George “Buddy” Guy (BG) was born in 1936 in Louisiana. His earliest influences included T-Bone Walker, Lightnin’ Slim and Lightnin’ Hopkins. BG wrote in his autobiography: “I wanted to play like B.B. King but act like Guitar Slim.” In 1957, BG cut a demo tape at a Louisiana radio station and bought a one-way train ticket to Chicago. Eric Clapton has said that BG is “by far without a doubt the best guitar player alive.” BG considers himself a “caretaker of the blues.” 

1. “I had a blues club before The House of Blues or any of these other clubs started. A lot of people will go into business and if they don’t make a lot of money in the first six months, they’ll close the doors. When I first opened my blues club Legends I lost millions of dollars keeping the doors open. I used to come off the road and meet payroll with money I had just made on tour. And I still didn’t close the doors.” “When I came to Chicago 54 years ago, they had so many blues clubs that I didn’t get to see them all. But over the years, drugs, DUIs and non-smoking really killed a lot of clubs all over the world.” “The blues has the blues.”

There was a time in the history of Chicago when the city was filled with blues clubs. The Chicago Tribune paints the scene in this way:

“There were so many places on the West Side and South Side that some nights we would just drive around with the window down and listen for the music coming out of the clubs,” remembers Jim O’Neal, a founder and former editor of Living Blues magazine, who began exploring the music in Chicago in the 1960s. “There could be as many as 30 bands playing on a weekend night in Chicago, up until the ‘70s,” recalls Bob Koester, founder of the Chicago blues and jazz label Delmark Records.

There are many factors that resulted in the decline of Blues Clubs. In addition to the factors BG mentions, music styles and fashions have also changed which makes the business even harder. There are also many new competing forms of entertainment. Fortunately, Legends can also sell BG merchandise. While selling “merch” is a major factor in keeping the club financially healthy, it is not a panacea. BG is most certainly correct that the most important factor of all are changes in the economics of running a club. The driving force for the club owner is selling alcohol. A music venue lives or dies based on how much alcohol it can sell. That may push a club owner toward a DJ rather than a band. Here’s an account of the situation in Seattle for a club:

Why would I spend $10,000 on an artist and take a ton of risk and then, y’know, ‘Oh, whoops, we made a mistake and nobody showed up?’ In our business, in the small, independent venue world, we don’t have the safety net for risk.” A traditional live-music show typically involves multiple bands, van loads of gear and instruments, and crew members. This translates to a much higher price tag than that attached to a DJ, who might only bring a laptop and turntables. “I obviously love bands, but a band is just so much more expensive,” says Chambers. “For a band, you have to put so much money down up front, versus a DJ night where you’re paying one person to show up and you know there’s a huge upside.” According to Chambers, DJ nights on weekends draw “usually double the amount” of people who come out to rock shows in those same slots. Johnson also points out that many dance nights are longer than a traditional show, driving more business to the bar. “When you do a typical three-band bill, say you have doors at eight and it’s over by midnight,” he tells me. “OK, well now you have two hours left over at the end where you’re not making any money at the bar because the show’s done. You can still make money that way. But when we do these DJ nights, we do them nine to close. So that’s just more time.” Venue employees also unanimously identified increased alcohol sales as a major advantage of these nights. “Any show at a venue, you’re making your money at the bar,” says Chambers. “That’s your primary source of income. I’ve been a bartender in venues forever, and you always get those big hits of people rushing the bar between sets. On a DJ night, though, there aren’t sets, and you’re getting that rush between songs rather than in 15-minute intervals.” Or as Johnson puts it, “When there’s a DJ, it’s ‘drink, go dance, come grab another drink. ”

2. “I used to go play at clubs and the place would be packed. But the promoter would say, ‘well, I didn’t make no money tonight.’ And I would ask for cab fare home and the guy would say, ‘you heard what I said. I didn’t make no money tonight.’ So if I didn’t end up walking home, I’d have to beg somebody for cab fare. So I said to myself then that if one day I was able to do what I’m doing now, I would never strand a musician. I have their money before the doors even open. I’ve been through that and I don’t want any other musicians to go through that.”

