What are the Odds. elycefeliz — Creative Commons/Flickr
Online video is here to stay, but your startup may not be so lucky.
Video sharing site, Veoh, a favorite around the sprawling estate of ScribeMedia, last week announced it will file for bankruptcy protection, but not before it gobbled up $75 million in venture money from a slate of blue ribbon backers, including Goldman Sachs, Intel’s venture arm, Intel Capital, Time Warner, Spark Capital and Disney’s Michael Eisner.
“In industries with low barriers to entry, such as media, there is a propensity to overfund,” says Steve Brotman, managing director at Greenhill Capital Partners, in New York City. An overfunded company with a bad business model gets to burn through that much more cash before hopping into the deadpool.
Brotman says his company has has avoided making investments in online video since 2004, when they put money into Critical Mention, a web-based television search and monitoring service. “We purposefully avoided the sector because it is very hot,” Brotman says.
Blaming the whole venture capital industry is foolish Brotman argues, because 90 percent of venture investments are not related to Web technologies, instead going to fund clean tech, telecommunications, biotech firms and other less buzzworthy, but equally lucrative sectors.
“Historically venture capital has been the highest performing asset class,” says Brotman.
On TechCrunch, Ashkan Karbasfrooshan calls out venture capitalists for their role in the untimely demise of Veoh and other video startups such as Joost. Karbasfrooshan says that online video startups are viewed as technology companies, when they bare more resemblance to media houses.
[T]he very same things that make technology companies successful are often weaknesses and even threats to media companies. For example, a tech company’s contract for recurring licensing fees is not as attractive as a series of contracts for recurring advertising deals. This merits a post in of itself, but the kinds of things that VCs were drawn to in video have all become commodities, namely: video aggregators, content delivery networks and content management systems, which are capital intensive, low margin areas always at the risk of getting cancelled and shifted to a competitor.
He also lays the failure of Veoh at the feet of VC’s who swing for the fences with every investment, hoping for a grand slam while they know that seven out of 10 will be whiffs. The investment game is won in singles and doubles he says. Media investors and the technology products in which they are invested are quite often fundamentally mismatched, Karbasfrooshan says.
There’s no one in the record company that’s a technologist,” Universal Music Chairman Doug Morris once explained. “That’s a misconception writers make all the time, that the record industry missed this. They didn’t. They just didn’t know what to do. It’s like if you were suddenly asked to operate on your dog to remove his kidney. What would you do?
While the gap between technologists and investors may be one issue, startups who take too much venture money may also be part of the problem. After all, each round of funding dilutes the founder’s equity and it also raises the stakes as investors expect multiples of their investment when the company becomes profitable.
Then, of course, it could just be a problem with the business model. Even with a great technology and an all star team, failure awaits the vast majority of new companies. Founders and investors know the risks, which is why the right tech investment can pay off so nicely. Most don’t.
Lots of money floating around can take its toll on the industry, but it’s not all bad.
“If there are bunches of companies raising lots of money at outrageous valuations, that’s a red flag for me,” says Twistage CEO, David Wadler. Twistage is a whitelabel video platform for media, enterprise and not for profit clients. “It’s also – from my perspective – an invitation to play in the space provided you can do something different, better, and/or smarter,” Wadler says. “There is no question that spending a lot of money to carve out a huge chunk of market is a valid strategy, however, it’s usually not one that multiple companies can pull off simultaneously,” he says. Since its inception, Twistage has raised $2.7 in venture funding.
Ultimately, all the money in the world cannot obscure the fact that there is only enough room for a few winners. The victors will have to balance the need to be continually innovative, while resisting the lure of investors flinging around too much cash.
“At the end of the day, companies that are overcapitalized face incredible pressure to realize what are often unrealistic returns,” says Wadler. “Investors, eager to get something back, sometimes spend good money after bad. Management panics as the stakes get ever higher, changing strategy repeatedly to try to make good on the investment and hang onto their jobs. While Veoh is a recent example of this, I’m quite confident it won’t be the last.”
