BUSINESS BLOGS
BUSINESS BLOGS
category: business
21 Apr 2009

Timing is everything: Buyer’s Market with no buyers in sight

A couple of years ago, digital media executives were talking to venture capitalists and trying to set up “roll up” funds.  The timing was bad in the sense that prices were irrationally high.  Today, the timing is great in that it is a “buyer’s market” but it is bad in that the credit and financial markets are tight.  But since most buyers are on the sidelines now, I think it’s a great opportunity to roll up such assets and maximize potential returns.

Insanity: More of the same, Expect different results

How much do you need?  Not $250M.  PE HUB’s Dan Primack is reporting that Netscape co-founder Marc Andreessen and his partner Ben Horowitz are raising a $250M fund.  He’s a bit skeptical of the amount:

$250 million is an extraordinary amount of capital for a first-time, early-stage fund. Andreessen said in February that initial investments would average just $500,000 (a fivefold increase from the $100k that he and Horowitz currently invest out of their own pockets). That would work out to more than 100 portfolio companies, even if you assume that the fund would quadruple-down on every investment (which it won’t).

Andreessen and Horowitz plan to thin the bloated portfolio size by complimenting their seed deals with a handful of $5 million-ish Series A plays, but I’d think the firm would really need to average $10 million per company to make things manageable.

I am skeptical of the strategy.  To me, this seems like continuing to invest in companies that have put up donuts on the IPO scorecard, no?

Now I don’t know whether or not they will be successful in placing all of that money, let alone raising it… but what I think would work really well now would be a roll-up fund to aggregate video assets, with a capital allocation of:

- 15% ad serving and player technology,
- 35% audience,
- 50% content.

I understand Marc isn’t a content guy, but the most astute investors - starting with uber angel investor Ron Conway - seem to agree that branded content is a multi-billion dollar opportunity.

Motivated Sellers

Yet as the sad Spotrunner alleged crimes show, trying to crack the TV advertising inefficiency via technology and algorithms alone is a losing proposition.  You need to include content in the mix, the right content.  Since most in the content business have yet to find a suitable and scalable revenue model (though we have!), then I think many entrepreneurs would be motivated to sell and join a roll-up strategy.

It’s not just the entrepreneurs that want to sell.  I can name you at least 5 VCs who are regretting making their investments in their portfolio companies in the video space because they bought into the hype and adopted a me-too strategy.  I’m not crazy to name either the VCs or companies here, but you don’t need a PHD to figure out who I am referring to.

So both entrepreneurs and VCs might very well trade in their clunkers for the shot of redemption, and it won’t cost much.

Wanted: Fresh gunpowder

Since most VCs have hitherto misfired and bet on every imaginable ill-fated trend (starting with UGC, then followed up by me-too aggregators), I think they will be a bit shy to continue to fund potential clunkers.  However, if someone has fresh gunpowder, then I cannot imagine them misfiring by buying video assets as per the breakdown I suggest above.

That strategy will give them top notch technology to serve content and ads, roll up the right content and then be able to promote it all against a large enough audience to monetize it effectively.

So, who’s gonna write me that check?