One of the results of the credit crunch has been the fact that VCs have seen a wrench thrown into their time horizons, exposing the flaws of their investment strategies. For the record, I am not talking about clean energy, infrastructure, semi-conductors, etc., I am strictly talking about the obsession that some VCs had with the consumer media sector.
VCs typically invest with 5-10 year time horizons, after which point they usually expect to see a 10x return on their investments (ideally more, of course). The exits come in the form of an acquisition or an IPO. However, with less and less IPOs happening, VCs now find themselves questioning their models. Exasperating matters is the explosion of VC funds out there, creating an influx of capital for too few VC-worthy projects.
The problem is, they are now looking at triggers and accelerators and scapegoating these as causes. The result now is pressure on VCs to liquidate their holdings. The WSJ, via SAI, reports that some of these distressed funds are now asking for $0.10 to $0.60 for every dollar invested. Considering that VC partners pride themselves on having a long term outlook, this line of action is quite surprising and sign of the times, which will certainly get worst before they get any better.
Meanwhile, a lot of VCs actually see themselves as innocent victims or bystanders who did nothing to bring this on to themselves. That’s half the story.
While I have always poked fun of VCs me-too mindset and herd mentalilty, I’ve also given them credit when and where it’s due. This being said, I just think a major problem with the VC execution here has been that many are simply out of their elements when it comes to the list of consumer web media investments they have made.
VCs tend to hail from engineering or computer programming backgrounds. If they’ve had any sales experience, it’s at a technology company which probably has very little exposure to advertising-supported revenue models. Yet as I am prone to repeat, there has only been one successful ad-supported technology company: Google. Even Google’s success was more of an exception, rather the rule, as a result of the perfect storm.
The harsh truth is that VCs are now seeing the chickens come home to roost:
- The acronym YASN was coined to illustrate the tendency for VCs to invest in “yet another social network”. Apart from MySpace and YouTube, no one can brag about a VC-worthy payoff.
- Think of the number of Digg clones that were backed to profit from user-generated content (UGC). Yet today, none of these companies - not even market leader and admittedly addictive Digg - have a clear path to profits or an exit.
The news for social networking companies’ hopes to monetize their audiences just gets worst and worst, even Facebook, which is growing faster than ever, is scaling back their revenue targets: from $300-350M this year to $250M, and that, with a healthy contribution from Redmond and uncle Steve.
So if VCs are in fact pruning their portfolios, it’s not just that the credit crunch has impacted their time horizons, it is that their bets were misplaced and plain wrong: VCs are simply allergic to content plays, for example, yet they will back countless content aggregators, why is that? VCs look for shortcuts. They think content creation does not scale or is not defensible, yet they will back countless applications that can be duplicated on a whim and a case of Red Bull’s.
To conclude, it is not because of the credit crunch, but rather, their poor investment thesis of backing these clones, that they have failed to show any major exits.
All the credit crunch has done is accelerate the inevitable. Lenin would say that war was the accelerator of history. In some ways, so has the financial meltdown that we’re now watching. Sooner or later, VCs would start to hear what marketers have been saying all along: UGC is undesirable. Their reluctance to heed this feedback now forces them to clean up their portfolios before being able to invest in new companies, which means that they will only be rendered ever more irrelevant.
This, of course, is just my two cents, mind you.
I am biased because we’re a video content producer/syndicator, so the polar opposite of UGC. But the fact remains: UGC has failed in the ad-supported ecosystem that is the Web… yet I don’t see any signs that VCs have learned from history.
Digg this Blog
Share on Facebook
WatchMojo on Twitter
WatchMojo on YouTube
Add to Favorites
WatchMojo Newsletter
The broader economy is certainly going to get a lot worst before it gets better. In fact, worst does not even begin to cover it. Here’s more doomsday talk from none other than Yale’s Robert Schiller, found via SAI.
But as the saying goes: there’s a bull market somewhere at all times, and reading this rosy outlook for online advertising, I wonder if maybe, just maybe, my stoic outlook in September 2007 was not ill-placed. Here’s what I said then:
If tomorrow you had to cut 10, 25, 50% of your ad budget, would you cut print, radio, tv, or web?
This ain’t 2000 when the bubble burst and the Nasdaq crashed, or 2001 when 9/11 happened; then, few F500 companies spent heavily or were experienced with web advertising, then it was a matter of “we don’t have the resources to experiment with the Web.” At the time, there were also less people online. It just did not offer you as much reach x frequency as the other medium.
