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!