I am the CEO of an online video company… and apparently, it’s a tough gig.
It’s true. Mind you, I had the choice of focusing on being CEO of a search engine, CEO of a blog network, CEO of whatever this is, and ultimately, I chose to be CEO of an online video startup because it gave me the best chance to write history and come up with a playbook and framework to build something successful in a spanking brand new industry.
Search, blogs, etc., were all “been there, done that” spaces; not necessarily in the “I’ve been there, done that” sense but rather in the “someone else has been there, done that… why reinvent the wheel” sense.
GigaOm lists the recent departures of notable CEOs as proof:
Herb Scannell of Next New Networks said his company would be better served by someone more web-oriented; Mollie Spilman deferred to her co-founder to lead Tidal TV; and Bill Joll of On2 didn’t give a reason, though it’s worth noting that his company recently had to restate earnings due to “falsified” sales accounts (the three are pictured in that order). And they’re not the only ones: Founding CEOs Josh Felser of Sony-owned Grouper (now Crackle) and Tim Tuttle of AOL-owned Truveo are also members of the recently-departed online video start-up CEO club.
Does commonality suggest cause?
Ok, this is not a coincidence, but let’s go deeper than assessing commonality.
1 - VCs do not understand media, let alone ad supported businesses
Spark Capital plunked down $8M in Next New Networks‘ Series A. Then Velocity Interactive Group and Goldman Sachs invested an additional $15M in the company’s Series B - a mere two years after the Series A. The company has raised $23M; let’s dumb down the numbers: say investors now own 50% of the firm, that gives it a value of about $50M. If VCs aim for 5x, 10x (let’s forget 100x here) that means N3 needs to exit for $250M - $500M. To put things into context, Atom Entertainment sold for $200M to Viacom and IGN sold for $650M to News Corp.
Sure, a video content company can and should sell for more… but it’s awfully hard when you swallow $23M in funding and don’t have a path to revenues, let alone profitability.
Revision 3, GigaOm states “has been on a tear lately, signing web stars Veronica Belmont, Zadi Diaz, and Gary Vaynerchuk), but the fact remains:
- they’ve raised $9M in funding already… and seeing how “they don’t seem any closer to turning a profit” that means that R3’s own CEO, Jim Louderback, will also be hard pressed to demonstrate a viable business model before long.
- more importantly, in light of the recent signings they have had, they are going after paying for talent, and that is a dangerous model for web content… no matter how proven they might seen. Remember Lonely Girl? Success if fickle, temporary and does not really convert to advertising success once advertisers realize what they actually want beyond flash and hype.
- Revision 3 remains extremely niche and tech-oriented. That is not a bad thing in of itself… but its appeal becomes increasingly limited to most would-be acquirers, who would favor something more lifestyle and neutral.
One natural fit for R3 was CNET, but now that it is in the hands of CBS… would it really want to pay 5x or 10x the most recent valuation R3 fetched? At a funding of $9M, presume a value of $20M+ at its most recent funding… projecting that same 5x or 10x multiple that means investors will balk at anything less than $100M to $200M.
Would you pay that for Revision3? Would you? I don’t see too many people paying that for Digg… Kevin Rose/Jay Adelson’s other business.
I used to own On2 stock (I got in at about $0.70 and got out at about $2.00). As a publicly traded company, yeah, I got news for you: falsify statements and you’re out. Nothing to discuss here. Let’s move on.
I don’t know much about Tidal TV apart from the fact that they raised a $15M series A. Listen, Tidal TV seems like it’s a cool idea… but $15M Series A - are you F’n crazy? Way to get behind the 8-ball. Don’t get me wrong, but a $15M Series A guarantees that you burn money before you have a clue what you are trying to do… it doesn’t mean automatic fail, but it does make it hard to succeed because time is money and with so much at stake the VCs shall get impatient, and that means the CEO shant stick around.
Hopefully, Tidal TV can prove me wrong… as a content producer, we are always rooting for tech startups and aggregators to become successful, but as I noted yesterday: increasingly YouTube is killing video-centric tech startups, not media companies.
The bottom line is it’s hard to over-deliver when you promise so much to get a lofty valuation. Rumor has it Funny or Die did a $10M round on a $100M valuation. Really? I don’t know what is funnier, that, or naming Will Ferrell CEO. I wonder how long he’d remain CEO.
As per Crackle’s CEO and Truveo’s CEO - those are acquired companies, naturally those guys won’t want to stick around at old school media companies SONY and AOL respectively.
2 - Online video advertising revenues are bullish, but remain embryonic
Online ad revenues in the US grew from $450M in 2006, to $750M in 2007, and crossed $1.25B in 2008. In four year, Forrester predicts a fat $7.1B… problem: no one has any clue what format that will come in (pre-roll, companion ad, overlay, PiP, etc.) It’s darn hard to plan to capture ad revenues down the road if you don’t have the foggiest clue what ad format you’re chasing.
For example, circa 2002-03, when the 300×250 (or 250×250) ad format took off, many publishers had never created an ad slot for this, so they had to continue running 728×90 and 120×600 ad sizes, leaving a lot of money on the table.
3 - Difference Between Social Media and Video
Let me actually be more specific about why there has been so much turnover in the corner office at online video startups:
- the social media hype train has fizzled… look at the relative inability of Facebook and MySpace to match revenues with their enormous audiences; look at the reduced projections for social networking sites. My gut says VCs figure that social networking sites are not worth their money, time, or attention.
however…
- online video is the real deal… to paraphrase Shaquille O’Neal referencing Paul Pierce:
“Take this down, online video is the motherf*****g truth. Quote me on that and don’t take nothing out. I knew it was the real deal, but I didn’t know it was this real.”
With online video becoming more and more omnipresent online, VCs who have skin in the game know that they can still go yard despite stalled efforts and founding CEOs on board… so sooner or later, they don’t mind taking out the knives.
That, my friends, is what you are seeing here.
All right, back to running a successful online video startup.
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June 24th, 2008 at 12:44 pm
I’m glad that your investment in On2 ended working out for you, but I’m curious as to why you made the investment to begin with. As someone who has a pretty good view of the video market, what did you see about their technology that supported their valuation? Even more importantly, if so much of your wealth is tied to online video, why concentrate that position further? I’ve read that David Jackson at Seeking Alpha has gone as far as to short the Street.com as a way to hedge against his concentration of wealth in SA. This seems a little extreme to me, but its interesting to see you take a different route with your own investments and I’m curious as to whether this was a strategic trade or something that you did with your gut?