Investing in Art with Masterworks CEO with Scott Lynn

0:01Light that spark fire nation JLD here and welcome to entrepreneurs on fire the only daily show interviewing the world's top entrepreneurs seven days a week. Today, we'll be breaking down investing in art with Masterworks. To drop these value bombs, I brought Scott Lynn into EO Fire Studios. Scott is the founder and CEO of Masterworks, the first platform allowing investors to buy and trade shares in blue chip art. Scott is a serial entrepreneur and a leading art collector. And today, we'll talk about how it's been investing in blue chip art over the past few decades, exactly how Masterworks works, how long of a period should you be thinking about before getting a return, what artists are most popular on the platform, and oh, so much more.

0:42And a big thank you for sponsoring today's episode goes to Scott and our sponsors. Over 41 ,000 businesses have future-proofed their business with NetSuite by Oracle, the number one cloud ERP, bringing accounting, financial management, inventory, and HR into one platform. Download the CFO's guide to AI and machine learning for free at netsuite.com slash fire. Do you have the right mentor in your life right now? For the first time in seven years, I'm opening up a few mentorship slots for individuals who know they need the guidance and accountability to take their business and life to the next level.

1:18Email me at john at eofire.com with a subject line mentor and we'll schedule a 15-minute chat to go over the program and see if it's the right fit for you. Scott, say what's up to Fire Nation and share something that you believe about becoming successful that most people disagree with. Thanks for having me on. Yeah. So something that most people would disagree with, I guess when I take a step back, so I've been starting companies for 20 years now, and I think about my evolution as an entrepreneur. And I think the one thing that I think about very differently today than I did back then is something that I refer to, which is really just strategy before execution.

2:03Meaning, when I think about a lot of the great companies that have been created over the past 20 years, I think most of those companies have been really great at strategy, finding a large market to operate in, figuring out how to differentiate, really becoming monopolies in their own segment, much more so than becoming great at execution. I think this is true of Facebook. I think this is true of Uber. I think this is true of lots of great companies. So, you know, I spent the beginning of my career really focusing on people structure process. How do I get teams working really hard? And I think today I focus much more on making sure I'm solving the right problem than just working really hard.

2:49Well, Fire Nation, as you heard in the introduction, Scott has a lot of cool things going on. Specifically today, we'll be talking about masterworks. And I want to talk, Scott, about how has investing in blue chip art been over the past few decades? It's an interesting question because it's really not possible to invest in art, broadly speaking, unless you have millions of dollars to buy paintings or tens of millions of dollars to build a portfolio. So when we think about investing over the past few decades, we're really thinking about, you know, centimillionaires, billionaires who buy paintings for their own personal collection.

3:26And then we look at how the value of those paintings have appreciated primarily based on what they sell for at public auction. So if you look at the art market overall, and we tend to focus on art created after World War II, that segment of the art market has outperformed the S &P by 130, 140 % over the past 25 years. So it's this very interesting asset class, but the only way to invest in it is if you have millions of dollars to buy a painting. So that's really what we've been trying to solve at Masterworks is how do we take these great works of art by artists like Banksy, Basquiat, etc., and make them investable by allowing people to purchase shares.

4:06Well, to that point, it does feel unattainable for most, for all those reasons you just shared. So what exactly gave you the idea to create a company that allows investors to both buy and trade shares in blue chip arts? What was that aha moment? Yeah, I mean, the aha moment was a long process, I guess. So as I kind of started companies and sold them over the years, I made money and I started collecting art. So I personally have a mid-century ABEX collection that's artists like Rothko, de Kooning, people like that. And I saw the value of my collection go up over time and always viewed it as an investment, like an important part of my portfolio.

4:56And then, you know, it was probably around 2016, there was a lot of talk around tokenizing assets, securitizing assets, specifically related to blockchain. And Masterworks is not a blockchain platform, but that, you know, all of those conversations gave me the idea of taking a painting and essentially making it investable by allowing people to buy shares. How exactly does Masterworks work? Like, say somebody's listening now and they're saying, you know, this is interesting with Scott sharing because I've always admired arts. Maybe there's a certain time period or individual that I've studied, but I can never buy a piece.