There are a number of ways that a club pays musicians today.  They include:

1. The club guarantees a fixed payment or a percentage of the revenue from a cover charge (whichever is greater): Only the most well-known and proven drinker attracting musicians get this arrangement with the Club. This is probably the formula Buddy Guy uses at Legends given what he said above.
2. The club splits the take at the door from the first dollar of revenue: This is the best treatment a lesser known and less proven band can hope for.
3. The club takes its expenses off the top and then splits the door revenue with the musicians: This is risky for the band.
4. The club charges the band a rental fee (“pay to play”): This is obviously the worst option for a band. But there are so many bands trying to break through and so few clubs on a relative basis for them to play in that this financial arrangement is common.  There are several variants of this method all of which create significant risk for the band.

Buddy Guy tells this story about the outcome of playing gig: “Before the late Junior Wells passed away, we were in California one time and didn’t get paid. So I saw a hot dog stand and we got one hot dog and got a knife and cut it into four pieces for us and the band. And we survived. And we still played. When you run into stuff like that, you should probably say there’s no light at the end of the tunnel. But I didn’t have that much sense. Music is what I had dedicated my life to and I’m still doing it.”

What might the financial math look like? Here’s one account of what happens Charleston:

“Two to three acts on a bill is standard. Generally, there’s a local opener, a regional touring act, and either a local or national headliner that’s a pretty safe bet for drawing a crowd. Let’s say you had a pretty solid night and got 200 folks out, each paying a $5 cover. That means you made $1,000, right? But remember that village? They need to get paid too. First comes the production fees for the door man, security, hospitality, and the sound man. A standard production fee in a 200 capacity is around $250. That leaves roughly $750. To get that many people out might seem easy, but remember we are talking about live, original music here. That’s a lot of people, and unless you want to risk potentially making zero dollars if not enough people show up, you might need a promoter. They will take another 15 percent of the net, or $112.50, leaving $637.50. Now split that evenly between three bands, and it’s a little over $200 per band. If each band spent $30 in gas to get there, that goes down to $170 per band. Split that four ways, and each person in each band walks with $42.50.”

3. “In 1985, no matter how much I loved my [first] club the Checkerboard was a drain. It drank up money like drunk drinking up whiskey.  I would have stayed except for the landlord pulling off some underhanded moves to get rid of me.”

If a club owner can’t control what the supplier charges for an essential item like rent, wholesale transfer pricing can kill the business. If you know of an old school restaurant or club in a prosperous area if you investigate you will often find that the operator owns the building. If the independent operator does not own the building they may be lucky and have a landlord who is willing to offer a lease in return for a reasonable percentage of gross revenue. Chain or multi location operations have a better chance of survival, but wholesale transfer pricing makes operating a music club without owning the building a tough way to earn a financial return. How many have failed in your area over the past five years?

4. “[Legends is] kind of downtown around the hotels, and that keeps it afloat.”

BG knows that without convention and tourism related business, there is simply not enough addressable market to keep a blues club alive. This is true even in Chicago. He learned this lesson the hard way. After BG’s unfortunate financial experience with the Checkerboard club, he opened his Legends blues club in 1985 in a leased building inside the Loop, behind the Hilton on Michigan Avenue. When BG had enough money to buy a building in 2010 he moved the club to its current location at 700 S. Wabash. Since BG now has no landlord he has solved his wholesale transfer pricing problems on rent, but owning the building that houses legends is not enough to ensure profitability.  There is perhaps no one who believes in the importance of a big market more than the venture capitalist Don Valentine who once put it this way: “I like opportunities that are addressing markets so big that even the management team can’t get in its way.” Whether there is a big enough market is just one business risk and it gets worse if barriers to entry are low. Opening a club is relatively easy compared to other businesses. Keeping the club open is not easy. As Warren Buffett has said: “In a commodity business, it’s very hard to be smarter than your dumbest competitor.”

