OnMedia: Raising Money From Strategic Corporate Investors

Moderator: Mark Stevens, Partner, Fenwick & West
David Horowitz, Principal, Comcast Interactive Capital
Seth Haberman, CEO, Visible World
Dan Beldy, Managing Director, Steamboat Ventures (a $400 m Disney fund with 16 investments)
John Edwards, CEO, Move Networks
Andrew Cleland, Executive Director, Investments, Time Warner

John Edwards says Move Networks paid dues by spending a lot of time with corporate customers, and then we got investment from Hummer Winblad and Steamboat Ventures, and then the corporate investors wanted to help us too, and the whole thing has snowballed. He says VCs and strategic investors operate on different timetables and principles. Having a good mix there gives you a chance to build momentum in the marketplace. I sometimes see it as kind of like the Orbitz model where they kind of gathered together all the players in the industry to make something happen.

Mark. Let’s talk about suitability for corporate investors. What are the indicators that an entrepreneur should call you?
David. We have a venture fund structure, a commitment from Comcast. Many say he looks like more like a financial investor than a strategic. We just have one limited investor. But we really look at the business and the market, and the growth potential. We try to be the advocate of our portfolio companies, helping open doors at Comcast.
Dan Beldy. We want to be in the top 25% across all venture firms. We are independent. We can be 100% aligned with the portfolio companies. There is no guarantee. We can’t tell ESPN or ABC what to do, but we can get companies introduced to them. How do you know the “option value” of our being able to open doors is worth anything–we have an open door policy where you can call any of our CEOs and ask them.
Andrew. We also act like a lot like a financial investor.

Mark. What is the path to reach you guys?
David. There is no requirement to have an operating sponsor.
Dan. Steamboat started in 2000; there was an education phase across our company. Business units now know what we are looking for. Online video is a big area, we decided to look at the companies emerging in that space. And John and Move Networks were already deploying tests with ABC, so that was nice, but it is not required that companies be doing business with us already.
Seth. We have relationships with 3 operating units of Comcast, as well as with the venture unit. Sometimes the operating units had difference with us, but the venture unit really backed us.

Andrew. We choose each year our key investment categories where we have pre-approval to consider investments. For 2007 they were things like new forms advertising, content, social networking, games, virtual worlds. For anything outside of those areas, we need to have a business unit sponsor the investment.

John. It takes a lot of time, energy, and effort, and travel to do this right and get the job done. It’s a very noisy marketplace out there. To make decisions rapidly, it’s helpful if the operators know if the financial side of their firm would invest in this company because it’s bigger than just them. And to be able to bust through the noise and create momentum is really helpful for the entrepreneur. If you’re out there by yourself, it’s a lot more difficult to break through all the noise.

Seth. It does take a lot of time. Napolean said “land I can recapture, time I cannot.”

Dan. Plus we’re nicer and friendlier than traditional VCs. (Laughter).

John. It takes a lot of time to raise money, and it is good to surround yourselves with VCs who can take some of the decisions on; so you don’t take your eye off the ball for so many months. The VCs who have assisted us have been extremely helpful in sharing the load and working with us. And entrepreneurs need to know how the VCs are going to work with you over the course of the business–what if a big ugly thing happens, how will they respond? You want people who can stand up and help you change the world. We have people with a long-term short-term combination of viewpoints to help us deal with issues we face.

Dan. Building shareholder value is the goal for corporate investors; that includes syndicating the investment, recruiting, building diversified revenue streams (not tied to just one company).

Mark. What if you go a strategic for an investment, and it is likely that their competitor might want to someday buy you?
David. Entrepreneurs tend to get concerned–they wonder if they take an investment from us, will we let them sell their services to Comcast’s competitors. So we point to investments where our portfolio companies have sold to Comcast competitors. As an investor, we want to see a company that has multiple markets, large customers within those markets.
Andrew. We welcome our portfolio companies to sell to any company. Also, on our investment terms, we don’t ask for rights of first refusal or first look–that tends to complicate investments. We don’t impose those terms; don’t like others to impose them either.

