Scott Lynn

[00:04:10] Scott, welcome back to What Got You There. How are you doing today?

[00:04:13] Scott Lynn: Thanks for having me. I’m doing well.

[00:04:16] Sean:  So it’s 5:00 PM on a Wednesday, how are you feeling at the end of the day like this, running a fast-growing company?

[00:04:23] Scott Lynn: I was actually feeling exhausted, but I didn’t want you to call attention to that.

Scott’s Mindset

[00:04:30] Sean: There are so many decisions you have to make throughout the day, we’re going to cover some of the decision-making frameworks. We covered a lot of your backstory, you were originally on Episode 137. I’m really interested in the evolution, both of you and the Masterworks, but I would love to know, is there a mindset you have that if you could just pass on to any young person starting out, you think would be incredibly beneficial for them?

[00:04:52] Scott Lynn: Yeah. I think the thing that I’ve learned throughout the years when I think about the past 20 years of starting different companies and learning along the way, I think the thing that’s been most impactful to me is really deciding what to do. I was actually talking to someone about this the other day, I think particularly when people go from job to job, they do it in a very suboptimal way because most people when they start looking for a job, look for jobs for 30 days or 60 days and they wind up in the next thing that’s available, that fits their needs. 

But that’s a really suboptimal way of thinking about how to take your next step. I think starting companies is similar. You want to be really thoughtful around what market do you go into. How does your pricing strategy work? How do you stay differentiated? I think the thing that I’ve learned throughout the years is really figuring out where to spend time, rather than just executing really rapidly or working really hard every single day.

[00:05:54] Sean: That’s really interesting. How did that actually play out when deciding to launch Masterworks?

[00:06:01] Scott Lynn: Well, Masterworks is sort of this really lucky evolution of doing something I love, which is collecting art for the past 20 years, and kind of combining that with finance and technology. I think the idea really started sort of at the very early phase of the crypto industry. And a lot of people were talking about how do you tokenize assets? How do you make things more accessible? How do you democratize things? 

It’s funny because I’ve sort of lived with this great art collection personally for many years, but never really thought about how to build investible products around it. That light bulb kind of turned on four years ago and it just occurred to me that this is probably the largest asset class that’s never been securitized. There’s never been an investment product built for it. When you look at the performance of the asset class, it’s historically appreciated faster than things, like public equities, but the only way to allocate to it is if you have millions of dollars to buy a painting. 

It’s generally inaccessible. When I started thinking through it, all of those dynamics felt really good. We did some early testing to figure out, is there a product-market fit? Do people actually want to invest in a product like this? We saw really good signals, and then we just started scaling it.

Confirmation Bias

[00:07:24] Sean: You mentioned those early days, just testing things out, what else is happening there? I think so many people are just intrigued. It’s like, okay, here’s an idea, it’s kind of experimenting a bit, but then I’m going to take that leap. As you mentioned, you’re about to enter a multi-decade journey here in terms of the company. I’m just wondering what are the other little things going on then?

[00:07:42] Scott Lynn: I think with any business, particularly as an entrepreneur, it’s easy to convince yourself that your idea is great. And I see this so many times across lots of different people. I hear them pitch me ideas, and I’m just thinking to myself, I don’t understand how this makes sense at all. But sometimes we just become, and I’ve done this myself many times, so passionate about something, so entrenched in something you just don’t know when to give up.

I like to be really methodical around how I think about starting a business and that’s coming up with the idea, really understanding things like the total available market. How big is the market? Are there any competitors in the market? But then also starting to test very simple product ideas. One of the things that I and other people on our team have done before is when you come up with a business idea, we’ve literally built a fake website for the business.

We run advertising on Facebook and other platforms to see how much receptivity or kind of what the relevancy scores or just the engagement scores are with that product concept. That in itself has killed so many different business ideas I’ve had because you come up with a great idea and then you put it on the market and you think everyone’s going to love it, and all of a sudden you’re paying $400 a lead and the ads are getting no response and it just doesn’t work. You quickly shut it down. But I think iterating in those really early stages to test different business ideas is critical. And I think like an entrepreneur, you learn a lot from that.

[00:09:12] Sean: This is great. You’re bringing up confirmation bias, oh, this is my idea, I’m looking for every single thing to confirm this. I’m wondering today how are you battling against that amongst yourself, being CEO? 

