I gave a talk yesterday at the Paley Center for Media to a number of members of the Writer’s Guild of America. The group generally consisted of folks who make or want to make a living by producing content – a job increasingly challenged by the web’s democratizing open platform.
I attempted to explain a little bit about venture capital and its significance in helping fund many of the most innovative companies of our time, how and why those companies tend to disrupt the status quo, the specific impact this disruption has had on the media industry and some practical tips for how to hopefully stay relevant in the new media order.
It was a thoughtful and receptive group. I hope they found the discussion worthwhile. If you’re interested, my slides can be found below.
As an aside, one thing the Internet sure has done is make the process of putting these presentations together so much easier. Images, data and even fully blown charts are all readily available in the public domain for anyone who needs them. Services like Slideshare and Scribd are simply fantastic. The web forces a premium on ideas and richness of discussion vs. the ability to make a fancy graph or chart. Yet another example of how the web enables us to focus on what really matters by making data and information so easily accessible to all.
There’s been a lot written lately about VC seed programs and some of the issues they present for entrepreneurs. Most notably, Chris Dixon has written a number of excellent posts on the topic. See here and here.
We’ve approached seed investing at Spark a bit differently, and we think it helps alleviate some of the concerns Chris and others have raised.
The basic premise of Start@Spark is that we want companies who ‘start’ at Spark to 'finish’ at Spark.
This first principle is the key driver of how we think about seed investing, and it has a number of very important implications for the firm as well as entrepreneurs:
1) We approach seed investments with the same level of scrutiny that we do all investments.
2) We take active roles in all the companies we seed.
3) We go into seed investments expecting to fund companies in subsequent rounds.
4) We are flexible in how we structure seed investments as well as subsequent rounds of financing to not disadvantage the entrepreneur.
This ultimately results in only a handful of seed investments to which we bring everything Spark has to bear. While we may be giving up the option value of having many small seed investments from which to cherry pick, we in turn gain a much closer relationship with the companies that we do seed which goes a long way towards ensuring that they get subsequent financing.
So why do we do seed investments? Fred Wilson wrote an excellent post recently on slow capital. There are many benefits to taking a staged approach to investing. It gives everyone a chance to learn, get to know each other better, understand business and capital needs more clearly, create a disciplined, milestone-based culture and generate results that help attract new investors. And in the off-chance it becomes apparent that the business prospects are not what everyone hoped, reach the appropriate but difficult conclusions together.
There is also the macro reality that capital requirements for many web services businesses have come down precipitously. It is important that venture firms adapt to this landscape and continue funding the best and the brightest at the earliest stages of development.
There are many advantages to taking seed money from a quality venture firm. It just needs to be done right.
I did an interview recently with Paid Content. The full post is below:
By - Thu 07 May 2009 04:30 AM PST
Spark Capital has had a busy few years. It launched in 2005 after raising $260 million, raised another $360 million in July 2007 for a second fund, and announced a funding initiative five weeks ago to focus on smaller bets in the $250,000 range. Spark has invested in a range of digital media companies, from thePlatform, which was sold to Comcast (NSDQ: CMCSA) for $100 million, to buzzy startups including Twitter, Veoh, Boxee and Tumblr. The firm has invested heavily in online video, which has come under pressure the last year because of the tough ad environment and has steep operating costs. Last week, I sat down with Mo Koyfman, principal at Spark, who came to the Boston-based VC fund from IAC (NSDQ: IACI) where he held a variety of strategic, transactional and operational roles. We talked about VC culture, Twitter (in which Spark is an investor), and the Asian gaming industry, among other topics. Below are excerpts from our conversation.
A Sanford Bernstein analyst published a report recently in which he called out Silicon Valley for having a culture where large Internet companies are often wooed by VCs into buying buzzy startups that have no real business model. What is your response to that?
There are certainly deals you can point to where businesses were bought that performed poorly, yet there are many other examples where they have performed tremendously well for the acquirer. It’s hard to speak in generalities. But what I will say is that big companies in general often have a very hard time innovating from within. So it is very important for the larger companies to look externally to acquire innovative businesses and technologies. Often with these acquisitions they’re not just buying the businesses, but are buying entire teams of employees – tech teams, business teams – that often will stay around for a long time and add tremendous value. But also some of the larger companies that make these acquisitions don’t always make the best home in terms of environment, support, etc., which is important in understanding why these acquisitions succeed or fail, and how much it’s a function of the acquirer versus the acquiree.
Twitter seems to be the “it” startup these days. Some of the other “it” companies of the past few years have either gone out of business or are rumored to be looking for a quick sale. How is Twitter different?
What Twitter has done is create a concept that seems very simple but is very smart in a couple of fundamental ways in terms of the character limit of instant messages and the notion of following someone online rather than the traditional friend relationship. And it’s an incredibly powerful tool because it constrains what you can put out and allows you to singularly determine who you want to follow at any time and allow others to do the same, yet not force that reciprocal relationship.