John. The VCs gave us advice that protected us from deal terms that would make going forward difficult. VCs wanted us to have all exit strategies available to us.
Seth. All the VCs are reviewed based on how well the investments do, not how well the corporate parent does.

Dan. Steamboat last year invested in Quigo (an AlwaysOn company from last year), which was recently acquired by Time Warner.

Mark. You guys are “enlighted strategic investors” who care about financial returns, but there are many strategics out there who want to protect against their worst nightmare–waking up and reading in the Wall Street Journal to see that you have been sold to their biggest competitor.

Mark. What about board membership? What is it like to have a customer on your board?
John. I don’t feel like they are treating it that way. I have never felt like it is a customer. I haven’t worried about pricing strategies or anything else. There has never been a conflict, as I recall. As our advisors and board members sit around us, they are trying to help us succeed. They take our side on issues.
Dan. It’s an integrity issue. The information that is discussed at the board level does not flow back to headquarters. We report financial stuff to the CFO of Disney. You have to maintain a wall between those two entities.
Seth. We were paranoid about this when we started. But as Dan said, it ultimately comes down to someone who has a legal and fiduciary responsibility as a board member to keep things confidential, so it works.

Audience question: do you look at investing in companies so that you can acquire them? The VCs on the panel made it clear that they don’t have Corporate Development or M&A responsibilities–so that would be different people in the company.

Audience question: please give guidance on valuation. How do you determine the valuation of a company?
Dan. That is a negotiation everyone goes through based on risk, capital required, work, effort, and the value you place on the capital.
Audience. How about from the CEO point of view?
Seth. It is less important than you think it is. Many people fight over valuation. Focus on who partners are and the fundamentals are far more important.
John. I tried to imagine capital needs over the next 3-4-5 years; and anytime I took money, I could return a minimal amount of value back. Usually people are looking for 5-7x valuation after 5 years, a 30-40% annual return….you can make a mistake by getting valued too highly up front, and then you can’t bring more money in. But of course, you can also leave a lot of money on the table. I use the 5/5 principle, which I won’t go into right now–how you look at where and when you need money.

Mark. There are questions that come first: can you get financed, can you get good people around then table, only then ask about valuation. But if you are so focused on valuation, you won’t get the first two questions answered.

Dan. We don’t trade business for equity. Be very careful about that.

Seth. One company offered us bandwidth for equity.

Mark. Famous deal was done by AT&T where they put minutes into Tellme for equity. It gave a high valuation, and got in the way of their next round, because it was kind of funny money. But it ended up working out okay.

Seth. A lot of networks gave advertising time for equity in internet companies–a lot of those deals had to be unwound.

John. These kinds of things muddy up your future. Keep it as clean as possible so you don’t have traps down the road.

Chief Marketing Officer of the Future

Roger Wood, Senior VP, GM of the Americas at Amobee Media Systems, made the most interesting comment so far at OnMedia when he suggested that sometime in the next 36 months there will be a watershed event, when the first Chief Marketing Officer of the Future is hired by a Fortune 1000 company. I captured a few of his ideas about what kind of CMO this will be. It will be a person who started their career at Facebook or CBS Mobile, who grew up immersed in interactive (not just learning about it after they were an adult) and it will also be a person who grew up connected to friends of all ages, without a narrow geo-centric local worldview, but with friends from different countries, races, religions, and someone who is conversant with all mediums, and can oversee marketing strategies that use all of them.

OnMedia: Venture Capital and Angel Investing Workshop

Here are some highlights from the workshop that featured two lawyers (Sam Angus and Mark Stevens of Fenwick & West), two VCs (Will Price of Hummer Winblad and Dan Beldy, Steamboat Ventures), and one entrepreneur, Jed Simmons, COO of Next New Networks whose company raised $8 million from non-Silicon Valley investors for their content business:

  • Will said he thought the Charles River Venture Quick Start program (which provides seed capital of up to $250,000 for entrepreneurs) is a terrible thing for entrepreneurs, and he explained why. With their convertible note, they have an option on the next round. If you run through their capital, and need more, and then they decide to pass on your next round, then basically “you’re dead.” No other VC is going to want to touch your deal if the first VC that funds you decides to pass on the second round. As a counter-point, Dan Beldy said if you are an entrepreneur and have no other funding options except this kind of VC Quick Start program, so your decision is to not have a company or to have a company under these conditions, then of course, you take this money. But Dan said you may be able to take the money without giving the VC the predetermined right to your next round, or you try to get others in the round, so the signals to the market, if the VC passes, aren’t quite as strong, so you aren’t quite as dead. Will said he said Charles River just wanted to buy deal flow so they put out a “honey pot” to attract entrepreneurs, but that this isn’t a good deal for entrepreneurs.
  • Jed was asked why he took $8 million instead of doing a $1-2 million Series A round and then going back for more after he had proven his business could get traction. He said that his content/community strategy was to launch 10-15 properties he could get scale in the world of distribution through MySpace and YouTube. If we had only taken $1-2 million, so we could only launch one property, and we had been successful, the VCs would have then said, you’re a one-hit wonder, so how do we know you can repeat this success, and we didn’t want to do that–we wanted to prove by hiring young video talent that we could create multiple successes. So we raised enough to do that.
  • Exit possibilities are very different if you take $2 million from angels, where a $30-50 million acquisition looks attractive, than if you take $8 million from a VC fund.
  • Most interesting quote from Sam of Fenwick & West, “It’s unusual now to see angels doing convertible notes.” I guess there are enough sophisticated angels these days that deals that are priced are more common than deals that are going to be priced later.
  • Only take money from VCs if you believe they will add value. Don’t do it if you view them as a “necessary evil.” Many serial entrepreneurs in Silicon Valley go to VCs even on their 3rd or 4th startup–not because they need the money, but because they know having a team with experience and connections actually improves the likelihood of success, and of creating a bigger pie.

OnMedia Panel: Monetizing Online Video

Moderator: James Montgomery, CEO, Montgomery & Co.
John Edwards, CEO, Move Networks
Adam Berrey, SVP Marketing & Strategy, Brightcove
Iaain Scholnick, CEO, ImageSpan

James asked what video business models are successfully being rolled out in 2008.

Adam said there has been a lot of experimentation around ad-supported, paid content and subscription content. The model that is sticking most is ad supported. The top tier Hollywood and prime time content can support consumer payments, but for 60 years consumers have been trained to turn on the TV and get free, ad-supported content; and many content producers can make more money this way. We are finally seeing more long-form content coming online. The consumer behavior is different with short form and long form.

James asked how business models change with scale.
John Edwards said Move Networks deals almost exclusively with long form. We could do short form, but our partners mainly have long form. So we haven’t gone after the long tail. We felt we could get sustainable revenues from the popular, mass audience content. The vast majority of what we do is live or long form. But it’s a significant volume–the largest in the world (of viewers). People will come to watch prime time TV shows online. You can try a number of different ad formats. If you can deliver a high quality experience, consumers will stay longer. Quality stimulates usage. We track everything that goes on during an episode–is the mouse moving, etc. We send that data back in real time so content publisher can measure it. This is the first time this has ever been possible. If you can know who’s watching and what they are watching and what they like and what they are skipping, it allows you to do more intelligent programming, and also more intelligent advertising. Across 100 fox properties, you can target different ads to different locations. You have to have great content, have a great quality delivery, and keep the costs down. Many companies come to us paying 35c per gigabyte, we get the costs down to under a dime, closer to 5 cents. So you are looking for average margin per viewing hour. Our properties (partners) are profitable in what they are doing with us.
James: like Fox, ABC?
John. Exactly. We provide the service to content partners, a transaction fee, we don’t share in their revenue. We hope to show them how to get a profitable business model.
Q. What kind of ROI are they seeing? One year payoff, or less?
John. If you look at our stations, they are at 40-60cents per hour in revenue, and under a dime in costs, that would be the average, and we’re talking about targeting premium content that has a good strong audience with substantial views. If you look at any of our properties today, there will be a million people watching the TV shows right now. So our scale is significant. We allow that because of the way we treat the video.