5. “In my pocket hugging my thigh was $600. Took me two years to get that money together.” 

In his biography, BG recalls leaving Louisiana in 1957 for Chicago with just $600 to his name.

My life before September 25, 1957, was one thing, and my life after was something else. I had said my goodbyes and asked Bob to drive me down to Hammond, the first train stop north of New Orleans. All I had was a suitcase with a few clothes, my reel-to-reel tape with the song I cut as WXOK and my Les Paul Gibson guitar.

In a PBS oral history BG describes some of what happened next:

I arrived at about 11:26 the night of September 25, 1957. For some reason I can’t ever forget that. And at that point, I wasn’t looking to be a musician. I wanted to meet, in my book, the giants of musicians, which was Howlin’ Wolf, Muddy Waters, Little Walter, Sonny Boy Williamson, Jimmy Reed, just to name a few of them. They all were living here then. And I wanted to go to work, just common labor in the day, and go out in the night and see if I would learn how I was supposed to play by watching them. My mother had had a stroke, and I was hoping to send money back down there. I got stranded; I’d never found a job. I really looked and looked – I was ready to do anything to help my family. I was too shy to sing, and I got stranded for three days with no food.

There are lessons that business startups and entrepreneurs can learn from BG’s experience. The first rule was stated best by a Harold Geneen an American businessman most famous for serving as president of  ITT Corporation: “The only unforgivable sin in business is to run out of cash.” Lots of other problems can be fixed, having but not having any cash is deadly. How much cash to have when starting out in a new venture is always a challenging question to answer. One suggested rule of thumb for startups is to have at least 6 months of cash on hand. And you should be raising money far before you reach that point. Having at least 6 months of expenses in cash is a good rule from a personal standpoint as well. In addition to having some cash on hand, relatively low cash burn rates allow the individual or business more time to build something valuable. If the cash burn rate is too high, a business can find themselves itself under pressure to prematurely commit to something and that rushed decision can end up being fatal to the business. This is discussed in detail in my new book A Dozen Lessons for Entrepreneurs, which benefits the charity No Kid Hungry.

6. “I would’ve [taken the train home shortly after moving to Chicago] if someone had just loaned me a dime. Thank God they didn’t.”  

Six months after arriving in Chicago the $600 BG brought with him from Louisiana was gone. He was hungry. BG describes what happened next in this way:

Someone dragged me into the club while Otis Rush was playing, and I went up and played a number. And whoever owned the club said, “I don’t know who that is, but hire him.” And I went outside and was telling people how hungry I was, and someone said, “No way, man, the way you play that, you ain’t got no excuse being hungry again. I’m gonna call Muddy.” Well, I was walking out the door, and someone in the aisle slapped me. I didn’t know who he was; I didn’t want to be bothered. He said, “I’m Muddy. I’m the Mud.” And I said, “Oh, Jesus, I’m getting mugged.” But it was “Mud” he was saying, not “getting mugged.” He put me in the back of the car and made a salami sandwich and convinced me that I could stay and be a part of what they had invented in Chicago.

When someone like BG is a success survivor bias inevitably kicks in among onlookers. There are certainly many people who tried to do what he did but failed but who are now forgotten. 

7. “I’ve got so many friends who have passed on who were told they had to bring some money and they just hung up their guitars. But I didn’t, because I didn’t have much sense.” “I went many days hungry I still was going to small clubs, and I finally got a job driving a tow truck. And I would drive the tow truck from seven to five in the evening, wash the grease off of my hands, and go play the small club that night, because I loved my music so well. I didn’t even dream of saying, ‘One day you might hit the right note and not have to drive a tow truck anymore.’ I didn’t plan this; I didn’t see this. Because after I played with Muddy Waters and Little Walter and all those guys, I thought I had to go right to bed. I didn’t care about no record or nothing, and I just said, I met the guy I come here to meet. And that was high as I could go.” 

