Sometimes when you’re down in the trenches you can’t see the forest through the trees. It’s good to pause and look up, cause the daily grind overlooks the bigger picture which looks prettier day in, day out.
Trying to catch up after a hectic week, I strolled over to NewTeeVee and am glad I did. Liz Gannes points to a post by Brightroll’s CEO Tod Saceroti. Tod - whom I interviewed previously - runs a video ad network.
I estimate that video advertising will be 50% of search revenue within the next five years (2012) and will be larger than the entire search advertising business in the next ten years (2017).
That initially sounds extremely bold, and it is, but some digging suggests it’s not that far-fetched.
Some fairly outdated figures (Sept. 2006) you’ll come across clearly show that by 2010, or in 3 years, rich media (which includes video ads) will account for 18% with paid search fetching 40.8%. That’s not 50%, but it’s close.
Of course, since then, estimates for video ads have skyrocketed.
I’ve been keeping track of ever-increasing targets in online video advertising:
An estimate of the US online video ad market for 2009 - set in 2004: $657 million | Source.
An estimate of the US online video ad market for 2009 - set in 2005: $1.5 billion | Source.
An estimate of the US online video ad market for 2010 - set in 2006: $2.3 billion | Source.
An estimate of the US online video ad market for 2010 - set in late 2006: $3 billion | Source.
An estimate of the Worldwide online video ad market for 2011 - set in 2007: $10 billion | Source.
Admittedly, it’s always important to take these outlandish forecasts with a grain of salt, but it should be noted that the 2004-established forecast for 2009 of $657M is about $100M less than this year’s (2007) mark. In other words, much like paid search grew into a far larger beast than anyone could have imagined, so will video ads… and video ads is not being created out of thin air, unlike paid search ads.
Can Online Video Really Surpass Search Advertising?
Let’s examine some facts from Tod and Liz’ posts:
- ComScore recently released worldwide search statistics showing 15B monthly searches in North America, following up on their recent report showing 9.8B monthly U.S. core searches.
- ComScore shows 7B U.S. video impressions in March, 8.3B in May, and 9.1B in July.
- Search represents 50% of all online advertising revenue and the core revenue engine of Google and other large online players, while video remains a rounding error in the grand scheme of things, with about $750M in spending in 2007, up from about $450M in 2006. Search, of course, is the main driver of online ads at 41%. In fact, search is only going to accelerate its grip of web dollars. I found a good post on eMarketer that not only projects how big paid search will be, but how fast it grew.
This is important, because even I am wary of thinking that online video ads can outgrow search in 10 years. Video ads did just under $450M last year and will do $750M this year… that’s a far cry from paid search’s grip.
Clearly paid search advertising took off in 2003, the year internet advertising crept back up out of the grave.
While paid search is forecast to become a $10B segment in the US alone by 2008, video advertising isn’t yet getting such lofty figures, yet.
But can it?
The Argument for Web Video
In some ways, I share Tod’s bullishness on online video. After all, he and I have both risked our livelihood on the future of web video. He’s bet that he can build a valuable video ad network, I have bet that I can create a valuable video content play. I’m sure he’d never want to be in my shoes, and I won’t lie, I think ad networks are commodity services, the winner gets a huge payday, most fizzle out. Just look at all of the players in the middleman space:
- Brightcove
- Brightroll | see my interview with CEO Tod Saceroti here.
- Video Egg | see my interview with CEO Matt Sanchez here.
- Tremor Media
- Broadband Enterprises
- Yume
- Scanscout
- Google/YouTube
- AOL/Advertising.com/Instream
- VideoMovement
- etc.
Not to mention the video search players:
- Blinkx
- Pixsy
- Podzinger/Everyzing
- Google/YouTube?
And we’ve yet to cover the massive file sharing video sites, which include:
Michael Arrington and Henry Blodget do a pretty good job of listings features and business comparisons of the players in the space. But, since nothing in those networks are really exclusive, I reiterate why video content is key.
But either way, it seems like an astute bet for either play: online video should in theory be far more buyoant than search because search had absolutely no starting point in the offline world (the closest thing, it could be argued, are the Yellow Pages, after all) whereas online video will spawn from TV ads, what is basically a $57B market in the US already and a $73B by 2009.
