VC (TechCrunch contributor) Mark Suster published an article on his personal blog about one of his portfolio companies, Maker Studios. Other players in that space include The Collective and Fullscreen.
While Mark is clearly rationalizing his investment, his reasoning is worth understanding. However, I could not help but wonder if one of the excerpts in this piece will make any difference with his technology-loving peers:
[A]nybody who follows this blog knows that I believe television disruption has already begun and it is more likely to resemble Internet content than streaming long-form content to our living rooms. As I talked about this model with several friends in Silicon Valley I always heard the same refrain, “we don’t invest in content business[es] – they are ‘hits driven’.”
I had to laugh a bit at at the irony of this. For one, the consumer-driven startup world has become immensely hits driven. You need star power of entrepreneurs surrounded by star power angels & VCs who in turn get tons of press from adoring journalists who are insiders amongst this crowd of tech cognoscenti. And this is at the same time that content has become more predictable. Sure, you need to start with talent. But when you produce on [the] Internet you can test your content in the same way that Silicon Valley firms test early versions of their software.
You can get feedback from your audience and adjust based on their feedback. You can get subscribers who receive every version of your content that you release. You can monetize via Google Ad Sales before you have enough revenue to build your own sales team.
He concludes that video content represents the ultimate “lean startup”. He’s half-right.
Don’t try to build “television” online, it won’t work
A lot of the early video startups were anything but lean: Ripe Entertainment burned through $45 million, Next New Networks plowed through $25 million before being acquired by YouTube. Incidentally, Maker is trying to duplicate what Next New Networks eventually did, which is to identify successful YouTube channels and build a network around it. It’s actually a smart model, with the main limitation being that some of the underlying channels/producers can switch and go elsewhere. The other economic limitation is that you are basically beholden to YouTube’s economic terms, though over time you can diversify your distribution and even leverage YouTube’s warchest, seeing how it is spending anywhere from $100 million-250 million on content.
Content and Distribution go hand-in-hand
In any case, by web standards, I am a dinosaur in the online video content world: producing videos since 2006, maintaining that content is king, but admitting that without distribution content isn’t worth a warm bucket of spit. Indeed, the main companies that have grown to become valuable businesses are distribution ones. However, the fact remains that you had to invest in 100 companies to get one hit. That’s no way to allocate capital, if you ask me, and I think Mark agrees.
Let’s face it: VCs tend to suck “in the aggregate”
In fact, for the decade ending June 2011, writes Peter Cohan: “VCs earned an average of 1.3 percent for their long-suffering investors. Compared to returns from the Dow Jones Industrial Average (4.2 percent), the Nasdaq (2.5 percent) and the S&P 500 (2.7 percent), the historical statistics do not bode well for attracting new investment.”
That’s lunacy when you consider the risk that VCs take and the fact that with more risk you expect more return. The only thing you can expect from VCs seems to be insanity, where they expect a different outcome despite the same behavior.
Avoiding content like the plague
If we look just at online video, you see VCs now pouring money into ad networks. Without a doubt, 2011 saw ad networks steal market share and generate material revenue gains. But while a number of horses remain in the race, only 1 or 2 will really retain value let alone much relevance in 5 years time. The same thing happened with aggregators: YouTube won the crown and every YouTube clone is now entering year 5, 6 or 7 with no real sign of liquidity, and if they do offer some relief to investors, it will resemble more of a walk than a home run.
All we are saying, is give Content a chance…
I’m really not arguing that every content company would fare better than a distribution company. Clearly distribution companies are set up to scale faster. But the fact is, it takes a lot less capital to grow a content business these days thanks to YouTube’s awesome platform. With a new flavor in distribution popping up each year (Google, MySpace, StumbleUpon, Digg, Twitter, Facebook– and only some retaining their value), it could be argued that distribution in aggregate has become a commodity while content has become easier to scale and more defensible.
Moreover, content has become the new software, what with zero marginal production and distribution costs. When you consider especially that cheap hardware and open source software has rendered technology anything but defensive, you wonder if the VC herd will perk up and follow Mark’s lead.
Photo credit: Karl Baron