Reading Andrew Chen’s Which Startup Collapse Will End the Web 2.0 Era, I could not help but think about how in the dot com boom, financiers and entrepreneurs rushed to take an idea from a powerpoint presentation to an IPO in a ridiculously quick time span, which explains why all of the high profile dot coms bombed.
This time around (web 2.0), it wasn’t all that different. The only difference, really, was that instead of drowning a napkin with capital and hoping that money could make up for time, we thought that free software and cheap hardware could make up for time, and money.
Time and money have always been inter-related, hence the time value of money concept.
Now that we’re clearly in a recession, deflationary period, or outright depression, you have to wonder: can you actually win by scaling quickly, or are you in fact better off managing the clock and winning by attrition?
Last week, I read that Mania TV was on the auction block looking to sell for cheap. Mania TV was one of the first companies that I came across back in 2004/05 that made me think: oh, look, online video content can work. However, I thought Mania TV suffered from a multiple personality, where they went from wanting to emulate MTV, to dabbling in Hollywood too much, then to becoming Yet Another UGC Site, to then morphing into an Aggregator, only to return to their original content creation roots. It’s a shame. I really hope they survive and thrive.
But in that process, they plowed through $24M in funding, making it nearly impossible to provide a realistic exit for investors, and in turn, in this economy, rendering them unable to raise an additional penny. I hope they survive, but I am not sure they will. However, even the most recognizable Web 2.0 brands have in fact raised boatloads, be it Digg, Slide, or many others that come to mind.
As such, if we are to learn from history then, the way to build a company is not to drown an idea with capital and try to make up for the time it takes to go through the motions and learn what works in an industry, at a given time, for a given company, but to actually grow up in a natural, healthy way.
Getting back to Allen Chen’s article about the companies that might indeed crash and burn and end the Web 2.0 era, look out for the following characteristics that he lists:
- Started in 2004-2007, and
- Self-described as Web 2.0 startups
- Have grown to lots of headcount, let’s say >40 people, which can burn through a $5M Series A in under a year
- Substantial traffic, let’s say >5 million uniques per month, which drives up the cost structure
- Ad-based business models, which rely on big sales teams calling up agencies (whose pockets are now reduced, if not closed)
- Low-context advertising inventory, with low CPM in sectors like communication and entertainment
- Mature internet sectors, where the upside is now established, and acquirers are less likely to pay up as a result
- Not a leader in their category, where they may be #5 or higher, and investors may be unlikely to keep supporting their growth
- Media content hosting, where they allow users to upload, host, and stream content without charging a dime, which also drives down the cost structure
Read the whole piece here. Sometimes you win by having vision, ambition, execution… other times, it’s luck… and timing!
Learn to manage the clock. Winning by attrition is winning nonetheless.
Regular readers have surely come across the short version of how my old company crushed old media stalwarts Maxim, GQ, Esquire, Playboy et al. and deeper-pocketed competitors such as TheMan ($17M of funding folks!) to become the #1 online magazine in the men’s lifestyle space:
It’s a three step process, are you ready?
1- We didn’t get buried by the weight of excess funding and irrational expectations;
2- We ran the company with an eye on costs and a desire to generate more and more revenues and thus be “profitable“ (pronounced “prŏf‘ĭ-tə-bəl” and is a derivative of the noun profit, profitable is an adjective that basically means “not being f*cked”);
3- Then when the [insert name of] bubble burst, we charged ahead while our peers had to scale back.
Well… the same thing is happening now with my new company WatchMojo.com. From NewTeeVee:
ManiaTV Lays Off 20, to Reduce Amount of Original Content
Layoffs are a common theme these days, mostly due to the current economic downturn. We’ve recently covered layoffs at Veoh, PermissionTV, Playboy, Heavy, Seesmic, and BitTorrent. Crackle, another site focused on original content, also lost most of its staff amid a move from Northern California to its Sony mothership in Culver City, Calif.
I am not sure I would put Heavy and Mania TV as our direct competitors… but seeing how we all produce original content, then I guess, to some extent, yes, we compete. The point is, both companies made cardinal mistake #1: believe your own PR, raise too much money, get cornered by VCs to cut just as the online video market takes off.
It is a shame, because in all fairness, back in 2004 when I was looking for new projects to pursue, it was the sight of Mania that led me into thinking that producing video content for the Web could work. I am actually rooting for them and hope that this bit of cost cutting will help them indeed reach profitability.
