Broadcasting an Investment Thesis for Digital Media

There's no doubt Digital Media (DM) is a hot topic these days.  But, how do you make money?  

Last night at the VEF (Vancouver Enterprise Forum), a panel of Venture Capitalists (VCs) moderated by Danny Robinson of Bootup Labs attempted to answer this question.  The panel was made up of Shawn Abbott (Partner at iNovia Capital), local boy Steve Hnatiuk (Executive LP at Yaletown Venture Partners), Bill Bryant (Partner with Draper Fisher Jurvetson - DFJ), and Kushal Saha (Managing Director at Cascadia Capital).  These are guys who make a living putting capital in harm's way taking chances on growth business categories.  So, with all the hullabaloo around Digital Media writ large in the social consciousness right now, it makes sense to ask the money men 'what's the deal?'

The short answer is FUD.  Translation: Fear, Uncertainty, and Doubt.

The long answer starts right where Danny started the panel off last night.  He asked the question, "what is digital media?"

Shawn Abbott succinctly summarized the question by dividing DM into either a narrow or a broad view.  Narrowly, digital media is simply the migration of broadcast media online.  More broadly, digital media can be stretched to include pretty much anything online (i.e. Saas, Web 2.0).  Kushal expanded on this saying there is convergence of Web 2.0 and DM happening here and there citing Zynga as an example.  In other words, it's tough to boil it down to a soundbite and if you ask a dozen VCs you'll probably get a dozen different answers (or more if any of them went to Harvard).  Compounding the uncertainty is the fact this space is continuing to evolve.  

For the panel VCs, they seemed inclined to lean more toward the narrow definition.

Within that narrow definition, the question for VCs then becomes, 'how do we make money investing in digital media?'

The guys put on a brave face, but it was clear to me that they really don't know.  Keep in mind, a VC is constrained by the requirements of their [current] business model.  Generally, they are looking for exits in the $100 million dollar range within a time frame of 3 -5 years.  Is that realistic?  That's a discussion for another time.

For the purposes of this discussion, the panel continued returning to a couple of key stumbling blocks with respect to making investments in this category.  DFJ's Bill Bryant was the most outspoken and forthright on this front.  He bluntly stated a number of times that, quite simply, digital media monetizes poorly.  Furthermore, for a VC, the deals don't tend to fit within their investment model.  The capital requirements aren't big enough to warrant their participation and neither are the exits.

Shawn Abbott and Steve Hnatiuk were somewhat more charitable in their assessment instead focusing on the potential for new business models to emerge and convert "eyeball capture" (my term) into dollars.  Kushal Saha equated the value of digital media to the data streams being produced.  

But answers about how to actually do so, and more importantly for entrepreneurs, how to get funded to do so were few and far between.

Even Facebook, the newest 800 pound gorilla in online social media, was dubbed "not a venture deal".  If that's the case, what hope does an entrepreneur have for building a venture-backed company on top of the Facebook platform?   

Long story short, it appears VCs are ceding the digital media space to Angel investors and incubators for the time being.  The prevailing view is that the capital efficiency afforded to new entrants combined with the smaller exits ($20 - $50 million) make this space unsuitable for VCs.  

That said, this does not preclude an abundance of opportunity for innovation and continued disruption of the media industry.  Shawn Abbott had just returned from NYC where the mood at traditional media companies continues to be bleak.  Kushal Saha pointed to a gap between advertising spend in the "old world of media" and to what has migrated online.  There is cash missing and I guess the question is, will this cash reemerge vis-a-vis one of these new models or is it gone forever.

Bill Bryant referred to the media business as being "deflationary".  In other words, it's a smaller pie and it's getting smaller.

So, it's not all rosey for digital media.  Users love it, but that doesn't mean it will ever generate VC-sized returns.

Traditional media is walking dead according to these guys.  Before getting too deep into eulogizing these guys, I would like to disagree somewhat.  I think traditional media will complete the migration to digital. They'll crush their shareholders in the process, but they will get there.  One man's opinion.

I'll leave you with a few more quick hits from last night:

Bill: Investment for a Saas Company on the Enterprise software side is THE SAME as a traditional enterprise software company ($20 - $30 million)

Kushal: There will be a move away from CPM and advertising to micro-transactions

Kushal and Steve: Data streams are key to finding value

Bill: Beware wary of Platform Risk. There's the possibility of the parent eating the child and there will only be one winner per category.