Moreover, when search began to grow in size, the broader online ad market was morbid. Video today is set to leverage the momentum in the broader online ad space, which crossed $10B in the first 6 months of 2007 in the US.
Nothing but a G-Thang Baby
Of course, as we pointed out last week, Google clocked just under 40% of US ads, a dizzying feat for any one company.
But Google really was an anomaly in many ways:
- It was one of the last major search companies of the web 1.0 era that got VC funding;
- In other words, its predecessors had tired of waiting for a path to profits, preferring the path of portaldom, instead;
- The Nasdaq crash dried up VC-funded, CPM-priced display/banner advertising;
- Google learned from GoTo.com’s pay-per-click model and leveraged its distribution via Google.com, something GoTo.com lacked;
- It leveraged its balance sheet to acquire technology to move into contextual advertising (Applied Semantics) and took out the main/lone competing contextual text ad network (Sprinks);
- Mainly, Google won in search because Yahoo! featured it on its portal;
- Lastly, it was privately held and by the time it had to open its kimono and reveal just how profitable search was, it was too late for anyone else to react.
Frankly, it was not any one event that led to Google’s near $200B market cap. If any one of these variables had not happened, I don’t think Google would have won so convincingly.
As we saw above, paid search did not even register on the radar until 2002, by 2003, it began to take off. By then, Google was well established as the leader and it took advantage of the sharp spike in ad spending being spent on paid search.
Video vs. Search
I should state right off the bat that search’s underlying value - converting intent to purchase - is unmistakably what makes it so lucrative.
But if you consider that users spend 47% of their time consuming content vs. 5% searching, according to a recent report, then it can almost be argued that video has a 9x premium over search. Of course, something like 7 websites out of 10 are discovered via search… so while video consumption is becoming more and more prevalent,
Online viewers watched an average of 158 minutes of streaming video per streamer.
The average video stream duration was 2.5 minutes.
Nearly three out of four (74.3 percent) U.S. Internet users streamed video online.
More than one out of three (35 percent) U.S. Internet users streamed video on YouTube.com.
The average online video viewer consumed 63 video streams, or more than two per day.
comparing search to video will always be fuzzy math, at best.
Of course, video is anything but under-funded
Because of Google’s mammoth success and the promise of TV’s $75B ad budget shifting online, investors have poured a lot of money in all-things-video: be it a) file sharing networks, b) search and navigation or c) ad networks.
Earlier this year, after a barrage of investments in video ad networks, I asked if the pocket of bubble that had developed in video file sharing sites last year had moved into video ad networks. Since then, you’ve seen far less (almost none) Series A rounds in file sharing services but further Series B, C or D rounds in the main second tier ones. As well, you’ve seen follow up investment in ad networks like Time Warner Investment’s sizable deal in ScanScout, but less Series A deals there too.
I still maintain that you will see more and more VCs getting into d) video content. I am literally on the front lines there and VCs who last year did not “get it” why we produced made-for-web video content are now calling us and singing our praises… of course, many have scored large funding rounds, namely NextNewNetworks, Revision3, FunnyOrDie, MyDamnChannel as well as “older” players like Ripe, Mania TV, so me saying this is not exactly ahead of the curve, it’s simply reporting it after the fact as it gathers momentum, to understand why and read more on this, see my earlier post.
The Argument for Video Content
Thankfully, I’ve gotten enough validations of the need for good video content in the past few weeks that I need to stress it lesser and lesser.
But it’s interesting to note just how much content will be needed to fill the “series of tubes” that make up the Web.
What About TV Content?
TV content is going to be moving online, slowly, not because media companies don’t get it, au contraire, it will move slowly and selectively because TV executives have been studying history books and see that even the most progressive of print newspaper companies, such as The Chronicle, ended up with shrinking businesses as a result of the webification of their business. Notice I said the webification and not digitization. That’s because digitization is quite good for them, but it’s the smaller online ad market of the Internet that tangles traditional media companies online as if they’re caught in a spider web: slow to navigate, unsure of their next move, fearful of making a mortal mistake.
Ultimately, TV companies will lose a lot of offline revenues and make up some - but not enough - online revenues. That’s exactly what happened to print firms and there is no rime or reason to think that it won’t happen to TV companies, right?
Well, maybe not. People probably wonder why I share a lot of market intelligence and promote other seemingly competitors. I explain that if we are to really push the bulk $73B US TV ad market online - and dare I say it - “make the pie higher” then we need
- more users online
- more content online
- more reason to advertise more money online.