[00:09:25] Scott Lynn: It’s funny, I think introspection is really hard. I think people, in general, are not good at being introspective and maybe that’s confirmation bias for whatever reason. I think you always kind of have to second guess yourself. It’s like Andy Grove, always be paranoid. There’s some dynamic like that I think is really healthy. And a lot of these businesses and markets are changing so fast, too. Like the people that you have on your team today, may not work tomorrow. 

The strategy that you have today may not work tomorrow. You’re always trying to avoid confirmation bias. Although I think avoiding it entirely is hard, but we’re always trying to do that. 

Hiring Successful CEOs

[00:10:11] Sean: You mentioned how quickly, how rapidly things change. I’m wondering for you, how do you get to that 30,000-foot view? Where you can zoom in on the micro details, but then you can also zoom out on like, okay, what are we doing five, 10 years from now.

[00:10:23] Scott Lynn: The zooming in and out thing I think is a really interesting point. I was actually talking to one of my friends, one of the top tech founders of all time, and we were talking about how do you think about hiring really successful managers and particularly really successful CEOs to run big companies and what skillsets matter? And one of the things that I think really clicked between both of us was that it’s very difficult to find people who are very high level. And by high level I mean, strategic. 

Understand how to think about the product, how to think about differentiation, what markets to go into, when to partner with someone, when to buy someone, like high-level strategic thinking. Then at the same time can get very low level because a lot of these businesses, particularly businesses that are SAS or predicated on very specific LTV to CAC metrics, if you change an onboarding model, all your CAC goes up 40%. And those very small details can have really make-or-break dynamics within businesses that I still think in today’s world most CEOs don’t appreciate. 

I don’t think Harvard Business School is teaching minute details around onboarding funnels, which can make or break businesses. There are lots of CEOs that would just say, oh, I’ll just hire a marketing person to do that. But those details are so critical that I don’t think you can just hire them. I think that the thing that it’s hard to find a CEO that moves between a really high level and a really low level. And just frankly, ignores the middle. In the middle, you kind of have a middle management layer, which is essential for any company. It’s easy to hire people into those roles. It’s really hard to hire high-level people and super low-level people.

[00:12:15] Sean: How would you describe yourself as a CEO? Even if I was asking another employee at Masterworks, what type of CEO is Scott?

[00:12:26] Scott Lynn: I’d love to hear the answer to that question. I think it depends on who you ask. I think certain people would say I’m very high-level and totally hands-off to the point that I just made. I think other people would say I’m super low-level micromanaging every detail. And the reality is, it’s really person-dependent.

If I’m very low-level and very hands-on, that probably means that I have to think there’s a big opportunity in that function or I think there are problems with that function. And if I’m totally hands-off, that probably means that I’m happy with how that function’s running. I think managers have to be situational in order to really adapt to the business. 

[00:13:08] Sean: What does it feel like when you’re operating at your best?

[00:13:11] Scott Lynn: I think it feels like you’re having fun. I don’t believe in this concept of work-life balance. I’ve never believed in this concept of work-life balance. At the end of the day, if you’re really successful, it’s probably because you really love what you’re doing and it doesn’t feel like work. So trying to put people in this framework where they think of work-life balance, I think if you’re thinking about work-life balance, you just have the wrong job. You’re just doing something that you don’t fundamentally love.

Critical Decision-making

[00:13:37] Sean: Back to your earlier point, what is this thing you’re about to embark on? I always think about what ship are you going to get on? If you’re going to be taking this job, this career, if you’re gonna be on the ship for a while, you better be one of those people who are really going to enjoy it.

[00:13:50] Scott Lynn: Don’t get on the wrong ship. There are just so many people that get on the wrong ship, particularly in early careers. I was telling a friend’s kid this at one point, but it’s sort of like a decision tree. You sort of come down, you have two options. For each of those two options, you have two more options, and making those very early decisions correct is so critical because that’s when you’re starting off the decision tree. And if you wind up on the wrong branch, then you wind up in someplace that you don’t want to be 20 or 30 years from now. I think making the right decisions really early on in someone’s career is really important.

[00:14:26] Sean: How do you think about your ability to impact major aspects of the company with each individual decision? I am just trying to think of the decisions that you’re going to make, they’re going to be weighted differently. And with those really high impact decisions, what does that process look like for you to finally pull the trigger and make that decision?

[00:14:44] Scott Lynn: Well, critical decision-making I just think it has to be really thorough. You have to second guess yourself to think through all the different situations. Try to think through how it plays out. For me personally, when I do that, it’s usually alone. I’m thinking about those things alone at night or in the morning. I don’t know if there’s a perfect process for it, but I just think spending a lot of time thinking it through is really important.