In terms of them maintaining their position in the marketplace, one of the most important things the team decided early on was to keep the platform open and to allow lots of different folks to build on top of the platform in interesting ways. And what you have now is a rich, robust ecosystem being built around Twitter, and that’s a very powerful thing. It’s not just Twitter, it’s everything that ties into Twitter. It’s the entire universe that Twittter sits in, and the more that continues to happen, the more it’s difficult to upset that ecosystem.
Digital-music startups have huge cost challenges because they have to pay the labels to get access to the music. Doesn’t Twitter have a similar issue because it has to pay a fee to the cellphone companies every time someone Tweets?
We’ve got some great folks on board that are helping us navigate those relationships, and we don’t see it continuing to be a prohibitive cost of the business going forward.
Do you think Twitter’s revenue growth is going to come mostly from advertising or commerce (i.e. sales or subscriptions, virtual goods, etc.)?
I won’t speculate on where it will come from and the mix, but I will say that they are smartly and deliberately thinking through all the monetization options. You’ll see Twitter launch some initial stuff in the near future and continue to do more over time.
You’ve invested in a few different online video companies, including Veoh and Next New Networks. Veoh is a video aggregator, while Next New Networks produces its own programming; and Veoh sells mostly banner and pre-roll ads, whereas Next New Networks sells more custom sponsorships and syndicates its content. As a VC, do you see these companies as different types of bets?
I think that there are certainly two different sides of the content/distribution video landscape, but video is an area that we believe is going to be valuable long-term on the web and we’ve placed a number of bets – from Veoh to Next New to Boxee – to try and capitalize on the video explosion we’re seeing on the web. It’s a challenging marketplace because the cost of hosting and streaming video is still expensive, but the costs will come down and advertisers have been a bit slower to take to the medium than we may have hoped, exacerbated by this economic environment. So it’s not a space without its challenges, but it’s one that over time will have some real winners.
Who will be the biggest winner – the aggregators or producers?
I think there will be winners on both sides.
You’re an investor in OMGPOP, which said it plans to make money by selling premium subscriptions and virtual goods. Some of the Chinese gaming and internet companies have been doing this well for the past year.
More than the past year, and not just in China – Korea and other nations. And by the way, Facebook by some estimates has sold in the hundreds of millions of dollars in virtual goods themselves over the past year.
Let’s talk about virtual goods—why is that market growing so rapidly?
At the end of the day, virtual goods are purchased either for status or to enhance performance or for gifting purposes – all the same reasons we buy these things in the real world. And the more time we spend in the virtual world, it follows very clearly to me that we’ll be willing to spend money to fulfill those basic human needs and desires in the virtual space as we do in the real world.
As we spend more time racing cars in the virtual space we’re going to want more stuff for those cars. As we spend more time living in the virtual space with our avatars we’re going to want to make sure they are dressed the way we’d like them to be. As we spend more time on Facebook and MySpace we’re going to want to give people Valentines’ and birthday gifts in those worlds as well. When you get down to the underlying psychological motivations for buying and giving goods many of those are transferable to virtual goods and fulfill the same need. You’re not just paying for the underlying product, you’re paying for the experience.
Facebook’s capital situation is again the topic du jour. Techcrunch is reporting that the company received term sheets at a $2B valuation, SAI has it at $4B and the blogs are of course having a field day. My take:
Notwithstanding their race to cash flow positive, Facebook will need more capital to build it’s business. The key choice for them is whether they raise private capital now, figure out monetization and then go public or prepare earlier for a public offering.
Monetization is of course the fundamental issue, and I suspect Facebook is working on grand plans for a digital economy of sorts. Which makes complete sense to me…at least in theory. If you support a ‘people economy’ the size of Facebook (on and now offsite with Connect), payment infrastructure is a very natural evolution of the platform. More so than advertising given the utilitarian nature of the service.
As for the terms of the deal if FB does raise now, valuation will certainly be closer to $5B than $2B. And investors will swallow an expensive equity conversion in exchange for a piece of paper that sits at the top of the capital stack (first money out) and carries a preferred rate of return likely in the 14% - 16% range. This gives them little downside risk, a decent return in that instance and a chance for a big win should Facebook fulfill it’s promise. See the recent HomeAway financing as an example.
While I’m not sure that a deal gets done – FB may just swing for the IPO – I for one think it would be smart if they took the time to figure out the monetization path before exposing themselves to the brutal scrutiny of the quarter-to-quarter public markets.
That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place…And so it is today. When someone demands to know how we are going to replace newspapers, they are really demanding to be told that we are not living through a revolution. They are demanding to be told that old systems won’t break before new systems are in place. They are demanding to be told that ancient social bargains aren’t in peril, that core institutions will be spared, that new methods of spreading information will improve previous practice rather than upending it. They are demanding to be lied to.
Clay Shirky, Newspapers and Thinking the Unthinkable
Since I read these lines from Clay Shirky’s brilliant piece on the decline of newspapers, I can’t seem to get them out of my head.