It’s not obvious because offline marketing is so inefficient and online is so much more efficient, that I think to quote First Round Capital’s Josh Kopelman “shrinking market” mantra, the Web is the ultimate bucket of cold water on offline media’s advertising streams.
Work backwards to determine how many video ad streams we’ll need
The following is more of a philosophical - though proven by basic math - argument of how many content streams will we need by 2011 around the world to ensure economic equilibrium between demand of advertising and supply of content. Since the web is all about creating optimal balances, then this is actually plausible.
According to my previous number-crunching, we’ll need 645 Billion to 1.5 Trillion each month video streams per month, provided CPM ratesare $20 for pre-roll ads and users find it acceptable to run 1 ad per 3 content streams.
Of course, I don’t think it will be all pre-roll… though it will most certainly be advertising-supported, and not subscriptions-based. The point is: if all of the variables hold up and more users flow online, then we’ll need content, lots of it.
I can easily argue that most of the following strata of the online video market has become a commodity, CDNs arguably being the latest ones. The only one that I think has yet to become a commodity is made-for-web video content… though of course, I am extremely biased.
1 - content management system (CMS) platform technology companies
2 - advertising creation and management companies
3 - aggregation and distribution
4 - video file hosting and sharing
5 - video content editing
6 - content producers
7 - content delivery network, or CDNs
From our biased vantage point, the best place to be in videos long term (in 5 to 10 years) is video content. Distribution has become a commodity and fragmented where the power is in the hands content holders who own the rights. So long as these embrace an open model of distribution, then once the space monetizes - and hopefully Google and search has shown that it always does - the companies who are well entrenched in owning chunks of video content should (if the theory maintains) reap considerable financial power.
That’s why I like CBS’ open online distribution strategy. But it’s ironic that the biggest cynics think that Google’s YouTube will be eating media companies lunch. I don’t see it that way, for a different reason.
Yes, YouTube is going to make Google’s purchase price of $1.65B look awfully cheap over time, and that deal might very well one day overthrow MySpace from our Top 10 Web M&A Deals of All Time… but I think that given just how fragmented and non-exclusive most content distribution deals are, then the content owner will be able to have considerable leverage with endless distribution.
However, the challenge for traditional media is that their costs are too high relative to the [probably] smaller web video ad market… so what will hurt media companies is not big, bad Google, but their own envy to become as powerful as Google is online.
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WatchMojo NewsletterThe past few years have seen a balancing of the playing field between investors and entrepreneurs, one of the many manifestations of this trend has been a site launched by Nivi and Naval, called VentureHacks.com. HipMojo.com sat down with one half the terror twins to learn more about the venture, what exactly is a venture hack and what entrepreneurs and VCs can take away from it.
Q - Tell me about your and your colleague’s background?
A - I (Nivi) am an entrepreneur-in-residence at Atlas Venture. I’ve worked with startups in roles from Vice President to Inventor, including Songbird (Sequoia), Grockit (Benchmark), Kovio (Kleiner), and Newroo (MySpace). On the venture capital side, I’ve also worked with Bessemer and one of Softbank’s funds.
Naval runs Hit Forge, an early stage fund which offers friendly seed capital and viral marketing help for social networking and Facebook application companies. He has worked with startups in roles from Founder to Advisor, including Epinions (Ebay), XFire (Viacom), Vast.com, and Mercantila. He has also invested in half a dozen companies as a VC including Scintera, Neopath, and Technorati.
Q - What’s the concept or big idea behind VentureHacks.com?
A - We show entrepreneurs how to negotiate better deals with their investors. At best, first-time entrepreneurs negotiate sub-optimal deals. At worst, they negotiate awful deals. And they don’t know how their first deal will affect the rest of their chess game with investors.
This isn’t surprising—investors play this game once-a-day while entrepreneurs play it once-a-lifetime.
Startups have one chance to raise money right. You can fix almost any mistake in a startup—if you hire the wrong guy, you can fire him. But you can’t fire your investors. You can’t fix bad investment terms.
We level the playing field so startups can do this critical job right.
Q - What’s the biggest mistake entrepreneurs make?