There’s a lot of people that just do a really simple analysis, do a SWOT analysis or something, and I just don’t think any of that stuff has ever really been shown to be predictive or particularly useful. I do think having a framework in your own brain to think through the cause-and-effect of things is important. Just spending the right amount of time on really critical decisions.

[00:15:03] Sean: Well, one of the things that seem to keep popping up, you mentioned introspection earlier and it seems like you’re pretty self-aware. You understand what works best for you, and you’re not trying to just apply someone else’s model on top of you, just because you heard that was a good model. I’m just wondering about that process for you, just becoming more introspective, really understanding how you operate best, is that something that you actively think about, or does that just naturally occur?

[00:16:00] Scott Lynn: It’s funny though, I don’t know if I’m not self-aware or not. I’m not sure how to think about that, but I think the best CEOs are those that are humble. I think it’s those that listen well, those that learn, those that grow over time. I think it’s all of those qualities that make people successful and just natural willingness to want to iterate, to want to try more, to continue to just move ahead.

[00:16:37] Sean: You mentioned some of those big things that are typical of successful CEOs. What’s happening behind the scenes that are really hard as a CEO of a fast-growing company that most people will not talk about or it’s just not really known?

[00:16:50] Scott Lynn: There are so many things, I guess. There are different phases that companies go through, and I think this zero to one phrase that Peter Thiel came up with is a nice way to think of the early phase but going through those phases is hard. Masterworks went through the phase of kind of finding product-market fit, scaling quickly, arguably kind of achieving profitability, maybe that was later in the scaling phase. Today we’re really in the scale phase. We’ve found a product-market fit. This past Monday, we had 11 people start, we’re hiring 30 or 40 people a month. 

And to a certain extent, we’re trying to keep the wheels on the bus. We’re growing quickly from a people perspective with tons of new people starting, we’re training new people. We’re trying to make sure they understand our business or revenue model, the strategy, where they fit into the strategy. But at the same time, also just trying to make sure that they’re the right people and that we’re making the right bets as we scale out the company. I think in these hyper-growth phases, it’s just a lot of work. It’s people’s decisions primarily that I would say I’m spending time on now.

[00:18:06] Sean: What are you spending the most amount of time on that doesn’t actively show up on the bottom line but has a huge impact on the future of the company?

[00:18:18] Scott Lynn: Right now, it’s people. I’m literally spending six hours a day in interviews right now. Not interviews like this, but people interviews. So right now that’s really the majority of the time and that doesn’t have an impact on the bottom line, but those are such critical decisions. If you look at all data around these hires and I’ve just experienced it so many times, you may hire someone at the senior level, and it can just be a make or break dynamic particularly when you’re in this hyper-growth phase.

Masterworks

[00:18:56] Sean: I think it’d be helpful even just to add some context, I just want to make sure anyone who didn’t listen to episode #137 knows what exactly Masterworks does and walk us through the process currently.

[00:19:06] Scott Lynn: Masterworks is the first from ever to securitize a painting. We do that by filing individual artworks with the SEC as public offerings. Today, we’re taking one painting public roughly every five days. We’re raising right now on a run-rate basis, about $500 million a year growing 2, 3X year over year. I guess since we spoke last time, we’ve become the largest buyer in the art market. 

We’re the only firm to provide any sort of investment product to help investors gain exposure to the asset class. We have a secondary market now where people are trading securities in individual paintings. We’ve really built out a platform for the first time ever for people to invest in art.

[00:19:50] Sean: Essentially people can buy fractional shares of some of those legendary art pieces around, correct?

[00:19:57] Scott Lynn: Yeah. And the thesis is that if we look at the characteristics of the asset class over the past 25 years, contemporary art has appreciated at 14% a year. It’s non-correlated meaning it doesn’t necessarily move in the same direction that the public equities do. It doesn’t go up when the stock market does and decline, and just really behaves differently, which makes it a very good diversifier for any portfolio. The challenge historically is the only way, to invest in it is if you have millions of dollars to buy a painting.

We think it’s a natural asset class to securitize. It’s a natural asset class that the people should be able to invest in. We fundamentally believe that 10 years from now, people will think of investing in art or allocating to arts, similar to how they think about allocating to public equities, allocating real estate, allocating fixed income. We think it deserves a role in an investment portfolio.

