a painting sold for $450 million is not necessarily the price tag, right? Like there's lots of things that are $450 million. Bridges cost $450 million. buildings cost $450 million. The difference is that in the art market, you really have one person buying that painting for $450 million, which is staggering, right?

Starting point is 00:31:03 In every other asset class, there's consortiums of people that buy these very expensive things together. So I think our view is that as these assets become securitized, it will be easier for some of these paintings that are very valuable to find buyers in the billion-dollar-plus range if they're collectives of investors. Going back to the correlation a little bit more, I'm kind of curious because what you said just struck something for me, which is, you know, if it's uncorrelated to the S&P 500, but also correlated to, say, the wealth effect, as I understand it, you know, when we were studying

Starting point is 00:31:38 wine, I look at it in a similar way where the price of wine kind of tends to go more correlated to the markets, it seems, because it generates this wealth effect and people can then leverage or sell or whatever and create liquidity to buy it to diversify into something like art. So with the markets going, you know, maybe entering recession territory, we're not sure yet. Do you think that we'll have a drag on the art market, just generally speaking? Well, I think recessions in general are always problematic for every asset class. So you just have to say that broadly. But if you look at the correlation between the art prices and the S&P, as you mentioned, historically, it's been negligible.

Starting point is 00:32:17 And, you know, what we saw even during COVID was was that art prices, not only increased, but increased at rapid rates. I mean, we saw in the depths of COVID in March of 2020, something like 20 artist markets set price records. You know, that's 180 degrees opposite of what you would expect. And I think the reality is, for better, for worse, the top 1% on a global basis just wasn't impacted by COVID, arguably benefited. I do think that our prices are correlated to the wealth effect, as you describe it. And as long as there's more, more billioners being created. And as long as the people that are buying art are getting wealthier, we continue to expect prices to go up. You mentioned that the Mona Lisa would probably fetch a

Starting point is 00:33:02 billion dollars or more easily. Why does someone like the Louvre not securitize it? Maybe through you, maybe they could leverage your platform and sell even a piece of it to fund other activities or other art purchases. Has anyone approached you about that? You know, it's interesting. We had during COVID, But the contemporary art museum in the Netherlands, I think I'm getting the name specifically wrong, was having financial. The museum in contemporary art in the Netherlands was having financial problems. And we went in and we agreed to buy a bank seat from them. And then we turned around and we lent the bank seat to them.

Starting point is 00:33:40 So you can go and see that bank seat today still hanging on their walls. Now at some point, that painting will sell and investors will get proceeds. and that the painting will have to leave the museum. But I do think it's an interesting strategy for museums who want to raise capital, retain the painting over the next several years, potentially maybe have a writer-first refusal if someone does make an offer to buy the painting for the museum to raise the capital and continue to hold it internally. But, yeah, I mean, there's so much art that's trapped up in museums

Starting point is 00:34:12 and frankly so much in storage that's never even displayed, that it does seem like at some point museums should be more. more rational about deaccessioning. I think there's just always been concerns about the museum's role in society and selling works of art that should belong to the public. Yeah. You know, on the topic of galleries, you have a gallery in Soho. Is that just overflowing at this point with art?

Starting point is 00:34:39 And at what point is, are you going to continue to open up more and more galleries to make it more like a museum aspect across the country? What's the strategy there? It's a good question. We get asked this question all the time by investors, so I prefer not to answer it right now because I don't want to commit to anything. You know, we do have a gallery. We actually moved offices, so we're no longer in Soho, but we do have a gallery at our new office space in Brookfield Place, kind of in downtown New York. But yeah, I mean, we bring art in selectively. The majority of art is still in storage. It's very hard to display the volume of art that we're buying. But, you know, one initiative this year is to, frankly, get better at building relationships with museums or institutions and trying to let more paintings live in public spaces. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customers.

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Starting point is 00:38:28 is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. All right. So I'm really eager to talk to you about the metaverse because last time you and I spoke, I mean, the B-Pol had just sold for $69 million. It was really the first NFT to do something like that. But NFTs even at that time weren't really being taken all that seriously. I'm not sure they should be even now, but I'm wondering if

Starting point is 00:39:12 your mind has changed on NFTs in any way. Our thinking is definitely evolving with NFTs. I think our position is probably still the same, but I'll walk you through, I guess, how we think about it today. So when we think about art or any other asset class, we think about it very fundamentally and we ask ourselves two questions. One, can we demonstrate that it beats inflation? And two, can we demonstrate that it lacks correlation with other asset class?