Shawn: It's still very early.  

Bill and Steve: "Lean" startup philosophy is "irrelevant" with respect to VC investment decisions 

All: Referrals are the only way to get venture funding

Steve to Vancouver entrepreneurs: There aren't that many of us, reach out!

Enjoy!

Don Listwin Talks Philanthro-Capitalism at the VEF

Don Listwin, founder and chairman of Canary Foundation, was in Vancouver Tuesday evening talking to Vancouver Enterprise Forum (VEF) about bringing DISRUPTIVE CHANGE to Cancer Research.  The Canary Foundation has the ambitious goal to deliver early detection tests for solid tumor cancers by 2015.  As you can see by the accompanying chart, you want to get 'em early.

Disruptive by nature, Listwin's resume reads like a Silicon Valley awards show.  From designing computer systems for NASA in the 80s to being the #2 guy at Cisco to running a company as CEO of Openwave, he's got some serious street cred.  Here's a guy who does not accept the status quo.  You could almost feel sorry for the poor, DOS-based bureaucrats and academics he's trained his eye on with this latest endeavour.  Almost.

He kicked off the talk easily ingratiating himself to the crowd by dissing the San Jose Sharks in favour of our hometown 'Nucks.  Well said sir!  go 'Nucks!

The talk was hugely entertaining on a bunch of levels.  If you ever get a chance to see him speak, I highly recommend it.  There are people in this world with the "gift of the gab" and Don is one of them. 

The decision to get into the Cancer Research business was an emotional one, and in describing the events surrounding his Mom's battle with Ovarian cancer to the audience, you know it's still incredibly painful to talk about.  I was moved.

Then I was astounded. 

Listwin describes the current financial model for health care in the US and it ain't pretty.  Of course, you don't need to be a genius to figure that out.  The recent Obamacare debate was a textbook example of a broken system.  It's a system begging for disruption and Canary Foundation is happy to oblige.

For example, the system of incentives (in the US) DO NOT favour Diagnostics (testing) at all!  All of the Margin, the money, is on the Therapeutics side (treatment).  Diagnostics are limited to a "Cost plus" model in contrast to the "Market Value" model on the Therapeutics side.  No wonder companies would rather invest in "after the fact" medicine. 

"Prevention gets screwed due to market forces"

Now, Don is not your run of the mill Philanthropist.  He made it abundantly clear that he doesn't want to just throw a bunch of donations into this broken system.  He wants to create a WHOLE NEW INDUSTRY and then get the hell out of the way.  For him, disruptive change here included both the For-Profit and Not-For-Profit sector.

In the case of early diagnostics for cancer, he points to the current market for Home Pregnancy Tests as a possible model.  His team is looking at creating technology that will identify very early "bio markers" that appear in the blood.  I might equate it more to a Diabetic test kit personally.  Eventually, the first step in cancer detection could involve something as simple as a trip to the drugstore.

But cultivating this change won't be an easy road to hoe.

There are barriers in the form of the current academic research Rat Race. It normally takes 3 years from the date of Research proposal to Answer.  Terabytes of data get produced, but don't get shared. 

There are barriers in government.  There has NEVER been a change in how medical testing is treated for insurance purposes without an act of Congress.  At this point, he actually points to China and BC as the most probable early adopters of his team's advancements!  He points out that the PAP Smear test was 1st validated in BC.

And he points to barriers within the Medical Practitioner community describing the handling of digitized health records by doctor's as a "nightmare".  Layer onto that the fact the Diagnostics guys don't talk to the Therapeutics guys and you're mired in Medico_1.0 thinking at its worst.

In his favour, he has a great team, a well defined vision, a bunch of dough, and the experience of having done massive disruption before.  Some of the keys include building partnerships and finding early adopters.  Sound familiar?

Like Don says,

The funnest industries to disrupt are the BIG ones with arrogant leaders"

Agreed!

Get involved! The 2010 Canary Derby is coming to Victoria June 12th and to Vancouver September 25th!

 

Tourist in Techie Land: Reporting from Cloudcamp Vancouver

During introductory remarks for Cloudcamp Vancouver this past Saturday one of the organizers asked the group, ‘how many of you are technical people and how many are “from the business side”?’. The split was about 70/30 for the technical side.  The witty rejoinder to this result was something about why having it on a Saturday is a good idea – ‘only the technical guys would think this is a good way to spend a Saturday’. I saw one guy wearing a shirt that said, “I’d rather be surfing”, but the picture was of an open laptop.  Okay, so I’m joking about that last bit.  But, as a non-techie attending on behalf of Indicee, I was definitely in the minority.  Hence the “tourist” designation.