[00:20:47] Sean: You mentioned Masterworks has achieved product-market fit. I’m wondering about you as the team when was that moment? When did it click, we got this? 

[00:20:56] Scott Lynn: I don’t know if there was a single moment. I don’t think there’s ever a single moment. When we started the business, because of all these tests that we had run, as I mentioned, we knew there was a lot of interest in people investing in art broadly. But in order to get the onboarding funnel right, in order to get the investment products right, how we price things, even just what type of art we buy, we didn’t know until we founded the firm that contemporary art was appreciating at 14% a year. 

And old masters were appreciating at 2% a year. We had an idea around that, but it took us a couple of years to really build out a research team to help inform us on how we think about appreciation in the market. A lot of this business and making it click was just slowly iterating on every different component until the flywheel which today is spinning pretty quickly. 

[00:21:52] Sean: What’s that research process like? How are you sourcing these pieces?

[00:21:56] Scott Lynn: It’s crazy, the art market, I tell people this all the time. I don’t think people totally believe me, but to contextualize it, the most sophisticated people in the art market today are families. They’re families that have been collecting for multi-generations. They have multi-billion dollar collections. But there’s nobody like a professional manager, such as Masterworks operating the art market. There’s nobody with a data analytics team, people aren’t using data to make decisions. 

Sotheby’s and Christie’s, two leading auction houses are more than 250 years old. These businesses literally had been operating the same way for centuries. So when we thought about using data to figure out how different things in the art market were appreciating, what we quickly learned is that there wasn’t a dataset. We went out and we bought auction catalogs of public auction sales, going back to the 1960s, 1970s, and had a team of 30 interns, literally do data entry, recording this data into a database, which now if you go to the Masterworks website and click on price database, you can actually access this data for free. 

And that data really served as the basis to do index construction on the asset class, understand how different segments were appreciating. But to me, it was so amazing coming into this market because I don’t think there’s any other industry that hasn’t been digitized in 2020. Or whenever we did that, I guess 2018 or whatever the year was. We were kind of the first ones to really create a data set that can be used to understand performance.

Challenges in Securitizing Art

[00:23:29] Sean: I know you’re probably like, this is a somewhat obvious question, but why you? Why did you see the white space and then be able to capitalize on that?

[00:23:37] Scott Lynn: I get asked that all the time and I don’t honestly know. The thing that is hard about the business is that it’s a heavily regulated business. All of our offerings are filed with the SEC. Our sales team is licensed by FINRA. Everything we do is very complicated from a regulatory perspective. I think that is just a really high hurdle that a lot of entrepreneurs haven’t been able to get over when having this idea and lots of people who’ve had this idea historically.

I think another one is how we use data to inform what we buy, how we think about the characteristics of the asset class, we’ve really been better than anyone else at that historically. And I think just my background in the art market and connections in the art market, it’s a very old school market. It’s hard to walk into a lot of these galleries or auction houses and buy $20 million paintings if you don’t have a reputation or a brand in that segment. There are lots of things I can come up with, but it’s surprising that nobody else has done it before.

[00:24:38] Sean: Believe me, I’m not looking for like black and white answers. For the majority of this, there shouldn’t be black and white answers. I’m just intrigued about the thought process and some of the things, even like you mentioned, just going into an auction house or just having some of these connections, these little things, they all come together. I’m wondering though, what are the things that you or the team are just spending too much time on? Let’s call it over these past two and a half years. Where in hindsight, it’s like, you know what? We probably would have cut the cord a little sooner.

[00:25:02] Scott Lynn: I think there were lots of things that we spent time on in the early stages that did not make sense. I’ll give you an example. One of the things that we thought when we first started the business was that we wanted to create a fun product for investors to buy securities in and a fund that owned lots of different Masterworks paintings, and we could just distribute that fund through family offices and in institutions. And this was sort of at the same time that we’re creating the retail platform where people could like pick and choose individual paintings to invest in. 

But we didn’t exactly know what the right investment product was. The easy approach from a very high level, 30,000-foot perspective is you build the fund, you sell it to a bunch of wealthy family offices, you raise a hundred million dollars and then you go forward. That’s much easier than building a platform that has to do automated investing through lots of different vehicles where people are picking and choosing paintings and trading securities, et cetera. But I think what we didn’t appreciate with that is that we didn’t really have a differentiator in that space. 