Starting point is 00:39:42 classes. And that's just, you know, that's kind of finance one-on-one should something be included in a portfolio and they have to meet those two criteria. And I think the challenge that people always forget with NFTs is that sure, they've shot way up in value. They actually collapsed for those who remember after they shot up in value and then they subsequently shot up in value again. We don't see that as a predictable trend line. We see that as highly volatile. So could be interesting to speculate. I don't personally know how to speculate on that market. Our team doesn't have, doesn't have that experience. When you think about the second point of correlation, I do think this one is changing. So I think historically we would have said NFTs are correlated to Ethereum,

Starting point is 00:40:26 which is correlated to Bitcoin, which is correlated to public equities. We haven't looked at this recently, but it does feel like that correlation dynamic is improving that NFTs are less correlated to Ethereum now than they were many months ago. So, you know, I think our view is that it's still early. As NFTs evolve, you know, as we see more predictable price increases, perhaps, it's a strategy we could consider, probably a strategy we would consider as part of a fund rather than specific individual investments, just to reduce the risk or the volatility. That's how we're thinking about it today.

Starting point is 00:41:03 Now, for someone like you who's put in real work to legitimize your products and to legally securitize the pieces of art, I think it took you over a year, you know, just to securitize your first one, does the opakness of the NFT industry bother you at all? Like, you know, the fact that it just seems very questionable, I guess, is a good word for it. So I think the truthful answer is yes, and that's a personal opinion, you know, more so than a master's, you know, more so than a Masterworks opinion, but I think the challenge that I have personally with crypto is that it's entirely unregulated. And regardless of your perspective on regulation, and I'm generally conservative when I think about things like regulation, but in securities, there has to be some regulation. And in crypto,

Starting point is 00:41:55 there's really none. So you, you know, you see major players influencing markets in ways that, that just hurt retail investors. You know, I do think that's fair that you have to always be very cautious with a lot of the data that you see in crypto markets because it is highly manipulated by small, small numbers of people. Now, I noticed that one of the VCs that came in on your series A is focused on the Web3 tech world. Are there plans for Masterworks to somehow play a role in that new innovation of sorts?

Starting point is 00:42:31 Well, you know, I think one of our blind spots continues to be this, this inepti space. So we did kind of let Mike Nova Brats and the Galaxy crowd come into the fundraise with the thought that they're much smarter than we are on crypto and NFTs. And we continue to explore that with them. We've got a meeting next week with them to continue to talk about it. So I think, you know, our view is that we want people around the table that understand things that we frankly don't understand. And that was really, really why we brought them in. Going back to galleries, could you see a world where there are galleries with digital TVs on the wall displaying NFTs at some point in the near future in the physical world? Yeah, I mean, you could.

Starting point is 00:43:17 You know, one of the features that were contemplating right now, which I personally think would be really cool, is individual user profiles at Masterworks where it's www.mastrox.com. forward slash Scott Lynn, and that effectively displays your art collection. And then you can click and go into a virtual gallery to see your art collection. You can share it with friends. You know, you can keep it for yourself. But it is, we've done this with a handful of paintings. And while it seems, you know, like a bit of a, I don't know, kind of Web. 3 feature on the surface, it is really interesting to see paintings at scale that you've

Starting point is 00:43:54 invested in in context with one another. frankly, some of the paintings that people are investing in are giant, right? They're 10 feet tall and 12, 13 feet wide, and people don't realize that until they see it in more of a virtual environment or the real world. So I think there are features like that that could be pretty cool and frankly, relatively simple to implement. Yeah, I imagine the quote unquote community aspect of Web3 could be really interesting for Masterworks because you can find communities of people who have similar interests. Say, for example, they might all own. owned a basquiat or the same basquiat if they have a fractional share in it. And that could really bring people together in some aspect. Have you considered that as part of this development as well? We have. And we also think about those, those kind of like, you know, we refer to them generally as lifestyle, lifestyle opportunities. We've thought about this in the real world. I mean, we, we now have, I think, 5,000 plus investors in New York City feels like, you know, we should have some.