5:37I wouldn't even want to think about storing it. Like, that's scary to me. So how exactly does Masterworks work for the individual that's going to just buy a share with the intention of potentially trading in the future? It's pretty crazy. So we operate in the US, so we live in a very regulated environment. And the regulatory framework that we operate under is very similar to how a company goes public. So we buy a painting, an individual painting valued between$1 and$30 million. We file that painting with the SEC as a public offering. We sell shares in the painting. And then after we close that offering, investors can then trade those shares on our secondary market.

6:20So we've done this now with over 450 paintings, over a billion dollars in art. And it's quite complicated because we effectively maintain over 450 public vehicles to do this. But that's how it works. So how does Masterworks acquire the arts that is found on your platform? What is a process that you go through, that your founders go through, that people that work at Masterworks do? How does that actually get acquired? It's really a two-step process. So the first thing that's most important in the art market is to choose the right artist market. So returns in the art market are highly correlated with the individual artist.

7:01So if you get the artist market wrong, you often wind up getting the return wrong. So we have a research team that analyzes a bunch of data on different artist markets. It's quite advanced today. We have ML models that we've built to try to predict future returns. And that basically has given us up to, at different points in time, 50 to 60 artists that we think are most investable. And by investable, I mean really produce the best risk-adjusted returns. that includes artists that you've heard of like like Banksy and Basquiat it also includes artists that you haven't heard of like like Cecily Brown or Stanley Whitney so so once we have the artist list we then give those lists to our acquisitions team who go out and they source paintings in those individual artist markets and similar to most asset classes they're they're really looking for the quality of the painting at the best price so once once they know that we're interested in buying Banksy, they'll go out and they'll source as many Banksy's as they possibly can.

8:02And then we'll find the best example at the best price. Now, once it is acquired, what happens? Is it displayed somewhere? Is it just moved from one store's facility to another? Is there any kind of live stream that somebody can be at home and be like, hey, listen, I own one millionth of this piece of art. Check it out. They can go there and they can actually show it in action. How does that work? It's a really good question. I would say this is definitely an area of improvement for us. So we would prefer to have all of our paintings out on loan at museums. Museums often have a multi-year, sometimes even a multi-decade planning process where they plan a lot of exhibitions far in advance.

8:44So I think now out of our whatever 450 plus paintings that we've had on the platform, I think maybe we have a half dozen or a dozen out on loan at any point in time. It's definitely less than we would like, but something we're working on in the future. Again, like in a perfect world, you would be able to, in any given city, see at least two or three paintings that we have in the collection at some museum. What type of investors are ideal for Masterworks? I mean, our listeners are a bunch of entrepreneurs, small business owners. You know, a lot of them have kind of created that lifestyle freedom, disposable income.

9:25They're looking, hey, maybe I'm going to buy some investment properties. Maybe I'm going to invest in Bitcoin. Maybe I'm going to do X, Y, and Z. Like what type of investors should be the ones that would be looking at something like Masterworks? We think that art as an allocation makes sense generally for most types of investors. We're a financial advisor, so we onboard investors talking about the size of their investment portfolio, what they're investing in today. And then we make a recommendation depending on the risk tolerance of that investor as to what percentage they should think about allocating to art.

10:03That allocation for most of our investors ranges anywhere between a couple percent to mid-digit single percentages as part of an overall portfolio. So if you have a$500 ,000 portfolio, we might recommend$5 ,000 to start, and then you grow that to$10 ,000 or$15 ,000 over the next couple of years. The one thing is that these are long-term securities. So it is important for people to realize that if you invest in art through masterworks or otherwise, you should think of these as seven to 10-year investments that are illiquid before you ultimately sell them. So that is the one constraint that applies to all investors.