We were first-time managers. Nobody knew us. The asset class was brand new. We couldn’t articulate exactly how fast the asset class was appreciating, how to think about it versus other asset classes. And we really just got no traction. We spent six or 12 months trying to do that with the team and really got nowhere. We’re doing that again today now, but I think today four years later, we have a track record. Most people know us. If you’re interested in art investment products, people are coming to us anyway. That’s an example of I guess a strategy that we had early on that we thought made sense high level that we never got off the ground for various reasons.

[00:26:59] Sean: Scott, I appreciate this so much. This is awesome. You’re actually describing how it actually works, whether it’s starting a company as opposed to like, no, no, flawless idea execution was perfect.

[00:27:08] Scott Lynn: It’s never flawless

Handling the Unknown

[00:27:10] Sean: I know. It’s great though. And one of the things that just keep popping up is the number of unknowns and scenarios that you’re entering where you just don’t have the final outcome. I know you’ve been an entrepreneur for a very long time, how do you get comfortable with going into the unknown and handling that complexity?

[00:27:26] Scott Lynn: I think you get comfortable with knowing you won’t get comfortable. One of my favorite books I read last year was Thinking, Fast and Slow by Daniel Kahneman. It was a really great book and I think one of the things that the book highlights, a lot of success in life is luck, but if you conclude that it’s luck, then what you do differently is you try to put yourself in as many situations as possible to be lucky. And I think that’s what really successful people do. We realize that a lot of things are just luck, but you iterate fast, you try new things, you fail fast, and you just keep moving forward. I think that’s really critical.

[00:28:15] Sean: You bring up a good point. So many people are willing just to stop things even before they start whereas a lot of great entrepreneurs explore the possibilities, well, let’s see what’s the potential here? What can happen?

[00:28:26] Scott Lynn: I think you move into the unknown, see what happens, and if it doesn’t work, for whatever reason, you move onto the next unknown. Like everything is effectively an unknown that you just got to go for it.

[00:28:37] Sean: You mentioned Kahneman’s book Thinking, Fast and Slow. Are you an avid reader? Are you reading a lot of books or other things like that?

[00:28:45] Scott Lynn: I go through phases, I think, depending on how tired I am at night, but one of my new year’s resolutions was to get back to reading kind of 30, 45 minutes a night. I wouldn’t say I’ve been that successful with that this year. There are definitely books that have been really influential to me and have shaped my career that I go back to over the years.

Most Influential Person in Scott’s Career

[00:29:10] Sean: I’m wondering if you could have any entrepreneur, CEO, or business leader throughout history and could just be in your corner that you could just go through strategy, decisions with, who would you love just to have there?

[00:29:22] Scott Lynn: My answer is super geeky. Mine is not a well-known personality, it’s Michael Porter who wrote the Competitive Strategy. He’s really been the most influential person in my career in terms of how do I think through business strategy? How do I think about differentiation? How do I think about the product? I really like what Porter has done because it’s basically given business leaders throughout the decades, a very specific framework to think through. 

How do you position your business? How do you differentiate to capture the most margin, within a particular market? And I think that’s just a framework that particularly in today’s role, where everyone wants to be a CEO and everyone’s trying a different idea all the time is kind of missing. But I think it’s one of the most important ideas in business history.

Learning Phase

[00:30:14] Sean: I love these inflection moments where you pick up this book, you’re fundamentally different afterward. Are there any other key inflection points? Weren’t you managing like 70 people as CEO when you were 17? I’m just wondering, how you progressed from that.

[00:30:32] Scott Lynn: You’re right. I started my first company in high school, which became the most popular game on the internet when I was graduating high school. That business grew very quickly. I think, inflection points, I don’t know if I would call them inflection points. I would describe things as a kind of learning phase, I guess. And we talked very early on in the episode, sort of that change from focusing on execution to focusing on strategy or deciding what to do. I spent the first 10, 15 years of my career hyper-focused on execution.

Like people, structure, process, working hard, working fast without really thinking about where was I going and what was I working on. Now in the early days of the internet, there was just so much opportunity everywhere that maybe execution was just as important as anything else. But there are so many struggles as an entrepreneur that you go through. I think everyone kind of has people management struggles. Like, how do you hire people? How do you coach people? How do you fire people? 

My thinking on that’s definitely evolved throughout the years. How do you think about strategy? How I think about the product. What are your weaknesses? Who do you hire on your team that you really need? There’s lots of stuff, but nothing specific really comes to mind.

[00:31:58] Sean: Execution to strategy, a lot of that involves people as well, where’s the next 10-year learning phase. Are you even thinking about that?