A - In the context of a financing, entrepreneurs focus on valuation when they should be focusing on controlling the company through board control and limited protective provisions. Valuation is temporary, control is forever.
The easiest way to maintain control of the company is to create good alternatives while you’re raising money. If you’re not
willing to walk away from a deal, you won’t get a good deal. Great alternatives make it easy to walk away.
You create alternatives by focusing on fund-raising: you pitch and negotiate with all your prospective investors at once. This may seem obvious but entrepreneurs often end up meeting investors one-after-another, instead of all-at-once.
Focusing on fund-raising creates scarcity and social proof which close deals. Focus also yields a quick yes or no from investors so you can avoid perpetually raising capital.
Q - What’s the biggest mistake VCs make?
A - The biggest opportunity for venture firms is differentiation. Firms compete for deals, and differentiation is the only way to compete.
Most firms offer the same product: a bundle of money plus the promise of value-add. And the few firms that are differentiated don’t communicate their differentiation to entrepreneurs effectively. Y Combinator is one example of differentiated capital with excellent marketing communications.
It’s ironic that firms which thrive by investing in game-changing businesses have barely differentiated themselves, let alone changed the rules of their own game.
Q - All factors being equal: should entrepreneurs accept VC or angel money?
A - There is no typical VC or angel. Instead of pitting VCs versus angels, consider the perceived pros and cons of each and pick the best investor.
Angels are perceived to have less money, invest for fun, make their decisions quickly, and not ask for control. VCs are perceived to have more money, invest as if their careers depended on it, make decisions slowly, and ask for control.
You’re looking for an angel or VC that has follow-on capital, supports companies in tough times, invests like his career depends on it, makes decisions quickly, and doesn’t ask for control.
Q - Is there really such a thing as dumb money?
A - If smart money is money plus the promise of value-add, then dumb money is just money. Dumb money sounds bad but it’s what entrepreneurs primarily want from investors: money.
Some angels, venture funds, and hedge funds provide money and get out of the way—they’re somewhat “dumb”. But there’s very little money that says “our primary responsibility is to provide capital.” And there’s too much money that thinks “smart” means “we know how to run your business better than you.”
Before you raise dumb money, you need to determine whether the investor can provide his pro rata in the next round, whether he will support you if the company is going sideways, whether you trust him, whether he has impeccable references, et cetera. But these are the same questions you need to ask before you raise money from
anybody.
Wherever you raise money, you should raise it as if your investors were dumb money, i.e. just money. In other words, unbundle money and value-add. Get money on the best terms possible and get value-add on the best terms possible.
Whether you want advice or introductions to customers and recruits, you can buy it for a tenth of what most investors charge. A hand-picked advisor or independent director will only ask for 0.25% - 2.5% of your company. He will be more aligned with you than an investor because he will own common stock. And he won’t have conflicting responsibilities to his venture firm, other venture firms, or limited partners.
Smart and dumb investors will add value. To decide if you should pay for it, ask yourself whether you would add an investor to your board of directors/advisors if he didn’t come with money. If the answer is no, you should treat him like dumb money. If the answer is yes, you can subtract some dilution from his proposed investment because he
offsets the cost of a value-add director or advisor. But if the investor ends up not adding value, you can’t fire him like you can fire an advisor or director. You can only hope to ignore him.
Instead of looking for value-add from an investor, first look for money-add and second, look for someone who is humble, someone you trust, someone who will treat you like a peer, someone who shares your vision, and someone who is betting on you, not the numbers.
Q - Do you get any slack from VCs?
A - No. Smart investors like educated entrepreneurs.
Q - What does it take to be a successful entrepreneur?
A - Successful entrepreneurs delight their customer, execute relentlessly, and enjoy lots of luck. Like porn, you recognize great entrepreneurs when you see them and you get better at recognizing them every day.
Q - What does it take to be a successful investor?
A - Successful investors have access to capital, great dealflow, good judgement in picking companies, and, in competitive markets, the competitive advantage to win deals.
Q - Your website claims, “We’ve raised $100M or so in financing from firms including Sequoia, Benchmark , August, and Bessemer . We’ve also invested another $20M in about 12 companies.” So the question is: Who really has it tougher? Entrepreneurs or VCs when you consider their predicament: in other words, VCs have to actually make their investments
worthwhile; whereas entrepreneurs ultimately pitch to people who’s job it is to invest money?