Here’s my thoughts on the day.

For the uninitiated, Cloudcamps are workshop-based events where the participants decide the curriculum at the beginning of the day.  Then, they spend the rest of the day talking about their main areas of interest with respect to “Cloud Computing“.  This can even include spirited, in fact heated, debate about how one defines Cloud Computing.

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Building the Start-up Infrastructure: NYC Edition

Here in Vancouver we’ve made great strides in producing a start-up-friendly environment and we’re continuing to build on that.  You can look at things like the Vancouver Enterprise Forum, the Angel Forum, Bootup Labs, Network Hub, DigiBC, Growthworks, and on and on it goes.  As anyone who knows me can attest, I’ve been a big fan of the Vancouver start-up community for a number of years now and it’s fantastic to see the momentum building behind this local movement!  I call it the Start-up Infrastructure.

As you may have guessed, we aren’t alone in recognizing the importance of having a solid infrastructure for our entrepreneurs and would-be entrepreneurs.  As part of my role blogging for Indicee (another great local story), I recently had a chance to speak with an entrepreneur helping to build out the start-up infrastructure in The Big Apple!

I think we should jump on these opportunities to learn from and connect with infrastructure guys in other markets.  Let’s keep building out the infrastructure until we can link Vancouver to New York to Toronto to Silicon Valley and all points in between!

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Bootup Labs Brings Paul Kedrosky to Vancouver

Last Thursday, November 19th, investor, writer, entrepreneur Paul Kedrosky was in Vancouver as part of Global Entrepreneurship Week.  Paul is a regular financial pundit on CNBC frequently quoted in major publications around the world; he is a former partner at local venture capital (VC) firm, Ventures West, and a current Senior Fellow at the Kauffman Foundation.  Remember to thank our friends at Bootup Labs for making it happen.

The evening kicked off with an announcement from Dean Prelazzi of British Columbia Innovation Council (BCIC) of a partnership between BCIC and Bootup Labs.  This news, in and of itself, was worth the trip.  I think this partnership really validates the efforts of Boris, Danny, and Maura over at Bootup, and continues to improve the local start-up ecosystem.  I think Maura and Rob Lewis have a running joke about 'the ecosystem' but I can't recall the details; topic for another time.

During the introduction, Boris (the emcee) artfully opened to door to the topic of GROKSOUP, one of Paul's previous companies.  Groksoup is widely recognized as one of the first hosted blogging services.  Think about this; at the time it folded, Blogger.com wasn't even called Blogger.com yet.  We all had a good laugh when Paul explained (a bit sheepishly) his reasons for exiting, "it was the year 2000, and I thought blogging had peaked".  Awesome.  -- Reminds me of the truthful candor you'll find on Bessemer Venture Partners' "Anti-Portfolio" page on their website (I highly recommend this link - very enlightening - companies they took a pass on). --

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Original Domainer Kevin Ham talks at VEF: Summary

Despite what you make think about his politics or the industry of domaining in general; or for that matter, his relatively 'spontaneous' speaking style, Kevin Ham managed to convey some interesting ideas and stories about his journey from Med Student at University of Western Ontario (in my home town of London Ontario) to Internet Mogul that most people have never heard of.  I thought I'd highlight a few of the stories and comments that I found interesting; I hope you enjoy.  There's one analogy I'll leave out; if you were there, you know what I'm talking about.  It definitely caused a "pregnant pause" throughout the audience.

Story 1: Kevin Ham was indoctrinated to the internet by way of website hosting back in those heady days of the late 90's where, well, you know.  He ran a website and decided to try and fund it with advertising.  This is a great commentary on pricing and on understanding value propositions.  Kevin was looking for advertisers and sent out 1,000 emails to web hosting companies offering space on his site for $30/month.  In his mind, he figured this would be an automatic 'yes' for prospects.  No takers.  He reconsidered his pricing and the next month sent out an email offering space for $300/month! He got a half dozen takers!  The next month $3,000/month and he got one more taker.  Amazing!  This is the type of experience that we should all consider when looking at pricing decisions.  The answer can be counter-intuitive.

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