Scott Lynn on how Masterworks went from a fledgling idea to a full-blown leader in the art investing world
A unicorn startup based in New York, Masterworks looms large as a rare example of a company that has successfully delivered on its promise to disrupt an industry. Art investing was once gated away from ordinary investors, but Masterworks has turned it into an opportunity for everyday investors.
From record-breaking fractionalized offerings of paintings by Jean-Michel Basquiat to becoming a node for art finance conversations through its Level & Co. Gallery, Masterworks is making waves. The company paid out over $25 million to its investors in 2022 and is currently managing $822 million in assets for a user community of over 800,000 members.
The company has done all of this despite turbulent times in the stock and crypto markets. The man behind Masterworks, CEO and founder Scott Lynn, rightly deserves the lion’s share of the credit for his company’s success.
How did Lynn know he was onto something when conceiving the idea of Masterworks, and how did he execute it?
“Sometimes as an entrepreneur,” Lynn says, “you have this aha moment where you’re like, wow, there’s a $1.5 trillion asset class that’s sitting out there, that’s outperformed public equities, that’s uncorrelated to other asset classes and nobody’s ever built an investment product for it.”
The asset class Lynn refers to is art investing. Long considered an alternative investment, art never received much attention from everyday investors due to several roadblocks. Blue-chip art is expensive, and valuing it is tedious. Investors with access to boatloads of money and a team of experts could realistically invest in individual pieces of art, something no ordinary investor can realistically possess.
Buying art is just the beginning. Storage costs are expensive, since artwork is sensitive to its environment. As a result, ordinary investors could only choose from a small number of mutual funds investing in art portfolios.
While these funds gave retail investors access, they were still kept at arm’s length, away from the artworks themselves. Investors could never dig into a painting’s price history or receive reports about portfolio assets, as they would with individual stock.
Lynn recognized the value of a historical art sales database. This database would fulfill two functions. First, it would give investors data they could rely on. Second, it would give Masterworks a good idea of which paintings they should purchase and securitize for their investors, given the works’ price momentum and other profitability indicators.
This idea isn’t revolutionary. Lynn borrowed it from the real estate world, where comparables or “comps” drive valuation. By tracking repeat purchases of the same paintings, Lynn could make informed decisions about a given piece’s prospects for value appreciation, removing much of the industry’s traditional guesswork from the picture.
Digitizing an Opaque Market
While building a database sounded good on paper, executing it was a different task entirely. For starters, the art world never had a central database tracking sales. All Lynn had to go on were paper records of sales going back in time.
So that’s where he and his team began. “We literally went out and we located and found and purchased paper auction catalogs,” he says, “going back to the 1950s, along with the price lists that they would distribute after the sale ended for how much things sold for.”
Deciphering these lists was a task in itself. “Their price lists are like manually typed out price lists that they would hand out in 1953, after an auction ended, to everyone who was in attendance.” Lynn and his team spent hundreds of hours entering these paper records into their systems, and over time, their database took shape.
They now had the data to analyze paintings. But there was another obstacle. How could they offer a painting to the public for investment? After all, no one had ever done this. Lynn’s idea of securitizing a painting and offering shares in it to ordinary investors was pioneering, and this put him at risk of disapproval with the SEC.
The Masterworks team began working with the regulator to iron out details, a process that took close to two years, all the while scanning the art world for potential purchases and investing in them. The SEC saw the value Lynn was bringing to the market.
By offering a transparent data source to retail investors, Masterworks was circumventing reliance on expensive art appraisers. By fractionalizing a painting, the money hurdle was gone too. Ordinary people could manage their money without the need for high society input.
The First Offering
While the idea made sense to the SEC, convincing ordinary investors was an entirely different challenge.
“The hardest moments of the business were just those very early days of getting the first investors in,” Lynn says. “Our minimum was a $20 investment. We just kept iterating on the funnel, iterating on positioning, figuring out how we really market the asset class.”
Eventually, the low minimum investment attracted enough people to put together an offering. Masterworks’ first IPO was a Warhol listed at $1.996 million. Before the IPO received approval from the SEC, the company purchased a Monet for $4 million, reflecting Lynn’s confidence that his idea would become a reality.
Since then, Masterworks has iterated its positioning, as Lynn puts it, and increased the minimum investment in its offerings. It has spawned several competitors, all of whom aim to replicate Masterworks’ business model, but might find it challenging to compete with its deep database of historical art sales.
A Future Household Name?
Masterworks has far more room to grow, Lynn thinks. Over the years, the company’s commitment to iterating and testing its positioning in the market has made it resilient. “I think what I’ve realized over the past several years is that execution is fine and it’s important,” he says, “but strategy and constant iteration is much more important.”
The company recently established its Level & Co. gallery in Manhattan’s Upper East Side, acting as a node for art dealers and wealthy investors. Whichever way Masterworks goes, Lynn’s vision will undoubtedly power it to new heights.