10:43It's important for them to understand that. And Fire Nation, we're actually going to dive into that detail as soon as we get back from thanking our sponsors. Question for you, Fire Do you have the right mentor in your life right now? For me, mentorship was everything. From when I was just getting started in podcasting, webinars, course creation, book writing, you name it, I hired a mentor to guide me every step of the way. For the first time in seven years, I'm opening up a few mentorship slots for individuals who know they need the guidance and accountability to take their business and life to the next level.

11:19It's a three-month program and together we will achieve massive results. If you're interested in learning more, email me at john at eofire.com with the subject line mentor and we'll schedule a 15-minute chat to go over the program to see if it's the right fit for you. That's john, J-O-H-N at eofire.com, but only if you're prepared to ignite. It would be really nice if we could predict what the future holds for our business. Talk about saving a lot of time and frustration, but predictions are just that, predictions. Rates will rise or fall, inflation's up or down. Can someone please invent a crystal ball?

11:59Until we can actually see into the future, over 41 ,000 businesses have future-proofed their business with NetSuite by Oracle, the number one cloud ERP bringing accounting, financial management, inventory, and HR into one fluid platform. NetSuite gives you one source of truth so you can have the visibility and control you need to make quick decisions. And with real-time insights and forecasting, you can see into the future with actionable data. If our businesses needed this type of software, I'd use NetSuite in a heartbeat because whether your company is earning millions or even hundreds of millions, NetSuite helps you respond to immediate challenges and seize your biggest opportunities.

12:34Speaking of opportunity, download the CFO's guide to AI and machine learning at netsuite.com slash fire. The guide is free to you at netsuite.com slash fire. netsuite.com slash fire. Scott, we're back and let's talk about that. What we just kind of ended with before the break, which is once an investment is made on the Masterworks platform, you said there's about a seven to 10 year wait time that most people should just kind of be prepared for to get that return. Now, let's say that people are good with that because, you know, they're looking for long term investments. Once there is a liquidation opportunity or moment, like what does that look like?

13:14If someone's like, okay, it's been like 15 years, it seems to have appreciated well, I'm looking to potentially capture some or all of this gain. What does that look like? We ultimately control when the painting sells. So we will sell the painting if we think the value is above fair value and it makes sense at that point in time. Now, separate from that, we do have a secondary market. So investors can trade their shares on the secondary market. But oftentimes, since these are illiquid assets, those shares do trade at a discount. So we tell people regardless to be prepared to hold these securities for up to 10 years.

13:49Now, does Masterworks showcase its collection anywhere for investors to see the paintings in person? I mean, I know we talked about this earlier that you're looking to improve this. And let's kind of dive deeper within this topic. I know it is a focal point for what you're doing at Masterworks. Like what is your dream vision down the line? Let's say 20, 30 years from now. Is there like a masterworks gallery in LA, San Francisco, New York City, Chicago, that maybe owners have like access to go and actually look at these paintings and maybe they have some extra benefits that non -owners do? That's definitely the dream scenario.

14:28If you think about the collection we built today, it's probably one of the top three or four private collections in the world at this point. So, you know, just to give you an idea, we have for Basquiat, it's one of the top three collections. For Banksy, it's one of the top two collections. You know, it's pretty incredible. Like most artists that we own, we own 10, 20 paintings of theirs. So I do think at some point the dream scenario is to have a museum where our investors and just the general public can go and see the collection. And that's much easier for us long-term than kind of coordinating with hundreds of independent museums.

15:11So that's definitely something that we'd like to do at some point. And again, this is just kind of my entrepreneurial business mind thinking, but is that a possibility where now you're looking at like an actual dividend stream for people that have invested? Because now you maybe have these small galleries or even like museums that people are paying to get into. And then there's going to be a lot of revenue coming into your business masterworks that could potentially be distributed out to the people that actually own those paintings that are being displayed or just own a, you know, whatever percentage share of, you know, Masterworks in general based off of their investments in that.

15:43Has that ever been something you've thought about? We haven't really figured out how to crack that code at scale, but maybe there are limited opportunities where, where we, you know, we can do that on a case by case basis. But yeah, I mean, that, that would be the dream scenario if we could figure out a way to really create a dividend stream from these assets. I mean, investors would love that. So you've mentioned a couple of artists already a couple of times, and they're huge in names. So including them, who are some of the most popular artists on your platform? I mean, it's definitely, in terms of popularity, I would say it's Banksy and Basquiat.

