Thursday, January 05, 2006

VC & Media Companies: Same Business?


I've noticed over the last several months a lot of similarities between venture capitalists and the media worlds of recording companies and the TV/Movie industry. I'm in the process of raising money for the startup I founded (a podcasting company called ClickCaster at www.clickcaster.com) so I've talked to many VC's of late and, having spent a substantial amount of time in past lives around the media business both directly (as VP of technology at Viacom Interact and SVP of Technology at Paramount Digital Entertainment) and indirectly (as director of the Apple Electronic Media lab at Apple Computer) they act, from a business perspective, in very similar ways.

It's a hit's driven business. And it's a 'front the talent money, take the bulk of the profits at exit' approach from both the VC side and the Media business side.

Think about it. A VC fronts the startup company X dollars (say it's $1m). They then take a significant percentage of the company and integrate themselves tightly with the management of the company (usually through reporting systems and seat(s) on the board of directors). They have ALOT of say in what goes on in that company once they've put up the money. They continue to feed money, as needed, into that company, taking larger and larger percentages until they (almost always) have a majority control. When the company finally is sold or goes public (becomes 'a hit'), the VC takes the bulk of the profit and, usually, a nice multiple of their investment. The founders generally do OK, but only OK and sometimes they don’t do very well at all.

Now, if the VC firm is lucky, that happens with 1 of 5 investments they do. 1-2 will break even, 1-2 will totally fail and be written off. Sounds scary doesn't it?

Well, the Movie guys have been doing it for 100 years. And the recording industry for 50. And they seem to be doing reasonably well at it. Their hit rate is more like 1 in 10 as well. They’re still consistently profitable.

They 'front' the musician or the producers of the movie/tv series the money to create the programming. In the case of the recording industry, they front, say $1M to a hot act, and they then write a contract that charges the musician for every expense the record company incurs related to that musician. If the record makes, say $5M, the musician might get $500-$1M of that (due to the contract that give the majority of the profits to the recording company.. sound familiar? Kind of like how a VC has the majority ownership in the startup companies it invests in). So if that album gets hot and makes allot of money, it's unlikely the musician (on the first record deal they do, because they often sign off on onerous terms without knowing any better) usually ends up making no money and often OWING money (on that initial $1M 'front money') to the record company.

Pretty slick.

And if you really think about it, their mining the same thing: Intellectual Property and creativity (both required in large doses to create successful media and successful startup companies, especially in software and high tech). So it's really no surprise that their models, at the core, are very similar.

Now, the VC I’ve talked with to date haven’t been anywhere near the level of ‘slick’ (term used loosely) as record executives I've known and heard about in the past. They have been as a whole decent and honest folks, at least, so far (I haven’t closed a deal with one yet). But the similarities between the two businesses are strikingly similar in many ways. They are, in the end, investing money in high risk/high reward scenarios with a ‘play the numbers’ approach that cycles the ‘talent’ through at as high a rate as possible for as high a return on investment as possible.

I’m not saying this is bad (or good). I’m just noting that if you want to get an insight into how the VC community really works, you might consider looking at the recording industry or movie industry for cues.

Just my 2 cents, and, of course, I could be completely off my rocker here.

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