[00:32:07] Scott Lynn: Yeah. It’s much easier to recognize this stuff in hindsight, I think than it is when you’re in the present. For me, the challenge of Masterworks, I’ve been in tech, I’ve kind of been in finance, but we’re getting sort of deep into the weeds of the finance world at this point. I think a lot of that’s been a learning for me at least in terms of when we think of intermediary distribution, and when you’re after the advisors, how we sell in institutions. That’s probably been my biggest learning curve this year.

Priorities

[00:32:48] Sean: About the learning curve and learning phase, I’m just wondering for you, what’s going on behind the scenes? Are there things you’re spending a lot of time on that most people would never even conceptualize or think about, but you view as really vital to your success in the company?

[00:33:05] Scott Lynn: Well, I guess when I think about priorities, I always sort of think about the Stephen Covey Model, where you have things that are urgent and important and things that are not urgent and important. And I think as CEO, you kind of always have to be spending time on both. With our business right now, it just feels like everything is urgent and everything is important, but to really make progress on hiring, frankly is one of those things that’s always never urgent, but always important. You have to focus on that category. I try to divide tasks accordingly and kind of prioritize based on that.

The White Space

[00:33:48] Sean: You’re so good at spotting, the white space, I’m wondering where Scott’s spidey senses are going off with regards to what’s happening in the business world that’s just not obvious to others, but to you, your blinkers are going off.

[00:34:02] Scott Lynn: I have this list of ideas that I track and I come up with one business idea a day and I think about it. I think about them all the time and I get rid of 95% of them. I realize 10 days later, that was a horrible idea. You just keep cycling through all these things. I have lots of different ideas, I think on different industries that are super antiquated. It could still be disrupted, right? One of the industries that I always talk about that just makes no sense to me is recruiting.

I have no idea why companies pay recruiters the money they pay to bring candidates in. Feels like the job process of finding a job, making sure that it’s like a dream job for people. It’s a great life decision. It feels like that’s broken. I also think it’s really interesting how, when you look at data, high-level from a macro perspective, one of the things that clearly drives happiness and every individual human being is friendships. 

But the entire market is really focused on dating. I’ve always found that to be a really interesting dynamic. There’s lots of stuff like this that I think still there’s lots of white space out there that still exist in different industries that are waiting to be disrupted. It’s just finding the right product or the right way to do it is always the hard part.

[00:35:23] Sean: How do you channel that creative energy? I can tell your mind is going a million miles a minute, I’m assuming throughout the day, how do you challenge that? 

[00:35:36] Scott Lynn: I’m 41 years old now, I work out with a 24-year-old trainer. He kills me every morning. That’s the only way that I kind of manage stress or but I’m not good at it, I guess.

Dynamics in the Art Market

[00:35:50] Sean: We’re all figuring this out. One of the things that I appreciate, what you’ve been able to do is you were talking about so many of the different industries that you’ve tapped into and then went super deep on. Are there things that you’re studying outside the art world, that you think are really going to greatly influence the art market moving forward?

[00:36:08] Scott Lynn: That’s a really interesting question. There’s a couple of dynamics going on in the art market today that I think are unique. One is the Masterworks dynamic. Next year we’ll buy most likely more than a billion dollars in art. And that’s entirely new capital that’s being dumped into the art market where historically these paintings have really traded between ultra-high net worth families living around the world. We’re bringing a new capital source into the art market, which I think is incredibly disruptive. 

And I think a lot of people in the art market, including ourselves, aren’t entirely sure how to think about how that impacts things over time. This other dynamic within the art market, which is interesting is really, we’re seeing more of a focus, I think, over the past several decades, on living artists. Whereas historically much of the returns have been deceased artists. We’re wondering how that impacts the asset class as living artists gain more and more momentum, more and more kind of control of the market. I mean, they’re living, they’re riskier in certain ways than ones who are deceased.

I think there’s the market’s changing in terms of what types of artists are valued. The capital coming into the market is changing. And I think a lot of the intermediaries are changing. I think Sotheby’s and Christie’s would say they’re focused on selling online more so than in person. That’s kind of a COVID theme. We’re seeing a lot of crypto people come into the art market for the first time, particularly for artists like Banksy, Picasso. There’s definitely more change in the art market than I think there has been in decades. 

[00:37:50] Sean: What living artists are you seeing the most interest right now?