Recognizing destruction when it’s occurring takes a tougher emotional toll on us than an intellectual one. We may be acutely aware of what’s happening, but we still cling to familiar institutions. It’s a very natural human reaction. But once we begin to loosen our emotional grip on the past, we can break free.
Understanding what is to come in the wake of a revolution is an entirely different story. It is what venture capitalists attempt to do every day. But in reality, while we may be right on certain trends we certainly cannot predict the future with any degree of accuracy. We therefore bet on talented entrepreneurs going at big markets in the hope that *they* will figure it out.
Many markets are being completely upended today. The combination of increasing broadband penetration and speeds, rapidly declining personal computer costs, information and services moving to the cloud and recessionary pressures on many high cost traditional businesses has created the perfect storm.
But what will come in it’s stead? What businesses will be built? What models will be employed?
These are the questions being asked across a number of media and advertising markets today – the music business, the publishing business, the classified advertising business, the yellow pages business, the banner advertising business, the video business and the list goes on.
We have to change the way we think. We have to ignore old models and old cost structures. Forget the labels. Forget the printing presses. Forget the banner ad.
We have to start by asking what does the consumer or customer *really* want? How can we deliver it to them as efficiently and effectively as possible? What is the least it can cost us to deliver? What can we fairly charge for it?
Let’s take the classified ad business as an example. While the largely free craigslist has gone a long way towards annihilating a good portion of that market, does that mean there will be no value created in the future servicing local businesses looking to acquire consumers?
Certainly not. But with our limited current view, we often fail to see the possibilities or even what’s happening right under our nose.
First of all, old school classified categories such as recruiting, autos and personals have all seen hugely profitable businesses built on the web (e.g. Monster, Autotrader, Match). Now these businesses, or at least their current models, are themselves likely to be upended by better, more efficient models over time. But new ones will certainly be built in their stead to service the same needs but with very different business and economic models.
Secondly, while craigslist is incredible at inventory and demand aggregation, it has other holes in its offering for local merchants. Social marketing and payments solutions are just two examples where innovation has barely scratched the surface.
I continue to be intrigued by vertical content and marketplace businesses starting anew in the wake of the creative destruction we’re experiencing. The businesses of tomorrow are being created today. Keep ‘em coming!
Today the Spark Capital team announces a new seed program, .
Having helped incubate a number of start-ups in the past, I am personally very excited for this new initiative. There is no greater challenge or bigger thrill than trying to build something from nothing. We at Spark look forward to supporting entrepreneurs at the earliest stages of ideation and innovation.
It is also fundamentally important that we do our part to help bring this great country out of its current financial and economic malaise. It is our time to rebuild. And hopefully Start@Spark can do its small part to contribute to that rebuilding.
As said eloquently in this am:
So, this must be a terrible time to fund a start-up company. Correct? Au contraire. This may be the best time in the last 8 years to start a company. While capital is scarce, the tectonic plates continue to shift creating major rifts. The walls are coming down and the barriers to entering new markets are falling along-side.
Looking forward to hearing your ideas!
As I’ve stated previously on this blog, I fundamentally agree with Chris’ notion that in order for online businesses to create big profitable companies they will have to start charging for great (making them great is not trivial of course) services. Advertising alone will not be able to fill the void.
This is not a new concept for consumers, even on the web. For years, consumers have paid for dating sites, listings sites, gaming sites and others.
Keying off Chris’ piece, Fred Wilson wrote a provocative post extolling the virtues of Internet business models that drive cash flow through a rigorous focus on scalability and cost minimization. There is of course truth to Fred’s point that revenue and cost have a 1:1 relationship and a dollar lost of one is as good as a dollar gained of the other.
But, as I commented on A VC, in order for a company to be both big and profitable I believe they need to do both – maximize revenue and minimize cost.
Part of the distinction here is simply a stage thing – earlier-stage companies benefit tremendously from lean teams and nimble operations that can move quickly to build product and adapt it to market needs. But over the life-cycle of a great company, without investing to grow the top-line there is a fundamental cap imposed on profit and value.
So how do great companies manage to effectively do both? I believe it all comes down to great leadership. This may sound trite or obvious, but I don’t think it can be emphasized enough. This is a CEO’s fundamental challenge – maximizing revenue while minimizing costs, investing in the strategically important and positive ROI projects while maintaining a relentless focus on efficiency that always has the organization feeling one person short of fully staffed.
How do great leaders do this? They hire and empower incredibly talented people in all key functional areas, and those people in turn do the same all the way down the line. They focus almost all of their attention on capital allocation, to make sure money is always spent prudently and in the right places balancing all of the company’s short-term and long-term interests. And they create a culture of performance and accountability that permeates the entirety of the organization.
And that’s why the right leader is so critically important to the success of a company. If there’s anything that’s been confirmed for me in my early days in the venture business, it’s that great people best great ideas any day of the week.