November 20, 2007
While I certainly agree that most content plays are a bad fit for VC investment because they require investing alot of capital in the risky proposition of generating a hit, I think our panel’s preoccupation with the “hits” aspect of traditional content led it to miss an important point: the emergence of the digital panel is changing the rules and allowing some content business models to fit within the venture model. Specifically, the digital platform is on the one hand dramatically lowering the cost of creating and distributing content, while on the other hand making it easier to predict success (at least to some extent).
Very few have figured this out. While I am not one of them, I happen to have the privilege of backing a team that is. (Yup, you’re right, another VC pimping his portfolio, but that ain’t gonna stop me because I think it is true).
In addition to falling in love (figuratively) with the founders of Heavy.com, we invested based on the belief that they had cracked the code on how to achieve predictably high returns on investments in programming. Here is how they did it.
First, Heavy developed a track record of making content — cheaply — that people consistently liked enough to come back for more. As a result, and in conjunction with doing a good job of putting their content where their viewers were, Heavy eventually built an audience big enough to be interesting to advertisers. At the same time, they solved a harder problem — how to create and sell brand advertising against that programming and audience. The net result is that Heavy can pretty routinely generate content that need not be a blockbuster to generate returns. And, with predictable distribution and a predictable ability to monetize, Heavy now is able to make highly informed programming investment decisions. When they are pitched on, or themselves originate, a programming concept, Heavy can pretty accurately predict what sort of viewership the program will see, how much revenue it will generate, and thus what sort of ROI investing in the program will generate. In most instances, Heavy can invest in programs that, even if never a blockbuster, consistently end up being equivalent to a modest success for a cable property but at a fraction of the cost.
Having successfully established the three pillars of a digital media platform — programming, audience and monetization — the challenge now is all about execution and scale. Create more programming, extend the audience, and scale the sales effort.
So, yes, absolutely, our investment in Heavy (among others) was a venture investment in content. But — and this is the key for me and my partners — it was fully consistent with the basic venture model we espouse. Heavy had already established that it could consistently generate programs which made money. So the question standing between our investment and a great return is not whether Heavy makes lightning in a bottle and bangs out some blockbuster hits, but rather whether they can take their current model and scale it. Which, from a venture perspective, is not all that different from backing a software or business services company that has had early success with customers and is looking to scale the business. Certainly not without risk, like any VC investment, but by the same token the type of risk and the type of challenges that VCs and venture backed entrepreneurs see every day: building management and scaling the organization, continuing to innovate with product and staying ahead of the competition, and navigating through the constant change of highly dynamic markets.
Importantly, it had nothing to do with me deluding myself into believing I had some special nose for content I most assuredly don’t. But I think I do know great entrepreneurs when I meet them, and a good business model when I see it.
So I totally disagree with the position of some of my fellow panelists. VC investment in content can sometimes make a ton of sense.