Music Start-Up Takes on Apple's iTunes

LOS ANGELES (TheStreet) — The scarcity of venture capital is forcing start-ups to take bold steps to raise money. The digital music start-up Masterbeat.com, which specializes in new dance mixes, decided to go public only 14 months after launching.

The Los Angeles company started trading on the Over-the-Counter Bulletin Board this week through a reverse merger with Green Mountain Recovery, a debt collection company that Masterbeat bought and spun off as a private entity. It's an unusual way to access the market, especially for a company that didn't set out to become publicly traded.

Check out Masterbeat's Mad Money music mix

"I don't think we envisioned that we'd become a public company," says Masterbeat Chief Executive Brett Henrichsen, a dance club DJ and former marketing executive at IBM. He quit Big Blue after discovering there was a market for the dance CD compilations he was creating for his friends, and founded the Masterbeat brand in 1996. But it takes months to bring a CD to market, and eventually Henrichsen realized that the short attention span of the dance club audience didn't mesh with physical music distribution.

"Dance music is very timely," he says. "It's only a hit for a little while. I could see that I was going to have to reinvent or die."

He revamped Masterbeat as a digital music distribution site similar to Apple's (Stock Quote: AAPL) iTunes. He secured seed funding from New York attorney Jon Biondo, and the two of them launched Masterbeat.com in 2008.

Striking distribution deals was a challenge at first because major labels had typically created remixes to promotion the original versions of songs. "The labels didn't understand anything anymore from a technology standpoint," Henrichsen says.

Within months, the team convinced the big guns that a small player like Masterbeat could bring new dance music to the public faster than a giant like iTunes. Masterbeat.com now has deals with Vivendi's Universal Music, Sony Music (Stock Quote: SNE), EMI Group and Warner Music Group (Stock Quote: WMG). Warner gave the company exclusive digital distribution rights for several Madonna remixes. Download revenue doubled in 2009.