Adam from Brightcove said that what John was talking about what you can do if you have a property like Grey’s Anatomy, but most people don’t have a property like that. Consumers are sitting less and experiencing the web more. The internet is a different medium. It’s also a delivery infrastructure. We can broadcast television; but it can be a lean forward experience with people participating with communities. Our publishers are taking a multi-layer strategy. Adam said there are three major segments of content, and different ways to monetize each:

1. The highest interest long-form content; you ad sales force can sell sponsorships. But this is a small slice of web audience and content.

2. Next band of content, also often sold direct,

3. Remnant content, either fragmented content, or fragmented audience, or peak demand that you didn’t forecast accurately. Then you look at whether you should integrate into ad networks. The whole ad networks scene changed in 2007 when all the major ad networks were acquired. Microsoft, Yahoo, Google and AOL are all in the mix. There are announcements every week with especially Microsoft and Google trying to get into the sales opportunities. So media companies have to decide what to sell direct, what content to partner with someone else to sell. Goal is to maximize revenue off this content. The big trend this year is how to integrate with the changing landscape of ad networks.

John. There are a lot of content people out there with publishing tools. But if you break down where the
460 billion hours of television watched in US, 920 billion in world. That is driven by about 50 entities. When you look at pure volume and where ad inventory is going to come. The mass inventory is going to come from properties that have audience now. As we move forward, yes, other content flavors will deliver volume later, but for now, the major opportunities are in a few properties. Or they’re in this mass thing like YouTube that we don’t know how to get our hands around it and collect it into something that advertisers will buy.

We carry about as much traffic as YouTube in the U.S. They have small, scattered content. Ours is 50 properties that deal with massive volumes of content; and yet ours have a very straightforward revenue model. So companies are trying to make long tail work, but it’s a difficult problem. All the greatest ad networks in the world are not going to bring audience.

Q. Let’s go to the long tail.
Iain. (ImageSpan) You have millions of different silos of content that have to be threaded against a demographic so you can sell advertising. We are working on this problem. On the video side, we are dealing with Nokia. They have a lot of video content. They are identifying the most popular downloads and trying to sell ads around that; and they want to pay the content producer something.

The panelists all seemed to agree that video on mobile is further out. It will require enabling advertisers to buy a demographic or a psychographic. But that is not available right now.

John Edwards said that Move Networks’ system allows for the content on a single pass to be prepared to run on any viewing environment, set top, Mac, PC, mobile. And it will always deliver stellar quality. That’s what we do–the video preparation. I’m not bullish on the mobile video experience soon, I think the game platforms will be an opportunity sooner.

Adam said he’d like to see an open platform for video on TV and mobile devices, like a web browser that would allow anyone to participate in this.

John said that in the US you have to get the cell phone networks to open up, but even then there would be a technical challenge since every handset is different. If Apple opens up their platform, we’ll be there in a nano-second. We’re ready from an infrastructure standpoint.

But there are 3 billion handsets; next to the TV, the mobile phone is next in number of units. Since there isn’t a standard, software developers can’t write to this. There is so much fragmentation, which prevents pulling it together and marshalling it for business purposes.

James asked if all the ad dollars are just going to follow a few highly popular properties, if the web is really going to change anything, or if we are just seeing more of the same.

John. We have a 50-60 year old TV industry that is doing well, and will do well for some time. Report to Congress last February said average time watched actually went up a little. As we move to new models it’s a little like when TV started and radio programs migrated to TV, with someone standing up reading. Then new varieties of TV started up. My daughter loves to minimize the screen and type and do other things all at the same time. We’re going to have to target the audiences, and recognize there will be multiple types. We can’t generalize everything into one great whole, and call it it. If we do that, we’ll miss the opportunity.

Adam. It’s also different times of day where people behave differently. At work someone might be on a broadband connection, and might not have time to watch a 43 minute show, but they may want to access something around a show. Most of our customers are big media companies, top brands that dominate the industry, and all of them have a multi-platform strategy. They are going to use all the different day-parts across all the different mediums.