In technical terms, online advertising’s beta (the ratio compared to the average) was much higher so in a downturn it suffered a deeper decline.
Today, the secret’s out of the bag: print advertising is pretty ineffective, TV is expensive and random, no one listens to radio etc., and online is where it’s at. If an externality - say the sub-prime credit situation turns sour - online advertising might be affected, but TV and other more expensive (and inefficient, effective etc.) formats will be hit harder, faster, and unlike the Web, they simply will not recover.
In other words, once advertising budgets recover, a much larger portion will be allocated to the Web, but if something does happen, the Web will be the least affected thanks to the 3 Ts:
- tracked
- targeted
- timely.
Hopefully I won’t look like a buffoon for writing that a year ago, but I still think online advertising will be the major winner with:
- Print being the biggest loser: why? no one reads print and it is a very archaic distribution method, facing massive asset value drops (hmm… all of them) and steep debt (NYT, Tribune) they will also have to cut resources at a time when they should be investing more and more digital media and in digital distribution. Print’s only salvation will be the fact that you don’t need to be connected and can take it on the go.
- Followed by TV: even more expensive as audiences fall, marketers’ will have a disdain for untracked media
- Then Radio: satellite radio saw that better technology does not translate into success, terrestrial radio is free and the local flavor is hard to beat. Radio will be smaller and smaller for sure, but it won’t be as decimated as some expect.
- Then Outdoors: the only real way to reach people when they’re outside, not connected to anyone of the other media. Plus, as more and more digital screens proliferate, the options for outdoors begin to get better and better. Still, this will be small relative to the Web. I should note, WatchMojo.com’s videos reach 15M consumers across 2,000 screens in North America in digital networks outdoors…
The background:
In 2006, WatchMojo.com focused on content production.
In 2007, WatchMojo.com focused on improving production and distribution.
In 2008, WatchMojo.com focused on scaling production, increasing distribution and monetizing the videos.
To avoid finding ourselves deeper and deeper in the red, we began to insist on guaranteed revenue in our distribution deals. We did not always get others to go along. Sometimes, we gave in, other times, we balked. Frankly, there is such a thing as diminishing return when it comes to marginal distribution. Traditional media companies don’t want to trade offline dollars for online pennies, but when you are a so-called disruptor with no offline pedigree (as is our case, if we can call ourselves that), well, those online pennies add up quickly.
So net-net, we did manage to eke out revenue commitments more often than not. These deals helped us more than double syndication revenues this year.
Right now:
Content is and will remain king. With the economy slowing down, consumers will have less discretionary income and will turn to low-cost entertainment, namely: free content. I think the Web will only become more ingrained in people’s lives and web video will continue to explode in consumption. With UGC being rejected by marketers and publishers under more pressure to generate revenues, I think WatchMojo.com is uniquely positioned to benefit from the slowdown. But this being said, for sure, we’re not immune to the economy, so as companies hesitate to part with cash, we will lose a few licensing deals, too.
The dilemma:
But this creates a dilemma for us, which frankly, is keeping me up at night.
By holding back on speculative syndication deals (by speculative, I mean with no guaranteed revenue), our growth in streams slows down. We still doubled streams this year, as illustrated by the graph below…
… but our monthly and all-time stream count would no doubt me much higher if we blanketed the Web indiscriminately with no care or concern about revenue.
While VC-backed companies start to batten down the hatches to reduce their burn rate, we don’t have much fat to cut, so we’re charging ahead.
The question then it, should we:
- remain conservative during the downturn and continue to demand guaranteed revenue, even if less and less companies might be willing to part with cash…
OR
- get more aggressive and start to unleash our videos all over the place, knowing full well that much like search queries were eventually monetized, online video streams will too, and those with the most real estate and reach will prevail?
That is not my gut, that is essentially the case study of Google, who used the 2000 to give away their search technology at the expense of licensing revenues. Today, licensing revenue generates less than 1% but their free, ad-supported search powers $17B in annual revenues. Then again, Google did have $25M to subsist on, we don’t have that luxury, so I am not sure how relevant Google would be to our predicament. There are many other nuances in the Google analogy, since with technology, it’s a zero-sum game: you either use Google search technology or their competitors’, whereas with content, consumers want to consume more and more of it…
What would you do: continue to hold back distribution and charge for content OR give it away and make it up - potentially - in volume?
Thoughts?
PLAY