Life was still hard for BG after that initial break. But he persevered because he had a missionary attitude about his work. He loved the music and that sustained him during the hard times. Many business startups succeed for the same reason.

8. “In 1967 I was driving a tow truck making $2.11 an hour. A man [from Canada] came to me saying, ‘I guarantee you, you will make more money playing guitar than driving that tow truck.’ I said: ‘I got to have proof of that’ because I didn’t want to get out there and get stranded.”

BG was trying to create a “margin” of safety even though he probably did not know this term. The core idea behind a margin of safety approach is simple: life is often far less dangerous and painful if you have a financial or other cushion since you may make a mistake. The margin of safety concept applies in many areas of life that are not directly financial. Do you walk home or accept an automobile ride home with someone who has been drinking? Does getting in that car have a margin of safety? In a financial context Seth Klarman writes: “A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.” To better deal with inevitable mistakes we all make as human beings, Charlie Munger believes that you should have created a “margin” of sufficient size which ensures that even if mistakes happen the outcome will still be “adequate.” To illustrate, if you are thinking about moving to Mongolia to look for a job, having a bank account with at least six months expenses in it and enough for a plane ticket home if things go wrong is a good idea. Munger says: “In engineering, people have a big margin of safety. But in the financial world, people don’t give a damn about safety. They let it balloon and balloon and balloon. It’s aided by false accounting.” Buffett agrees:  “When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 trucks across it.  And the same principle works in investing.” The size of the Margin of Safety should vary with the magnitude of the risk involved. Michael Mauboussin writes in his book The Success Equation: “The margin of safety is available for absorbing the effect of miscalculations or worse than average luck.”

9. “The last time we was talking, I said, ‘B, you know all the money in the world ain’t no good if you can’t use it.'”

How can you say it better than BG does here?  Being the richest person in heaven or hell is not a valuable thing.

10. “If you go get a tire that’s got a slow leak in it, you can get it fixed before it goes down.” 

When I read BG saying this it reminded me of a Charlie Munger quote:

“There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested — there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’ We hate that kind of business.”

In terms of a decisional framework, every business has maintenance capex or the amount that must be invested to maintain the earnings power of the business. Growth capex is the spending to ramp up production. BG is saying that if a business does not maintain its equipment like tires or sound systems, eventually the business will break.

11. “When I went to Chicago I was looking for a dime and I found a quarter.” 

In deciding to move to Chicago BG increased his optionality. It worked out for BG better than he ever could have imagined. There are lot of ways to increase your optionality. As Nassim Taleb has said: “Living in a city, going to parties, taking classes, acquiring entrepreneurial skills, having cash in your bank account, avoiding debt are all examples of activities which increase optionality.” BG thought he had little to lose in leaving Louisiana. “I’m not afraid to do something. I was born on a sharecropper’s farm and we had to walk everywhere we went. I know how to boil a pot of potatoes on a fireplace. I grew up with this – not knowing what you’re going to eat tomorrow.” He thought his downside in leaving for Chicago was low. What did he have to lose? 

You might find I interesting that BG’s line “looking for a dime and found a quarter” is a line in the Foo Fighters song “Something from nothing.” For example, “Here lies a city on fire… it started with a spark, and burned into the dark” is inspired by the Great Chicago Fire in 1871. Someone on the web site Song Meanings did a nice job tying lines in that Foo Fighters song to Buddy Guy: 

“A button on a string” Buddy Guy talks about how we would convert anything he could into an instrument because he was broke when he was young.

“And held you in my bloody hands
These rattled bones and rubber bands
Washed them in the muddy water” – Muddy Waters is the Father of Chicago Blues.. also Buddy guy made a guitar like sound out of a rubber band.