James said AT&T just announced a test in Texas to throttle the bandwidth, and charge consumers who use more bandwidth more money. What would this do to your business model if consumers have to pay more for video?

John described how Move Networks would benefit under this scenario because its video delivery system is not centralized, but allows for caching every step of the way. It is the only video platform that works this way. They don’t use a central Flash server or anything like that, so they can inexpensively scale to tens of millions of viewers.

Adam. Consumers don’t like metered pricing.
James. That’s why they’re testing this in a small town in Texas.
Adam. We found out recently from one ISP that 1% of the ISP’s consumers account for 40% of bandwidth usage. ISPs will want to address this.

James asked for predictions for 2008. Adam said he is excited about the evolution of web properties that are run by large media companies, who are starting to produce “snackable media” that is mixed into their long-form strategy. John said this year there will be a lot of progress made in creating standardized ad formats, which will make it easier to finance new content, leading to a much better business for online video.

James asked about the next president. Adam said it was interesting how online video is affecting the campaign: Barack Obama announced his candidancy online on video; we’re working with several others to tell their story online. John Edwards said he dropped out of the race so that he could attend this conference. (Laugh).

Blogging AlwaysOn OnMediaNYC

I’m here in New York City today for the final day of the AlwaysOn OnMedia NYC conference. The first session is on monetizing internet video. John Edwards, CEO of Move Networks, is introducing himself right now. The panel moderator is James Montgomery, Montgomery & Co CEO, and the other two panelists are Adam Berrey, SVP Marketing Strategy of BrightCove, and Iain Scholnick, CEO, ImageSpan. I’ll be taking notes and posting throughout the day.

CNN: Glenn Beck Tribute to President Gordon B. Hinckley

Mormon Church President Gordon B. Hinckley passed away at his home last night at the age of 97, after serving his church for decades, travelling the world to witness for Jesus Christ (here are links to 77 sermons he gave as church president), and reaching out encourage everyone to stand for something and to try to be better. Glenn Beck, who appears nightly on his own show on CNN says that President Hinckley was his "shining city on a hill," the person who made him want to be better. You rarely see television that is this real and this personal. Glenn’s message is simply this: find a good example in your own life that inspires you to be a better person. Gordon B. Hinckley was that person for Glenn Beck. He will be sorely missed by millions in more than 150 nations who considered him to be a divinely inspired leader and prophet, including me. Take five minutes and watch this clip–it is well worth it.

video of McCain endorsing Romney

When Mitt Romney ran for Governor of Massachusetts, Senator McCain couldn’t say enough about how great he was for the party, for Massachusetts, and what incredible integrity and honesty he had. It is one of the finest character endorsements I have ever seen. This is the kind of video clip I’d like to see broadcast by a major news outlet like CNN or MSNBC. It’s pretty funny, given the current race. Or maybe Romney should have used this in his Florida TV advertisements! (Thanks for the two friends who sent it to me today.)

Social Networking Strategy for Utah Companies

I recently organized a Facebook group called Utah CEOs with a Facebook Strategy. Now I wish I had named it better. It should be something like Utah Executives who Have or Want to Have a Social Networking Strategy. The first event had more than 30 attendees. One of them blogged a summary of the Facebook Strategy lunch that we held this week, and said it was very worthwhile.

If you want to join this group which already has 125 members so you can be notified when we schedule our next event, click here.

As we (at FamilyLink.com) increase our expertise in building applications and making them both viral and scalable (which has taken us months of effort and investment) we are planning to select some key strategic partners–companies who have content or services in the family space–and develop some co-branded applications with them. These applications can generate revenue and click-throughs for both our partners and our own web sites.

We will sign our first co-development deal next week and announce the application shortly thereafter. We believe this new application is unique and will spread to millions of Facebook users, and that is related to our business of connecting families. Our We’re Related application has had more than 2 million installs, and our next two applications are growing very, very quickly. Both should reach into the hundreds of thousands of installs within a month.

If you are interested in talking about partnering with us, please use the Contact Me form on my blog, and I’ll get back with you shortly.

