Artist Pension Trust: What an Interesting Idea

I came across this 2005 Wired article on Artist Pension Trust (APT) through Matt Winn's blog.  APT is a barter-based investment program for young-ish artists. The company establishes region-specific "funds" and selects 250 artists for each. Participants are required to contribute 250 works throughout a 20-year period. Whenever an artwork is sold, proceeds are divided between its creator (40%) and the other 249 artists (32%); APT retains a 28% management fee for storing and promoting the artworks.

According to Wired, APT expects to pay out $1.5 billion - or over $600K per artist - by the time its first 12 funds mature. A 1998 study by two NYU business school professors showed that between 1953 and 2003, the fine art market performed almost as well as the S&P (10.4% vs 10.9% CAGR) and floats independently of the stock market. Works from lesser-known artists appreciated faster than masterpieces.  Which is why APT targets artists whose works are currently in the $5-$10K price range.

I wonder whether the same concept is applicable in the classical music world. For every Yo Yo Ma or Itzhak Perlman, there are countless Julliard alums who languish in regional orchestras. Might it make sense to pool risks across seemingly promising grads?

Indie rock bands and film producers, too, might benefit from opportunities to share in each other's success. Might it be possible for record labels and movie studios to offer an APT-like option?

Matt wants to bring APT to Web 2.0 by creating an Exit Fund, where young companies could pool risk by contributing equity to a partnership. One possible challenge is, artists and musicians have business models that will likely remain constant throughout an investment fund's lifetime. Even if an APT artist's 2006 painting doesn't sell well, his 2007 work might. On the other hand, once an Internet company goes bust (which could happen in a matter of months), the value of its shares evaporates altogether, and its founders can no longer make any additional contribution to the partnership.

As an alternative, might a private Digg/Survivor/predictive market be more fair? As Matt proposed, startups would contribute equity to a partnership. But instead of each company receiving equal rights, CEOs would be given a fixed number of points for buying shares in one another's companies. If A generates overwhelming interest among its peers, VCs might want to take note of this vote of confidence. On the other hand, if there are no takers at all on B's shares, it'd lose its place in the partnership.

Comments

[punctuative]

Isabel:

I'm glad you found my post a useful "thought platform" and thanks for the link love! It would seem artists of all kinds (musical, film, otherwise) should be able to benefit from risk/reward pooling. The ease of APT lies in both the duration of contribution (as you note), and in the medium itself, which garners a one-time sale value. Musicians, producers, and others rely on licensing and other monetization devices that complicate administration of a pooled fund. That being said, the hurdles aren't insurmountable.

I like your idea re private prediction markets but one might end up with a chicken and egg problem - entrepreneurs won't sign up until they see other companies already in the hopper that hold promise and with which they'd like to share equity. My sense is one would have to utilize a selection committee with enough cachet/experience that entrepreneurs would trust their equity was shared wisely. And I wouldn't limit it to web 2. There's a ton of other opportunity out there. Re contribution, one would have to establish funds by "vintage," much like venture funds. In other words, entrepreneur A would be pooled with a bunch of other entrepreneurs that joined the MidEast 2007 Fund. Anyway, just thoughts for now. Happy Holidays!

Best,
Matt

[Isabel Wang]

Hi Matt,

I've been reading HBS professor Andrew McAfee's old posts on "emergent" versus "imposed" systems. For instance, Yahoo! originally took an "imposed" approach to classifying sites into editor-selected categories, but del.icio.us is totally emergent and gives each user the ability to apply whatever tags he'd like to each page he bookmarks.

I wonder what Andrew (who's a big fan of emergence) would say about the chicken and egg of a startup equity exchange. Is it better to have a highly respected selection committee, or might it be possible to open up the whole system to the wisdom of the crowd?

1. X, a startup CEO, signs up; no commitment is required at this point. He is only asked to list other startups he'd be willing to trade shares with.

2. Companies listed by X are invited to participate. They invite others they feel are worthy. Inviters remain anonymous.

3. Using Swaptree-like technology (TechCrunch says its algorithm can generate matches for up to a 4-way exchange), startup CEOs are matched with investment partners. Participants can accept or decline any trades. They are alerted whenever new opportunities come up (due to new signups, or people updating their wish lists or putting shares they own on the market).

What do you think??

Isabel:

It's a great debate. I don't think the two approaches are mutually exclusive. It would seem the methodology described above makes a selection committee of two (i.e. two entrepreneurs need to agree to swap in order for a trade to occur), therefore benefiting from "emergence" only insofar as the initial filter step which requires 1 vote. That being said, I like the idea of enabling entrepreneurs to trade their equity in just such a way - as you put it, a "private exchange." Of course, pricing, security regulations, and other complexities would need to be addressed.

This notion of actively trading equity is somewhat different from the idea of a one-time contribution to a pool. I suspect a small group of experienced startup investors/executives would better select, and attract more promising startups, than a selection committee "of the crowd." My friend, Rob May, at Businesspundit.com, has written extensively re the wisdom of crowds and ran an interesting experiment that enabled crowds to formulate a business, share equity, and run with it. The results hardened his view of group wisdom. Here's a link to a post of his re the topic:

http://www.businesspundit.com/50226711/antisocial_media.php

He quotes Andy Rutledge, who writes, "Excellence is not the sum of opinions. Excellence is not born of consensus." I generally agree. There's a reason that venture investors stratify dramatically, with the top group of firms earning returns far and away ahead of the rest of the crowd.

Best,
Matt