A - Entrepreneurs and VCs both work hard before and after an investment.
Investors are typically personally wealthy and draw a very comfortable salary from their management fees, in addition to their potential carry in a portfolio of startups. Entrepreneurs are often strapped for cash and fully invested in a single startup.
The premise that investors “make their investments worthwhile” is incorrect. Companies make themselves worthwhile. In theory, investors prefer investments that require no work, have no risk, and have a tremendous return. In practice, investors are part of the team that makes a company a success or failure.
Q - Finish the sentence: The top VC in the world is…?
A - It depends on the startup’s market. And we avoid applauding or criticizing individual firms on Venture Hacks.
In general, the best firms don’t care what anybody else thinks, don’t take up your time with a lot of diligence, never pull out their Blackberries in a meeting, and don’t ask dumb questions.
They make decisions quickly, show up to meetings on time, pay attention when you speak, let management run their companies, treat entrepreneurs like peers, and conduct themselves with humility and trust.
I will give a shout out to Atlas Venture and their General Partner Jeff Fagnan who is crazy enough to support me while we write Venture Hacks. They don’t agree with everything we say but the whole firm is very entrepreneur-friendly. And a shout out goes to Naval, my Venture Hacks partner, and his Hit Forge fund—I’m lucky to be working with him and I recommend him to any entrepreneur.
Q - Naval gained notoriety from his lawsuit, did that help or hurt VH?
A - Neither. It’s a non-issue for us. The plaintiffs in the suit included 3 founders and 50-odd employees—it wasn’t “Naval’s lawsuit”. Since then, he has raised money from venture firms for several startups and for his Hit Forge fund—he has plenty of good VC relationships. Thanks for the opportunity to clear this up.
Q - What’s your biggest accomplishment?
A - I prefer contribution over accomplishment. Accomplishment is about me, contribution is about customers. I’m happy to have contributed to promising startups like Songbird and Grockit.
Q - Why should entrepreneurs check out VH?
A - Entrepreneurs can get a better deal by following our advice. Even companies with great exits can benefit from a better deal because a better deal makes more employees rich.
Fund-raising advice is abundant but mostly bad. Entrepreneurs usuallyget their advice from other entrepreneurs who are inexperienced, investors who are biased, and lawyers who know how to do things right (legally) but don’t know the right things to do.
There are a few people in the world who know the fund-raising game cold and we’ve been lucky enough to learn from some of them. Now we’re open-sourcing everything we know. I’ve learned a lot from my partner Naval, serial entrepreneur
Jim Pitkow, Jeff Fagnan at Atlas Venture, and Jorge del Calvo at Pillsbury Winthrop.
Q - Is the VC industry doomed?
A - No. Venture capital under management is increasing and VCs are a critical part of the startup ecosystem—I’m grateful they exist.
The rate of innovation is increasing and that innovation needs capital to get in customer’s hands. Capital invested in startups is going to increase, not decrease.
It’s wonderful that you can start a web-based software company with little capital. But after that early stage, even these companies need significant capital to reach their customers and beat their competition.
VC is not doomed but it is changing: see Y Combinator, Idealab, Hit Forge, Squid Labs, and others.
Q - Sell to a biggie or raise VC? what do you recommend?
A - Sell if an acquisition dramatically changes the lives of the founders and the early team. You can use an earn-out at the acquirer to capture some of the potential upside of raising money.
If you raise capital, you risk your current value for a chance to capture your future value. If you sell your company, you capture your current value, do your time at the acquirer, and then create future value at your next company. What’s the difference between creating future value at your current company and your next company?
One alternative to an acquisition is to cash-out some of the founder’s shares so they have enough money in their personal bank accounts to feel comfortable with the risk of building a bigger business. I’m guessing the Facebook founders have been cashed-out to some degree—but that’s a guess!
Q - Is VH a peripheral, tangent occupation or do you have bigger plans for it?
A - We’re always looking for ways to serve entrepreneurs. Our Term Sheet Hacks are a good start.
I want to invite your readers to “cold call” us if they’re starting a company and have questions, need introductions to investors, need help negotiating a term sheet, et cetera. We can’t help everyone but we can
certainly help the most promising companies—you can reach us at nandn@venturehacks.com.
Q - You’re a good man, thanks again for your time and keep up all of the good work at VentureHacks.com.
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