Romney Can Win

The Republican debate last night on MSNBC was quite friendly between the five Republican candidates. Chris Matthews and many others felt that Mitt Romney absoluted dominated the debate, which should help him shore up his recently acquired lead in at least three Florida polls. It feels great to see momentum shifting to the candidate that I believe can help the US deal with hard economic times and global competition better than anyone else in US history.

But debates, like most TV these days, are much more about entertainment than about substance. With 90 second responses it’s pretty difficult for any candidate to lay out their economic policy, or their national security plan, or anything substantive at all. The media are always looking for big fights, personal attacks, and insults, and they didn’t get much of that last night. (Although everyone was obsessing over the Mitt Romney quip about not being able to imagine Bill Clinton back in the white house with nothing to do.)

Between the mainstream media, the blogosphere, and the candidates web sites, it’s really difficult to figure out what is really going on, what positions people really have, and who really has a chance to win. The book “Amusing Ourselves to Death: Public Discourse in the Age of Television” by Neil Postman is a must-read if you want to see how the medium of television has changed politics and elections. “The Revolution Will Not Be Televised” by Howard Dean campaign manager Joe Trippi forecasts that the internet will change everything, but I think it will take another election cycle or two before it really happens.

No one wants to waste their vote, but it’s really tough with all the various voices out there to make sure that your vote is cast for the best candidate and is not wasted.

I found a great web site last night that links to major articles about Romney from all over the country.

It reminds me of one of my top 5 favorite business websites, Newslinx.com, a simple chronological list of key news articles in the high tech industry that I have been using for about 7-8 years now. I like it as a starting point far better than Google News (even their business or technology sections) because whoever chooses the articles is really smart about what is important. The only thing I rely on more is my Google Reader with all of my hand picked favorite sources. But I keep going back to Newslinx.com because the editor finds a bunch of major articles that I wouldn’t otherwise see.

So anyway. After last night I’m completely convinced that Romney can win. Thompson is out and Giuliani will probably drop out if he loses Florida next Tuesday. Romney has raised more money than any other Republican candidate, plus he has personal funds from his successful business career that he can also use to compete in every state and go on to win the Republican nomination. He will be a very formidable opponent in the November election, especially if the economy continues to be the major issue. No one is more qualified than he is to create a government environment (lower taxes, less regulation, etc) that is friendly to business growth. As he said, he can rally fiscal conservatives, social conservatives, and national defense conservatives with his message of strengthening the economy, the family, and the military.

I’ve maxed out my donation for the primary election. And I would encourage everyone who cares about the country’s economic future to read all these articles about Romney and see if you agree that he is the right person for the most difficult and important job in the world, and if he has the growing momentum and support to rally the Republican party and win in November. If you think he does, as I do, please contribute to his campaign.

My Amazon Kindle is almost here

Received from Amazon today:

“We now have estimated delivery dates for the Kindle order you placed on 12/17/07. We are now estimating that your Kindle will arrive between January 25 and February 1, 2008. We’ll contact you again to let you know when your order is shipped.”

When the Freakonomics blog asked back in November if the Amazon Kindle would be the next “must-have” technology, the iPod of ebooks, about 95% of the comments were attacks on the device or the business model behind it. That surprised me a bit. I went ahead and ordered one anyway.

I’m very anxious to try it out. My two biggest reasons: the incredible ebook selection that Amazon will be able to provide, and the whispernet service that allows me to download content from anywhere, without paying for a connection.

When my Kindle gets here, I’ll let you know what kind of user experience I have with it, and then predict whether it will finally be the ebook reader that everyone has some day hoped would appear.

Some investors are bullish on Amazon, in large part because of the Amazon Web Services now have 290,000 developers signed up, up from 25,000 the previous quarter (FamilyLink.com is a big fan of Amazon Web Services) and also because the Kindle will be a “money spinner” in 2008.

When Amazon releases its quarterly earnings report on January 30th, there is a good chance we will learn something about how many Kindles have been ordered so far, and whether this platform will become a major channel for publishers and consumers in the future.