Generative AI and the State (and Future) of Media Financing
In the coming months and years, if a VC or private equity firm wants to invest their pool of money in a streaming or media technology business, will Generative AI be a must-have component?
“I think that Venture Capital's interest in Generative AI and understanding how it's going to disrupt various business and consumer markets is very high,” says Simon Solotko, Senior Analyst, Tirias Research. “From a startup perspective, it’s interesting because it’s disrupted the startups that were pre-AI.”
Solotko says it’s quickly become apparent that “Generative AI can be used to build content with a level of capability and immediacy that was unexpected. It got good disruptively fast, and the use of Generative AI from producing images and text to creating video seems to be a ‘next 24 months’ thing, not a ‘next 10 years’ thing.”
Strategies for Making Streaming More Profitable
Naturally, an important goal of all media companies in the streaming space is how to make their streaming products and services more profitable. “They’re definitely looking to any solution that they can find to make that happen,” says Solotko. “We’re seeing the hybrid model of subscription-plus-advertising as necessary to sustain expensive content budgets.”
If one of the premises of what makes a successful business is you’re either saving money or supporting revenue growth, things could go either way, in terms of what types of media technology companies thrive—vendors who support reducing production and delivery costs, those who make advertising more profitable, or those who leverage something else like search or analytics.
Any of these areas could be what looks attractive for financing, but I’d put my money (if I were investing, which I’m not) on anything replacing expensive legacy hardware systems and adtech, closely followed up by the other categories. Adtech is one of the areas Volition Capital looks at in our sector.
Volition Capital Principal Jim Ferry shares what he concedes is “a bit of a contrarian view. The mindset is Google, Amazon, and Facebook own [advertising], but in my mind, people are constantly looking for solutions outside of the walled gardens that give them more control, provide them more data, and less dependency,” Ferry argues. “They probably control 50% of the ad market if you add it all up, but this is an enormous market. Where's the other 50% going?”
Ferry says CTV attribution is one area Volition has been focusing on. “There needs to be another kind of identifier in the market,” Ferry explains, “because it seems like we’re moving further and further away from the traditional cookies model, and all these privacy updates are making it harder to target individuals.”
Ferry adds that he thinks “unifying a lot of different disparate systems is interesting as well.” Most media companies have many different systems to run advertising in the digital and broadcast environments they distribute to. “The holy grail,” Ferry says, “would be something that kind of marries all of those advertising mediums together.”
Another high-potential use case for AI, Ferry says, is data. “So many companies are sitting on an insane amount of data,” Ferry says, “and I can't tell you the amount of startups that tell us ‘We also have this data asset and we can monetize that.’” AI allows them to set up rules to look at viewing data to understand who the customer is.
Investing Directly in Generative AI
What about a pure-play Generative AI company? “It's hard to invest in a Generative AI business where that is their core value prop, because you’re competing against Open AI, Google, and Microsoft—the people that have the deepest pockets in the world,” says Ferry. Plus the open source component of Generative AI makes things less proprietary and that’s not a plus when it comes to financing.
“My view on Generative AI is, if you’re not implementing it or using it in your technology, you’re going to fall behind,” says Ferry. “I think it's going to be a feature set where people are leveraging the APIs of a ChatGPT or something like that to build something interesting on top of their core products.”
Financing for media technology companies has changed recently, he adds. “Before, people were just optimizing for top-line growth and the thought process was, ‘We'll figure out profitability later.’”
Debt and Equity Financing
What is the state of debt and equity financing? “A lot of companies were falling back on debt before when it was essentially free and now everything that happened with the SVB [Silicon Valley Bank] has made debt a lot harder to access,” says Ferry.
Debt has never been exactly “free,” of course, but in earlier days it was common to finance with interest only, followed by a big balloon payment at maturity. Fast forward to now and the re-fi market is no longer there. “There's a lot of companies that are going to get hung out to dry when that debt comes up for maturity in the next year or two,” says Ferry. “Interest rates are higher now, so the math doesn’t work.”
Over on the equity side, according to Ferry, “The best businesses are still getting funded. If you have really strong unit economics and you don't need to be profitable, but you need to prove that there is a path to self-sustainability so you're not handcuffed to the next financing round,” says Ferry. There is money out there even if the funding requirements have gotten more stringent. “There’s so much capital committed to the private equity and growth equity market over the life of the fund… there's plenty of dry powder in the market.”
So this begs the question, what would happen if we ask ChatGPT to pick which company gets funded?
We will have a more in-depth article in the September-October issue of Streaming Media on how Generative AI is impacting different parts of the streaming workflow. If you’d like to talk about how your business will be using this, please get in touch.
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