Starting point is 00:44:56 venue, gallery, restaurant, members on the club that people can come and see these paintings, right? I mean, we've raised whatever, over $100 million from people in New York City alone. It would be great to do something in the real world where they can experience what they own. I've been really eager to talk to you about this. I don't know if you followed it at all, but there are these things now called DAWS, right? Decentralized autonomous organizations. There's this one that raised, I think, $45 million within maybe a day or two to then go and buy this copy of the Constitution. It was called Constitution Dow. And it got a lot of traction,

Starting point is 00:45:32 a lot of press. And very transparently, to their credit, on their website, it talked about how you weren't really buying a piece of the Constitution. You were buying what was called a voting right, essentially, on where to park the thing, basically. You would have some say as where to put it. And it just raised a lot of questions around, like, who actually owns the piece of art once, you know, it almost in that sense felt a little bit like a Kickstarter campaign for somebody to go then buy this thing. Talk to us about how MasterWorks is different from that. Well, I mean, at the end of the day, there's a lot of these DOWs or Dow like concepts, I think, that are trying to provide some lifestyle component or some, you know, interaction with the object

Starting point is 00:46:16 without actually having ownership. And we're fundamentally an investment platform, right? I mean, our view, again, is that this is the largest asset class that's never been securitized. Characteristically, it historically has outperformed public equities. It has negligible correlation. It deserves a role in a portfolio. I think when we think about our measurement of success, it's 10, 20 years from now. Investors hold a couple percent of a portfolio in art. That's very different than how the crypto world is functioning today, right? I'm not sure why people are spending millions of dollars on tokens to grant them voting rights or access to see something, right? Like, if I'm spending millions of dollars on something, I want it to be an investment and have

Starting point is 00:47:00 intrinsic value. Yeah, I agree. Now, you did say your team, they're not experts, say, on this NFT space yet, but have you seen any comparisons in that space that do make sense to you as far as the valuations of a certain piece of art or the, you know, scarcity, so to speak? Is there something there that you're starting to see this as, okay, yeah, I could see why that makes sense. You know, unfortunately, it's really the opposite. So when we think about cultural significance, and I think that's the right way to characterize your question, in the traditional art world, we think about three different things, which are all quantifiable. One is which museums collect that given artist. One is what other important artists does that artist exhibit with?

Starting point is 00:47:44 And then one is how global is the demand for a given artist. So obviously with NFTs, NFTs are global by nature. So I'm not sure that one's really relevant. The other two, I struggle with a bit more. I mean, if you look at historically who the tastemakers are and who decides what is culturally significant, museums play a very large role in that. And museums really haven't accepted, I guess, for lack of a better word, NFTs generally. So we don't we don't see curators or critics from that world stepping into to welcoming, you know,

Starting point is 00:48:22 NFTs or putting together exhibitions on NFTs. Yeah, that could change, but yet we haven't seen it. So I think those are the signals that we're looking for. When do institutions really start to buy NFTs, when they start to build shows around them, from an artist's perspective, what are the NFT artists that are doing things different, They're doing things interesting. Unlike other artists, I mean, there's a lot of these NFTs that I look at that are totally underwhelming.

Starting point is 00:48:47 You know, they look like they can be done by a third grader. So I don't, of course, people say that about our paintings. You know, we bring this. 20 million dollar boss gaps to the platform and people say, oh, my kid could do that. So maybe I'm now that person. But yeah, that's how we think about it, I guess. Well, given that there are now all these billionaires and gazillionaires in the crypto space, you even have, you know, 15-year-olds in the NFT space that are making millions of dollars now.

Starting point is 00:49:14 You know, if you thought about getting them into, onto your platform, have you considered accepting things like Bitcoin or Ethereum just to, you know, convert onto your platform for ownership of a piece of real work? Yeah, we do accept crypto via BitPay. So we take crypto as a payment method. You know, it's interesting with a lot of NFT people, we just don't, sorry, with a lot of crypto people, we just don't see them diversifying away from crypto. I mean, even these, I was talking to one of the heads of, one of the largest private banks in the world.

Starting point is 00:49:50 And he was talking about a lot of new clients that they're getting that are all crypto billionaires and how they just can't get them to diversify away from crypto in any way, shape, or form. And, you know, on a smaller scale, we see the same thing, which I think is a little bit unfortunate because, you know, I don't know, personally I've lived through three financial crises, and I think until you live through one, you don't totally appreciate the need for diversification, but most people that have created wealth of crypto really haven't seen that dynamic yet. One maybe comparison that I thought I would share with you that maybe I want your opinion on is the fact that you mentioned Monet is, I think, the best selling art.

Starting point is 00:50:30 It was certainly the highest bid, that $450 million piece of work that's, sold, but I think in general he's one of the top selling artists in the world. And the question is around awareness. So when you think about the value, it's easy to think about scarcity. But if you think about Monet, you know, his paintings are printed on posters that are sold in urban outfitters. I mean, they are everywhere. They're ubiquitous at this point. And so there's a lot of awareness about him. And even though that there are these really cheap, you know, replicas or facsimile, of his art distributed around the world, it doesn't seem to distract from the value he has of his real works. In the same way, the fact that an NFT could be a JPEG and distributed,

Starting point is 00:51:15 do you see a correlation there between awareness of an artist and value, even though the actual work could be distributed in a lot of different ways? It's an interesting question. We've never been able to measure that, but I have to believe it has an impact. I mean, other artists that we see a similar dynamic, with, or artists like Cause, who has a huge Instagram following, really, really became popular through Instagram, and that's helped him build, build his market. You know, Monet, interestingly, is the only, one of the very few impressions who we consider investable, right?