16:21You know, in terms of which artists on the platform that have performed the best over the past five years or even before we started, you know, 10 or 15 years. I think Basquiat is always a, you know, a prime example of an artist that has just a really impressive, long-term, consistent return. You know, his return has been anywhere from 10 % to 15 % a year for the past 20 years. And it's, you know, it's pretty incredible. I mean, you look at some of these paintings that sold in the 1980s for$30 ,000,$40 ,000 are now worth$150 million today. It's pretty crazy to see. That's insane. And the prices still go up.

17:01So it's just, you know, it's mind boggling to a certain extent. So who's an artist that, you know, maybe Masterworks has acquired some of this art or maybe they haven't yet. But for whatever reason, you're a huge fan. This may be lesser known, unknown. It's kind of a Scott favorite for whatever reason. My favorite artist is Willem de Kooning, who's an abstract painter, mid-century America. I own him personally. He hasn't quite met the Masterworks criteria in terms of risk-adjusted return, so we haven't acquired him, but he's one of my personal favorites. I love that. So Scott, you've shared a lot with us today about Masterworks, how it works, all the benefits, and all the realistic situations when it comes to investing in something like this.

17:52What would you want to leave our listeners with when it comes to your business, Masterworks, art in general? What is the value bomb you want to make sure we walk away with? I think when you think about the market for investing broadly, I think investing is going to change rapidly over the next 10 years. And that probably means when people think about their investment portfolio, it's no longer 60 % stocks and 40 % bonds. Even alternatives like Bitcoin are getting a lot of traction. But I do think we'll live in a world where 10, 15 years ago, people have a small allocation of art, they have a small allocation of real estate, they have Bitcoin in their portfolio.

18:30And this historical idea of a 60, 40 portfolio is just outdated. Now, one thing that I would love to ask you as we kind of close down here is if Fire Nation is listening, they're like, I want to learn more. I'm interested. This sounds interesting because I never thought I would have the opportunity to be able to claim ownership on an artist that I love or a painting that's worth$150 million in climbing. What would be your call to action for those listeners today? Yeah, just go to masterworks.com. We have a financial advisor team that's trained really on the art market. It's the only advisor that exists that really has that training.

19:10And schedule a call with one of our financial advisors and they'll walk you through the asset class. They'll talk to you about how you're investing today, understand what your goals are, and then make recommendations to get started. Fire Nation, you're the average of the five people you spend the most time with. And you've been hanging out with SL and JLD today. So keep up that heat. And for everything that we talked about, you want links, all that jazz, visit eofire.com, type Scott in the search bar. The show notes page will pop right up. And Scott, thank you for sharing your truth, your knowledge, your value with Fire Nation today.

19:43For that, we salute you and we will catch you on the flip side. Hey, Fire Nation, a huge thank you to our sponsors and Scott for sponsoring today's episode. And Fire Nation, what can 4 ,000 of the world's most successful entrepreneurs teach you? How about how to achieve financial freedom and fulfillment? My first traditionally published book, The Common Path to Uncommon Success is a revolutionary 17-step roadmap that will lead you to the lifestyle you've been dreaming about. This book took me 10 years of accumulating the genius of the world's top entrepreneurs, and you can get it all in one place when you visit UncommonSuccessBook.com.

20:18I'll catch you there or on the flip side. Over 41 ,000 businesses have future-approved their business with NetSuite by Oracle, the number one cloud ERP, bringing accounting, financial management, inventory, and HR into one platform. Download the CFO's guide to AI and machine learning for free at netsuite.com slash fire. Do you have the right mentor in your life right now? For the first time in seven years, I'm opening up a few mentorship slots for individuals who know they need the guidance and accountability to take their business and life to the next level. Email me at john at eofire.com with the subject line mentor, and we'll schedule a 15-minute chat to go over the program and see if it's the right fit for you.