[00:37:54] Scott Lynn: If you find that most interest has the highest appreciation rate, I think the highest appreciating artists that we track over the past year is probably Banksy. Banksy is interesting because our research team identified him as a momentum artist maybe two years ago. And we started buying Banksy back then, and that was somewhat of a controversial decision. Like a lot of people that don’t know the art market would say that makes total sense, Banksy is a big name, but Banksy, if you think about it is actually a very hard artist to back because he’s anonymous.

He doesn’t have a gallery. He’s not part of the art world infrastructure. You don’t see him at events, he’s not active with major collectors. He has a very small body of work. There’s not a lot of Banksy paintings. We’re seeing more of these pop culture dynamics now influence artists’ markets. I’m not sure of the exact numbers, but his market’s got up 100% probably year over year, if not more at this point. He’s clearly been the standout compared to other artists. 

[00:37:01] Sean: What are you guys looking at in terms of the pop culture impact on these specific artists?

[00:39:07] Scott Lynn: It’s a hard question because there are not that many artists that have really pop culture followings. Banksy has it. We don’t have a big data set to really conclude how the pop culture dynamic or the Instagram dynamic for that matter really impacts these artists’ markets. We do see more new collectors coming into Banksy markets, in particular, I think we probably see that also with Kaws but to a lesser extent. 

So possibly it’s helping bring in new collectors into their market and drive up prices. And generally, what we see within the art industry is that once a collector comes in and starts collecting one specific type of artist, they’ll eventually start other types of artists over time. I think that’s a good dynamic for the market.

[00:39:57] Sean: Are you guys tracking, what are those second-order artists? They’re going to start following and buy pieces based on that. You can be predictive in terms of what pieces will be more beneficial in the long run.

[00:40:09] Scott Lynn: Yeah, a little bit. We always tell people that when you look at volatility in the art market, it’s very hard to predictably make money for spending less than $500,000 a painting. The probability and outcomes are just too wide. We’re generally focusing on $500,000, million-dollar-plus paintings because those returns are more predictable. There are definitely people in our market that would tell you they can predictably buy $50,000 paintings, and they know they’ll turn into $500,000 art paintings. We think data would show otherwise.

NFTs

[00:40:52] Sean: What’s the impact of NFTs? I know you mentioned the crypto space is having some impact. I’m just wondering how you’re assessing all this.

[00:40:52] Scott Lynn: I’m the outspoken anti-NFT person. We don’t believe in NFTs for two primary reasons. The first is that we just take a step back and just think about finance 101 the definition of a strategic asset class is anything that beats inflation and is non-correlated. That’s what deserves a role in any investment portfolio. And I think with the NFTs, there’s not even enough data to conclude that they’re appreciating. There’s tons of data to conclude that they’re hugely volatile.

They go way up, they go way down and they go way up, they go way down, but I don’t think that we can conclude that they’re predictably appreciating. In terms of correlation, I think there’s a very high correlation between NFTs and Ethereum. There’s a very high correlation between Ethereum and Bitcoin. And there’s a very high correlation between Bitcoin and public equities. Even if we could conclude that NFTs are appreciating, we’re not really seeing them today as a diversifier for an investment portfolio. 

That’s the reason number one. They just don’t really meet the definition of what we think of as a strategic asset class. The second reason which I just fundamentally struggled with, and I don’t know how anyone gets their head around this. Let me, use an example to explain it. If we go out and we buy a $20 million Arbus painting, which we do all the time, at this point, we don’t actually own the copyright to that painting. The artist foundation owns the copyright. 

So when you’re buying an NFT, you’re literally buying an NFT that contains a digital image that you have no copyright or intellectual property rights. You own that image just as much as I own that image and how people are spending millions of dollars on something that they fundamentally have no ownership in, it doesn’t make sense to me.

Information Stream

[00:42:39] Sean: Yeah. I stay away from things I don’t know. I just have no idea about this. This is also highlighting one of the things I’m just so intrigued by, the number of things you have to understand. You even mentioned, you guys are taking something public every five to 10 days, which is crazy. Then you have to understand the art world, you have to understand tech, you’ve got to understand crypto, everything like that. What is your information stream like in terms of just what’s the information you need daily to be able to make these decisions?

[00:43:06] Scott Lynn: Yeah, it’s huge. And it’s getting bigger at Masterworks, it’s really interesting. Today we’re focusing on 55 artists markets there are roughly 7,000 artists that trade publicly at auction. We’re focused on a very small subset. Out of those 55 we’ve seen more than $10 billion in work that’s been offered to us privately. We’re now getting to the point where we have this huge data set of private work that nobody else has, that just helps us understand how prices are trending in private markets, independent of the public auction markets. That in itself is a huge competitive advantage. 

