We live in the subscription streaming era of media. Across film, TV, music, and audiobooks, subscription streaming platforms now shape the market. Gaming and podcasting could be next. Where are the startup opportunities in this shift, and in the next shift that will occur?

I sat down with Pär-Jörgen “PJ” Pärson, a partner at European venture firm Northzone, to discuss this at SLUSH this past winter. Pärson – a Swede who now runs Northzone’s office in NYC – led the top early-stage investor in Spotify and led the $35 million Series C in $45/month sports streaming service fuboTV (which has roughly 250,000 subscribers).

In the transcript below, we dive into the core investment thesis that has guided him for 20 years, how he went from running a fish distribution to running a VC firm, his best practices for effective board meetings and VC-entrepreneur relationships, and his assessment of the big social platforms, AR/VR, voice interfaces, blockchain, and the frontier of media. It has been edited for length and clarity.

From Fish to VC

Eric Peckham:

Northzone isn’t your first VC firm — Back in 1998, you created Cell Ventures, which was more of a holding company or studio model. What was your playbook then?

PJ Pärson:

The entire venture market was in its infancy in Europe at the time, and Cell Ventures was investing and incubating out of its own balance sheet. That model works if you are not dependent on outlier entrepreneurs. You could argue that was possible in those days because it was such an early phase of the market, and we didn’t have the top people betting on the internet at that time.

That approach would be much harder today. The big opportunities are when you have an entrepreneurial team that feels they own the whole solution, and that their financing partners are nothing more than financing partners helping enable their vision and decisions.

Peckham:

How did you jump into building and investing in tech? From my understanding, prior to Cell Ventures, your role was turning around a fish distributor, right?

Pärson:

Well, I came from private equity, where I was not particularly happy. One of our portfolio companies was struggling, and I chose to take over that company and get out of private equity. Because the turnaround coincided with the advent of the internet – I used internet technology to create-cost effective and simple ways to deploy a communications system within the company at almost no budget.

Then I basically retained ownership, found professional leadership for that company, and subsequently sold it. It really taught me the disruptive nature of the internet for existing companies. But when I started to see if I could scale that model to other old school companies that were inefficient or going stale, I saw more and more that the real opportunity was actually in new business models.

Investing in value chain disruption

Peckham:

In terms of sourcing and investment decisions now at Northzone, would you say you’re particularly either a proactive, thesis-driven investor or a reactive, ‘see what comes through your network’ type of investor?

Pärson:

Well, I’m almost ashamed to say I’ve had the same investment thesis for 20 years. And that thesis has been based upon the very simple fact that there is a value chain in most industries, and in most industries that value chain is the result of historical relationships between the various constituents. The suppliers, and the consumers, and the middlemen, and all that stuff. And that value chain has a tendency to be transferred into a new model.

So there’s always value chain disruption potential in pretty much any industry. The trick is to know what role to play in that value chain. Do you want to take a role in many places along that value chain, or do you want to be a tollgate that everyone in the value chain passes through?

When I meet an entrepreneur, I see immediately, “Okay, this is a value chain disruption case,” and I can pretty quickly ascertain whether it’s a deal for me. And when I meet entrepreneurs at events like SLUSH, where I might meet someone who says, “you should meet this person” and we reach out, I can basically pull the trigger in a matter of days, because I know what I’m looking for.

But it’s much harder where the investment thesis is not around a particular way of creating value. Then I need much more time to digest, and I probably wouldn’t even understand why I would need to talk to those companies. So those folks are most likely to just land on my desk, and then I need time to digest and work through the opportunities.

Peckham:

You mentioned you can either be a tollgate or touch participants along that process in a range of ways. Do you have a strong sense that one of those two is a better business to build?

Pärson:

It depends entirely on what the industry is. Now it’s not so much of an investment theme anymore, but the marketplace idea is very much a way to organize the value chain. You can have a two-sided or multi-sided marketplace, and that is basically a different way of saying you’re organizing the value chain in a particular way. That’s why I was extremely bullish on marketplace investments six or seven years ago. Now it is harder to find unique opportunities in that theme. There are still some, but it certainly was at the core what Spotify was doing. To move a value chain that was controlled by various entities to a marketplace dynamic where Spotify is sitting on the marketplace clearing mechanism, so to speak.

Peckham:

How would you fit your portfolio company fuboTV into that framework?

Pärson:

That’s a game where access to content was the first critical sticking point for any OTT [over-the-top, a.k.a. online streaming]. And the fact that fuboTV sourced pretty much all the content through revenue sharing, made it an attractive content platform and gives fubo the chance to be the most attractive consumer proposition. Long term, that sourcing model is dependent on how much fubo scales, and vice versa.

So if we see a scenario where fubo launches into multiple international markets — they have soft launched in Spain, for instance — there is a pretty high likelihood that they can become the world’s largest purchaser of sports rights because it’s a very fragmented market. And that could then be the basis for striking deals directly with sports owners and teams or leagues, thereby providing them with global distribution on a revenue share basis. Which means they can take a larger share of the total value-add versus what they can today by selling access to networks on a local basis long in advance.

