Yesterday’s final implosion of video site Veoh, which declared bankruptcy after burning through $70 million of venture capital, was a long time coming. A lot of so-called smart money went into Veoh: investors included Goldman Sachs, Time Warner, Intel’s venture arm, Spark Capital and former Disney CEO Michael Eisner. And it was hardly an isolated incident. Joost, another high-flying video startup launched by the founders of Skype, went through $45M in VC money before ending up in a fire sale. Who’s next?
More importantly, why is so much venture capital that funded video startups going down the drain when the number of videos watched on the Web is going through the roof?
Nowadays, it is fashionable to discredit VCs as financial engineering hacks with no operational talent who lack the moral compass required to lead people; but that would be unfair. VCs, it turns out, are neither the problem nor the solution: good ones might offer more than cash, bad ones will kill your business. And once killed, they’ll blame everything and anyone but themselves.
Fish Out of Water
Last year I was speaking about raising capital with a fellow CEO, Brightroll’s CEO Tod Sacerdoti, and he mentioned that the “video industry is more media than technology”, to which I added, “that is why VCs come across like fish out of water”.
Indeed, most VCs tend to lack any meaningful background in advertising, publishing, sales or media. Selling software doesn’t cut it. Building chips is irrelevant.
In fact, the very same things that make technology companies successful are often weaknesses and even threats to media companies. For example, a tech company’s contract for recurring licensing fees is not as attractive as a series of contracts for recurring advertising deals. This merits a post in of itself, but the kinds of things that VCs were drawn to in video have all become commodities, namely: video aggregators, content delivery networks and content management systems, which are capital intensive, low margin areas always at the risk of getting cancelled and shifted to a competitor.
Making things worse is this “crazy ass backwards” investment thesis that they should invest in 10 companies and watch seven burn to the ground, hope that two do “ok”, and pray that one will be a “grand slam”. Forget the theory of diversification, which underpins all of finance, VCs keep aiming for the fence and let’s face it, finding winners in business is as hard as finding them in Hollywood. You win with singles, doubles, triples and occasioanlly home runs. basing your strategy on grand slams is futile, which takes us to VCs odious track record in online video. Online video startups tend to fall in one of the following categories, with some overlaps:
- Content management system (CMS) platform technology companies
- Advertising creation and management companies
- Content aggregation and distribution
- Video file hosting and sharing
- Video content editing
- Content producers
- Content delivery network (CDN)
Where are the grand slams other than YouTube? There aren’t any.
The Elusive Media VC
True media VCs just don’t exist. One explanation could be that most high ranking media executives who were working in big media with high salaries but little or no equity, never experienced the massive paydays that would give them a path to investing their own money and subsequently setting up a fund to invest on behalf of others. There are exceptions, of course.
But the entrepreneurs who have made fortunes in media tend to reinvest in their own empires rather than dole out the money to potential startup competitors. Media moguls like Rupert Murdoch, William Randolph Hearst, Sumner Redstone, SI Newhouse and the like who never sold out retained their earnings and built empires. Once they became the Establishment, it made little sense for them to finance the disruption.
Mr. Murdoch (who bought the company that bought my last company) bought MySpace when it was convenient, generated a windfall from the Google deal, and now that its fortunes have soured, he is divesting from the medium: first Photobucket, then Rotten Tomatoes.
Conversely, most VCs were technology founders and executives who sold companies and came into cash. They set up or joined VC funds to reinvest their money and continue the cycle of disruption.
The Web is Entering a Period of Massive Content Consumption.
There seems to be a massive wedge between media and technology. One side doesn’t get the other and the result is wasted investment dollars.
“There’s no one in the record company that’s a technologist,” Universal Music Chairman Doug Morris once explained. “That’s a misconception writers make all the time, that the record industry missed this. They didn’t. They just didn’t know what to do. It’s like if you were suddenly asked to operate on your dog to remove his kidney. What would you do?”
Well, alternatively, VCs have no clue where the advertising money will go in media but all VCs seek to invest in the Google of Video. Incidentally, Google’s initial business model was based on licensing its search technology, a unit which generated hundreds of millions of dollars. But today, Google is foremost an ad-supported business. However, it’s one of the only successful ad-supported technology businesses in the world.
Google lucked out by benefitting from a perfect storm and is now limited by its free, ad-supported worldview (Apple understands that if there is one thing people love to do is actually spend money – but again, separate post).
Regardless of whether the Internet will be larger on Mobile or PC, the nuts and bolts are starting to matter less than the content that is consumed, and how that content is monetized. More likely than not, the model will be advertising based. Today, fickle media companies have less faith in ad models, but consumers continue to shun paying for content.
Regardless, VCs keep investing in the next crapstr, whereas they should be investing in content, which is missing piece for advertising to take off in online video.
Content is King
“The real barrier is content and the model necessary to make more of it. Cable TV suffered from this same fate early on”, states Broadband Enterprises’ Matt Wasserlauf.
We’re still in the early days of online video content and history is repeating itself. The film industry initially recreated theater and added a camera to record plays; early TV recreated radio and added a camera as well. Online video content has much room for improvement, but what is missing is the kind of investment required to create compelling content. VCs keep throwing out cliché after cliché and just show their lack of understanding of that fact. Sure, some of the aggregators such as Veoh did scale quickly but it wasn’t all that defensive. Despite all of this, VCs seem to be making all of the same mistakes over and over again: investing in the technology and not in the content.