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.

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