Future of the Art Market

[00:43:41] Sean: What’s art buying going to look like in five, 10 years. I’m just wondering are there going to be big shifts or is this going to come to more people investing in Masterworks?

[00:43:53] Scott Lynn: I think one of the challenges with the art market, which we’ve done a good job reducing is just transaction fee. There are too many people in the art market trying to take too big of a piece of the pie. Like advisors charge 10%, auction houses charge anywhere between 10 and 20%. Dealers charge five or 10%, depending on who’s brokering the painting. All of these transaction costs just really make it prohibitive for collectors that aren’t sophisticated to make money in the art market. I think that’s really problematic. I hope that over time we see transaction costs go down in the market.

And we see dealers, galleries just become more thoughtful around how to bring in new collectors, how to help them understand the market, how to help them understand art, not only from a cultural significance perspective but also from an investment perspective. I think there should be an expectation that if a dealer tells a collector, they should buy something for a million dollars that dealer has a fiduciary obligation to make a recommendation that’s right for that person. Today, the market’s just a little bit of the wild west, so hopefully, that changes over time.

[00:45:11] Sean: I appreciate you shedding some light on that. I know it’s been a long day. We’re going to wrap this up here in a couple of minutes. I am wondering what’s the biggest unknown that you have question marks on, that you’re really intrigued by that. One of those head-scratchers, you’re like, I’m going to put some more attention to that, it just got me intrigued right now.

[00:45:31] Scott Lynn: That’s a good question. Nothing is really coming to mind. I wish I had an answer to that, but, I think I’m just so focused on Masterworks, in this business right now, I’m thinking less and less about other stuff lately. 

Conversation with Anyone Dead or Alive

[00:45:50] Sean: If you could just sit down with anyone dead or alive, you would just love having a deep form conversation with who would you love to do that with?

[00:46:07] Scott Lynn: Mine would be very personal. It would be my mom who passed away when I was in my early twenties. As you get older, you realize your parent relationships are probably very different than how you perceived them as a child. I think there are lots of questions I would ask there. From a business perspective, I mentioned Michael Porter who’s is living.

I think there are other people as well that are just fascinating. We mentioned Kahneman. I was a huge Jack Wells fan when I was younger, in my early twenties. For me, I think really talking with people that have influenced you and how you think about business today, decision-making today, life, personal stuff is most interesting.

Gustaf Courbet

[00:47:00] Sean: Final one, which artists throughout history are you most in awe of?

[00:47:05] Scott Lynn: Okay. My personal answer on this is this artist named Gustaf Courbet. And for people who are listening, who know art will know the artist. He was the first realist artist, a kind of founder of modernism. And the thing that’s so incredible is this painter was painting nude women, in 19th century France. And at that point in time, it was regarded as so crazy, so revolutionary that he was exiled from the country. He was not allowed to come back. 

And you can go to the Metropolitan and see this painting Origin of the World, which is this very explicit kind of x-rated painting. Which today it’s like anything else, like you’ve seen a million times, but back then it was just so significant politically that they exiled him. I think he’s one of the most just revolutionary, crazy, amazing painters in history that I find fascinating. 

[00:48:07] Sean: That’s awesome. We’ll have everything you mentioned linked up in the transcript and show notes. I’m just wondering anything else you want to leave the listeners with or any way for them to stay connected with you and what you’re doing at Masterworks?

[00:48:18] Scott Lynn: Yeah. Check out www.masterworks.io, request access, create an account, schedule a call with our membership team who basically will walk you through how to think of art as part of an investment portfolio, how art can impact your portfolio, hopefully for the better. They’ll talk about investment objectives, allocation rates, how to think about minimum investment, and so on.

[00:48:47] Sean: Scott Lynn, I can’t thank you enough for joining us on What Got You There.

[00:48:48] Scott Lynn: Thanks for having me. 

[00:48:52] Sean: You guys made it to the end of another episode of What Got You There. I hope you guys enjoyed it. I really do appreciate you taking the time to listen all the way through. If you found value in this, the best way you can support the show is by giving us a review, rating it, sharing it with your friends, and also sharing on social. I can’t tell you how much I appreciate it. Looking forward to you guys, listening to another episode.

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