They operate like a music studio or production company. They take applications from (or scout out) likely-looking 'undiscovered' artists / entrepreneurs, and offer them an advance / venture capital, along with advice and other resources, to create an album / product, in return for which they take an interest (shares / rights) in the resulting product.

The details vary slightly (as the other response said, music studios typically take the rights to the album in exchange for royalties, rather than directly becoming a part-owner of the artist) but the basic model looks very similar to me.