“But you can’t make me change my name
They’ll never make me change my name
Pay no mind now ain’t that’s something
Fuck it all I came from nothing”- The suits wanted to change Buddy Guy’s name to have him become more marketable.

In the premier episode of The Foo Fighter’s documentary Sonic Highways, Dave Grohl informs viewers about BG’s career via interviews and old video clips. You can find the link in the End Notes.

12. “Music is like prize fighting. If you are good enough to make the right plays in front of the right audience, then you are on your way. If not, you don’t go anywhere. That’s just a part of life.”

Financial success in the music business expresses itself in a power law distribution.  A phenomenon called “preferential attachment” produces the“power law distributions. This phenomenon is not new, but as Nassim Taleb points out, it has received an accelerating boost from digitization and the internet. A writer of a story about Nassim Taleb put it this way: “We live in Extremistan, where black swans proliferate, winners tend to take all and the rest get nothing –there’s Domingo and a thousand opera singers working in Starbucks.” Why is this the case? In the book Entertainment Industry Economics Harold L. Vogel argues that Metcalfe’s law is a phenomenon that:

The distribution of financial success in the music business looks like this:

As an example of a power law distribution in the music business: The share of concert revenue taken home by the top 1% of performers has more than doubled, rising from 26 percent in 1982 to 56 percent in 2003.

As another example, the top 5 percent of musicians take home almost 90 percent of all concert revenues.

This power law outcomes means that being a musician is a winner take all business. This applies to other forms of art. Unfortunately, most performers in the arts will need another job to make ends meet financially.

Bonus quotes:

“If you don’t think you got the blues, just keep livin’.” “And I wanted to make my mother feel good, so I say, ‘Well, I’m gonna go to Chicago and make more money than I’m making here, and I’m gonna be sending you money back and you’ll see how well I’m doing. I’m gonna drive back down to you in a polka-dot Cadillac.’ I knew I was lying to her. And when she passed away in 1968, I said to myself, ‘You lied to your mama and never got a chance to tell her you were lying.” That bothered me. And one day I said to myself, ‘You know what? I’m gonna see if Fender will make me a polka-dot Strat.’”

“The blues comes in all denominations, man. It comes with your family, with your lover, with your friend. And I had some good friends until I loaned them a lot of money; then I lost them. I’ve got a piece of paper in my club,  ‘You loan your friend your money, your gonna lose your money and your friend.” And that’s the blues, sir.” “Listen to the lyrics – we’re singing about everyday life: rich people trying to keep money, poor people trying to get it, and everyone having trouble with their husband or wife!” 

“I compare my guitar playing to the gumbo. I copied something from everybody.” “I can’t learn nothing from listening to me. That’s something I already know.”

“I used to tell my mother when I was about 10 or 11, ‘I can’t wait till I’ll be a man,’ and she used to look at me and say, ‘Ok, when you get to be a man, you got to go where you don’t want to go,’ and I just realized she was telling me the truth. At that time, I couldn’t see that.”

Notes:

 Foo Fighters Sonic Highways: Buddy Guy Extended Interview (HBO) https://www.youtube.com/watch?v=VRRC1tCIudk

When I Left Home: My Story https://www.amazon.com/When-Left-Home-My-Story/dp/0306821796

Rolling Stone https://www.rollingstone.com/music/artists/buddy-guy/biography

Rolling Stone:  https://www.rollingstone.com/music/features/from-howlin-wolf-to-hendrix-the-life-and-times-of-buddy-guy-20151104

PBS Oral History: http://www.pbs.org/americanrootsmusic/pbs_arm_oralh_buddyguy.html

Seattle Weekly: http://www.seattleweekly.com/music/last-night-a-dj-saved-my-life/

Charleston: https://www.charlestoncitypaper.com/charleston/a-musicians-case-against-the-5-cover-charge/Content?oid=5846161

Song Meanings:  http://songmeanings.com/songs/view/3530822107859492820/

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