For instance, take the NBA. They have more viewers in China than they have in the US. But they don’t monetize those viewers in a good way. There are many of those opportunities that could be leveraged with an international consumer base and a content platform that delivers all the completeness on the content side. That was no different with Spotify.

Peckham:

I’m curious: you said if a deal comes your way that doesn’t fit this framework, it takes a lot longer for you to evaluate it, and often you just ignore it. What would make a deal that doesn’t fit that framework pique your interest enough to still spend time on it? What has to be there that jumps out so much?

Pärson:

Typically the founders. You can pretty much immediately sense star quality in founders. And it’s not that they are unusually communicative, or fit those stereotypes of “cool people”. It’s just this ability to make people believe in them, be it other investors or seed investors, or early employees, or co-founders, and that really stands out. And aiming high for the kind of talent that they surround themselves with, that also stands out. Because there is one concept that we’re using a lot internally, which is: is there a founder or co-founder, or early employees with very high alternative cost? So a case where they could do pretty much anything else, but they chose to do this. They are accepting a high alternative cost, which is a pretty good indication of quality.

Media trends

Peckham:

The comparison of fuboTV and the subscription OTT market versus Spotify and the music streaming platforms is interesting. Do you think a subscription bundle can be a highly profitable, successful business, without some sort of exclusive content? It makes sense to have a Netflix subscription, and maybe also pay for fuboTV, or whatever else. You don’t need multiple music streaming subscriptions, right?

Pärson:

In terms of exclusive content, I do believe that the content market, and the idea of exclusivity, is flawed in many ways. And I think Spotify proved it really well. Proved that what the artists or the content owners really need is maximum distribution — and distribution at a certain minimum RPU (revenue per user), of course. But the thing is when you start to restrict distribution, you can get a higher RPU, but the underlying market is still actually eyeballs. So what is ultimately fueling the interest of Man United or the Patriots is the number of people who want to watch their games. If you restrict that, then you’re undermining the company. We saw that when Twitter had acquired the online rights for the NFL…I think it was the Superbowl, a few years back. It was a total disaster for the NFL. They got no eyeballs for that and it really undermined their OTT business.

Peckham:

What does that say for independent startups that require high-quality content, like a fuboTV, when they’re competing with an ESPN+, or a DAZN which is part of a bigger group, or potentially Apple or Amazon who are looking at sports rights? They could spend billions on that a startup doesn’t have.

Pärson:

If the leagues are rational, they’ll see that doing a deal with someone like Amazon will not give them enough. Where they can’t give them exclusive 360-degree rights, they could give them maybe exclusive rights for some games, like Thursday night games. Or they can give them exclusives on some aspect of the content. But if they were to give up broader exclusivity then they would restrict their market, even if they’re doing a deal with the giant players. I don’t think that’s in their interests. Also if you look at most of the media giants today, they need like four or five distribution channels.

The coming platform change?

Northzone Partner PJ Parsons image via Northzone Press Kit

Peckham:

Let’s step back. As an investor now, looking for early-stage startups, what’s interesting to you in the media, entertainment, & gaming realm? Where are you hunting? What trends are piquing your interest?

Pärson:

I think we’re ripe for a platform change. The dominance of Facebook and Google and the Apple App Store really has, in a way, stifled innovation. It makes it hard for a media company to create a product that is really disrupting outside of very restrictive parameters defined by these giants. So I’ve started to look, for instance at [companies like] Brave. Brave’s browser, is basically a blockchain initiative, or it’s turned into a blockchain initiative, I would say. It started as an ad blocking browser and now pretty much all browsers have ad blockers, so they were pioneers in that regard.

Peckham:

This is from the former Mozilla CEO, right?

Pärson:

Yes. And then you have DuckDuckGo search. With those two you can get high privacy, and a new type of platform that doesn’t exploit your data as a consumer, which probably forces media properties to think differently than in the past. Differently in so far as you would probably see subscription models as the default, rather than ad models as the default. And maybe different types of funding models — anything from tip jar to real subscription, to micro-transactions, if you can get a good type of cryptocurrency compensation model to function. That’s the area I’m most optimistic about, because I don’t see many of the typical main media segments being wide open for disruption.

Then again there are a number of combinations. We’re looking at a really cool startup right now in London, called Pirate Studios, which is basically a physical recording studio for bands and DJs. But they’re also developing a network for distributing the stuff that you are recording either as a recording or even as live performance. And you can interact with other people, or fans or what have you. So that’s a mixed media model, which still has some legs. Where you combine events with a media model, which is happening on a large scale.

Peckham:

Are there radical shifts in broader media, or certain subsets of the industry, that you predict will happen in the next five years from blockchain or from AI?

Pärson:

I think there will be very strong focus from existing media players, including Facebook and Google, to continue the personalization and continue to streamline what you’re getting, and create even stronger bubbles. Because so much of their business model is to maximize and second guess what you want in order to maximize their ad revenues, or affiliate revenues or what have you. And that path I think will be led by the giants, because they sit on the biggest data sets, and they also invest the most in AI.