Last week I was going to comment that according to Compete.com’s stats, both Heavy.com and Mania TV have single digit market shares in the video landscape. If I was running those companies, it would present an interesting dilemma:
- do you focus on a destination strategy and pour more resources into developing your market share,
or
- do you embrace broad distribution and get your content everywhere else. On this point, worth noting that Heavy has evolved quite a bit from content creation to aggregation; while Mania TV moved away from original content to UGC, only to realize that was a bad move…
Both companies have raised $20-25M each in funding. Say the investors want 5-20x in an exit, who would pay $100M to $500M for either company? I don’t know.
Both companies seem to have been around forever (Heavy since the late 1990s) and Mania since 2003-ish so I presume the companies are now easily making way over $10M per year in revenues… but they also probably have high costs… so they very well might raise more money, too.
If that happens, then the case study that comes to mind is UGO: they ultimately sold for $100M but they’d raised $80M in funding. Their last institutional investor even managed to lock in a 5x liquidation preference.
Yesterday we learned that Heavy was spinning off its ad network business; and today the company announced layoffs.
Layoffs?
The problem with most of these online video companies is that they already have bloated costs. Heavy’s CEO says that revenues are growing 60% per annum, probably true. What he does not talk about is escalating costs: 5+ years into the venture, I am sure the company’s costs have grown, too.
Last week CBS VP of M&A Mike Marquez talked about looking for video assets. He stressed cash; either:
- how much cash can a firm make for us today
or
- how much cash can a firm make for us tomorrow.
The problem with most of these “legacy online video producers” is that their cost structures are mature, but their revenues are not… meaning they not only don’t gush out cash but they bleed it.
Note: technically, broadly, WatchMojo.com competes in this space.
Mania TV adds $5M to their $17M in funding, bringing the total to $22M. Ripe TV remains “king of the hill” funding-wise with $32M… followed by Heavy.com’s $25M but I am not sure if they really fall in video creators anymore…
These amounts are just a “tad” more than the money we’ve invested in WatchMojo.com, of course. I reiterate that you are better off not being funded up the wazoo until you know what your business model will look like and it actually pans out. I’m not alone in thinking that, take it from a pro like Fred Wilson: the following is the most accurate thing I’ve ever read about why VC-backed firms fail (our commentary here and here).
Last year I predicted that VCs would finally get it right and start to fund content companies. Howard Lindzon rightfully (at the time) said I was wrong. I think my timing was off. It did not really happen in 2007 but it is certainly happening in 2008.
Mind you, some VCs have been funding content creators for some time now which is why some companies are behind the proverbial the 8-ball, playing catch-up and trying to align their business realities with the prospects and theory that led their initial funding rounds.
Regardless, you are seeing an acceleration of all of this in 2008, though it’s not always VCs alone; as talent agencies (ICM, CAA, WMA) and media heavyweights (Jon Miller, Ross Levinsohn, Terry Semel, etc.) and strategic investors (AT&T, etc.) are all getting in the act.
In fact, Mania TV was one of the first video content producers out there. They emailed me at my old gig looking for a biz dev opportunity and I was intrigued with the idea of producing video for the Web. This was in 2005: broadband users weren’t as prevalent as they are now, hosting costs were much higher. Most importantly, hyper-distribution was in its infancy. What is hyper-syndication:
- The Democratization of Content and the Commoditization of Distribution
- The Commoditization of Distribution and Scalability of Content
Ultimately, I’d love nothing more than seeing Ripe, Heavy and Mania TV have monster exits, but at those funding levels already - and with video advertising still in an embryonic stage (to grow from $1B in 2008 to $7.1B in next four years) - I fear that some of these companies will have a hard time finding buyers right now… especialy in the context of 2008 being the year of micro deals with new media firms.
Obviously that’s where the additional funding comes in: to take them to an exit. Invariably, some of these companies funds (be it from financing or operations) will also be spent on acquisitions: the IGN method of consolidating a space and then exiting at a much higher range (in IGN’s case, $650M to News Corp.).
Interestingly, Mania TV was one of the original sources of inspiration for WatchMojo.com in the context of made-for-web video programming (sans Dave Navarro et al., of course). In all honesty, last year I lost faith in them when they jumped on the UGC bandwa-bong but thankfully, they came to their senses and went back to their roots with original programming.
Anyway, combined with Generate’s $6M round, we’re updating our video funding table, below:
PLAY