Starting point is 00:51:53 He outperforms significantly outperforms most other impressionist artists, and perhaps that's why his brand continues to just live on much larger than other, other artists. like Van Gogh would be another example, but he painted far, far fewer paintings. But yeah, I mean, we haven't quantified it, but it seems like that would be the case. It's interesting you haven't quantified. So even looking at like Google Trends or something, just, you know, really back of envelope stuff, would you be looking into the overall internet interest in something like a certain artist? Yeah, we, you know, it's funny.

Starting point is 00:52:28 We spent a lot of time with Google Trends data. We've never been able to really correlate, to really correlate increasing Google. trends with eventual increase in prices. And an example is the Banksy sale or the painting shredded, right? So that was the all-time peak when people were searching for Banksy and couldn't figure out, you know, how this work of art shredded itself a couple years ago. And that really was just kind of general retail interest but had nothing to do with his marketer prices. Now, does your platform inform participants about how many works are actually publicly available, you know, from a certain artist.

Starting point is 00:53:06 Because I think that's such an interesting metric. Like even the Da Vinci's, I think there was two that aren't, you know, held by museums of that one piece of, you know, they're just so rare. I feel like that's such an important metric if you're considering buying into an artist. Is that displayed on the website? It's not displayed on the website. It's a metric that we are going through, through painstaking effort to collect across all these artists markets internally.

Starting point is 00:53:29 It's very hard to collect because, you know, you have to understand how many paintings the artist painted to begin with. And then throughout time, you have to track declining supply by paintings going into institutions. So individual artist markets can take, you know, weeks on their own just to collect data for one market. But it is, it is something we look at internally, but we don't share it once we collect it. Last question about the Metaverse. So Masterworks comes in and democratizes access to these unbelievable works of art, which is so cool. But the web, three aspect is all about decentralization, right? So is there a world where Masterworks itself is

Starting point is 00:54:11 disrupted because artists are now interacting right with the participants or investors directly just on a blockchain somewhere? I think that's really NFTs, right? I mean, when artists create NFTs, they can sell them directly to someone via the blockchain. Now, you know, I can safely say that from being in the art market for a long time and knowing lots of artists, like many artists struggle with all of the commercial aspects of the art market, right? They're very good at painting paintings, but they don't know how to price them. They don't know how to find collectors to buy them. So they work with galleries. And galleries really have taken on that role for over 100 years. So I, you know, I don't know if that's a problem that blockchain solves.

Starting point is 00:54:59 it clearly solves the ability to just complete the transaction. But I think, you know, in terms of kind of representing the artist, communicating the story, finding the right collectors, building out museum interests, building out collector interest. There's probably still an intermediary that's required for an artist. All right, Scott, I love having you on the show. I always learn a ton, and this did not disappoint. So thank you so much for coming on again,

Starting point is 00:55:26 and especially entertaining my thoughts on the Web3 space. All right, for those looking to get interested in this, maybe for the first time, what are the best resources that you would recommend, either through your platform or otherwise, before they get started? Yeah, so again, you can go to Masterworks, www.mastrox.com, create an account, schedule a call with our membership team. Our membership team walks you through suitability, talks about how you're investing today, what your risk tolerance is,

Starting point is 00:55:53 makes recommendations around specific artists, how to think about art as part of your overall portfolio. It's really the best place to get started. They can point you to third-party resources as well. City does some great research on the art market. Our research team partners a lot of other private banks. Some of that is linked to on our website. But yeah, I would just start, start slow, start small, diversify over time is really the right way to get involved. Scott, really appreciate the time. Thanks for coming on the show. Let's do it again. Thanks for having me. All right, everybody, that's all we had for you this time. If you're loving the show,

Starting point is 00:56:27 please go ahead and follow us on your favorite podcast app. And be sure to leave us a review, we would really appreciate it. We're also trying to continuously improve this show. So give us feedback. You can find me on Twitter at Trey Lockerby. And if you're trying to navigate the current markets, I highly encourage you to check out the TIP finance tool. Simply Google TIP and it'll pop right up. And with that, we will see you again next time. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com.

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We Study Billionaires - The Investor’s Podcast Network - TIP419: How Art Performs During Inflation w/ Scott Lynn

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