Whereas I think and hope the counter-movement that will pick up speed is where people basically shun that type of environment, and develop competing propositions where that isn’t part of the equation. Where serendipity can happen again in your feed. Or when your first 10 search results are not sponsored results. That opens up an opportunity to reinvent the online media experience.

Peckham:

Were there things that you predicted would happen in media, say five years ago, that didn’t happen?

Pärson:

My hopes were too high that the established media houses would see the dangers of jumping into bed with Facebook and Google. [That they would see] they were being totally sacked and undermined by those companies. Instead, the response has been extremely shortsighted, not even tactical and definitely not strategic. I think they have even shortened their lifespan over the past five years. I thought that they would fight back in at least some sort of productive way. But they’re just laying down flat to die.

Peckham:

Publishing companies in particular, to be honest. We saw so much complaining about the dependence on Facebook and Google and the need to add subscriptions, and shift away from it. Then immediately Google offers Google for Subscriptions which says, “let us manage all your subscriptions and customer information for you.” And they said, “Oh okay.” Right? It’s the classic dilemma of not wanting to kill the short term traffic and revenue.

Interactivity & next-gen content formats

Peckham:

If you see less opportunity for startups in traditional areas of media like music and publishing, what do you think about new content formats like voice interfaces, AR, or VR?

Pärson:

I think the user interfaces for VR and AR [right now] feel clunky. The user experience is just not there yet. And I don’t know how far we are from reaching the point where they start to become convincing. Remember when people were feeling nauseous when they used one of those headsets? They still do. Five years later people are still nauseous. And I mean you can’t have a situation where people feel sick when they use something, you know? Even the threat of feeling sick makes you hesitate, right? So I think the runway to takeoff has a lot to do with the quality of the user experience. When that is good and really immersive then I think it could be a significant game changer.

Peckham:

What about voice-first media?

Pärson:

I would say that it already has a very strong role today as an alternative to a mouse. But I don’t think it has got to the stage where conversational interfaces are even close to being precise enough to really wow people. Early adopters can take repeating a phrase once, or can even see [the tech] misunderstand you and still think that it’s cool. The early majority could just never accept that, so I think we’re pretty far from primetime on broader conversational interfaces. Short instructions and stuff like that though, absolutely.

Alexa obviously, or Echo, are very well positioned. They made exactly the right call there. Alexa can actually respond to simple questions, and does that really well, and then doesn’t understand more complex questions, which means you’re getting used to it only being good for simple questions. Simple instruction is a good position in the value chain, right now at least.

Peckham:

As we see more interactivity with content — even thinking about how people are flipping through videos or photos on their phone — are there tactics from the gaming world, (which is obviously built on a lot more interactivity and in-game purchases, etc) that you see or can see being applied to other content formats?

Pärson:

Yeah so if you look at Tencent Music, for instance — their principal revenue model is actually virtual items and such, which is certainly something they brought into their revenue model from the gaming world. At the end of the day, you need to offer the consumer something that has a perceived value.

That’s also an area I’m pretty bullish about within the blockchain movement; the idea of non-fungible assets, where you can actually guarantee that there’s only one digital copy of an item. And not only in terms of the digital art of an artist that obviously has inherent value, but also stuff like knowing you have the only digital autograph from a say Zlatan Ibrahimovic (or some other soccer player) that exists. That’s a pretty cool thing to own, and it’s being guaranteed by this non-fungibility. There are lots of opportunities for startups to work along those lines. That’s a part of the physical world that we can replicate that in the digital world now.

Approach to VC

Peckham:

As a board member of these companies, is there a particular voice that you usually have in the board debate around an important decision? Is your natural response to just ask a lot of questions, kind of Socratic method with the entrepreneur? Or to lay out a path you see?

Pärson:

I prefer to ask the questions as a choice. “Would you do this, or that?” Because even if those questions aren’t exactly right all the time, it really puts the decision parameters and the assumptions behind the potential decision clear into the open. It’s a way to get a smarter dialogue in the boardroom, because there are many board members who want to show that they were good people who have read the board material by asking questions on how to cut the numbers in a different direction. It actually doesn’t advance the problem-solving.

For instance, I’ll say “Why do you think the customers would like that rather than getting more of what they’ve already got?” That’s a simplistic view, but that framing can provoke a strategic discussion without putting the entrepreneur on the spot as if they have made the wrong decision.

Peckham:

And outside the specific boardroom context, how do you think about your particular style as a VC in how you interact with entrepreneurs?

Pärson:

Well, I have tremendous respect for the idea of aligned interests. So if we build dis-alignment into the agreement with the founders early on, that will inevitably come back to haunt you. You just don’t want to have dis-aligned interests. Not even in bad times. Most VCs want to have downside protection, for instance, and I think that is a misconception. (It’s something that works really well in high priced, later stage companies. Then it could be a good idea.)

When you are aligned, then you will get the truth from the entrepreneur all the time, because they will have no reason to tell you a polished version of the truth, or even try to convince you to do something that’s not in your interests because it wouldn’t be in their interests either. For a VC and an entrepreneur, when you lose confidence in each other because you’re not playing honestly or whatever it is, that’s a bond that can never be mended.