Online Video Funding Should Continue In 2009
The recent announcement by Ripcode, makers of hardware transcoders that power MySpace and a few other key customers, that they had closed another round of funding is just one sign of continued interest in online video throughout the investment community. Ripcode’s $12.5 million round of investment, led by Granite Ventures, also saw participation from a group of existing investor—ATA Ventures, El Dorado Ventures, Hunt Ventures, and Vesbridge Partners—who had participated in the earlier $19.5 million series A round.
In late 2008, at the NewTeeVee Live conference in San Francisco, a diverse group of venture capitalists provided insight into what types of startups might be funded in 2009. The bottom line was that, for those contrarians who choose to start up a new service in the midst of the economic downturn, funding won’t be impossible but will take longer and come at a higher cost of capital.
The panel, moderated by Constance Loizo of Thompson Reuters, features six venture backers: Dan Beldy of Steamboat Ventures, Daniel Cohen of Gemini Israel Funds, Warren Lee of Canaan Partners, Aydin Senkut of Felicis Ventures, James Slavet of Greylock, and Richard Wolpert of Mail Room, covered several major points.
One of the first, made by Gemini Israel’s Cohen, is that he’s not interested in funding a company that shows potential but that doesn’t already have traction.
"I'm glad I didn't invest in the video content layer company, but everything around it," said Cohen, adding that he looks at the total ecosystem before choosing where to invest.
"We look across the startup value chain," agreed Steamboat’s Beldy, "so we’re looking at the MSOs [cable operators] and even physical distribution. With online video, there's a VHS model which will have some cannibalization effect but will ultimately drive revenues."
"We’re not necessarily talking about original content pure-plays, but about the ecosystem," said Mail Room’s Wolpert. "I think the business models have changed, but no one's come along to completely compete head-to-head with the traditional broadcasters. Up until now you identified your show as being part of a network (NBC for instance) but the growth of DVRs mean you're less interested in the network and more about the show itself."
Cohen took the opposite view, noting "we sit here in SV and talk about making money while the broadcasters make money now."
"Monetization isn't here yet," said Lee, "so it's hard to replicate the benefit of an traditional broadcaster. But we can see that we will be able to replicate it hundreds of times over."
When Constance Loizo, the moderator, asked whether the group was more or less interested in video now than they were during the September financial services industry meltdown, given the cost of capital, most of the panel indicated a continued interest.
"We're optimistic that it's one of the areas that has been least affected," said Felicis Ventures’ Senkut, who acts as an angel investor for companies such as Brightroll and ScanScout. "We make our bets on based on the metrics."
"I think, though, that the cost of money is going to make it more difficult to raise funds," said Mail Room’s Wolpert, "but I'd rather be funding an on-line startup rather than looking at trying to deliver in traditional broadcast."
"The cost of capital is quite high now," agreed Canaan Partners’ Warren Lee, "so we recommend that startups approaching us think through the milestones and how you can hit those without a lot of money."
"One would think this environment would be to focus on later-stage," said Greylock’s Slavet, "but the valuations are quite high on those companies, since a lot of capital is chasing that. A bigger opportunity is Series A and angel, but in very high-quality companies that are capital efficient. Money still exists – it hasn't gone away - but the bar is higher. Several companies I've talked to for Series A have had multiple term sheets, which means capital is still obtainable."
When asked whether the higher cost of capital yielded a higher investment percentage for the venture capitalists, the response was uniform.
"Percentages haven't varied as much," said Steamboat Ventures’ Dan Beldy, "although you have to prove more with less capital. We still expect 10-30% investment with a group."
"If you're looking to raise a round from a classic VC," said Greylock’s Slavet, "you'll give up 25-33% of your business. The case I need to make internally is that we can make $50m on the deal. The potential for the cash return is what we are looking for."
"Valuations can't go down much as in last downturn," added Cohen, "where the boomerang of putting in egregious terms came back to hurt the VC. So Series A will remain the same but Series B or C will be less expensive."
"In last 1.5 years the $1m range has changed," said Wolpert. "The discounted rates have disappeared, since they were in lieu of actual equity with an attempt to raise a really high subsequent round."
"The days of experimental capital, to fund the 5th video search portal, for instance, are gone for the next few years," added Beldy.
"Valuation and stake discussions are a catch-22," said Aydin Senkut. "If the value is too high, then you'd be stuck in a route where you have to go IPO but don't have the revenues to justify it."