Finding Genius

by Kunal Mehta

  Another way that AI has already significantly impacted consumer businesses is in backend processes. For example, Stitch Fix uses a combination of AI and human stylists to deliver personalized fashion recommendations. Brands and retailers are starting to use AI chat bots for customer service and support. AI has also begun to transform the full stack of retail backend infrastructure, from product development, demand and inventory forecasting, marketing automation and analytics, to warehouse robotics for fulfillment.

  AR/VR also has the potential to transform the future of shopping and consumer experiences. Several retailers have incorporated AR in the shopping experience (e.g. Ikea launched an AR tool to see how a product would look in your home virtually, Sephora launched a virtual makeup artist, Walmart acquired and incubated Spatialand for next-gen VR shopping experiences), but to date AR/VR has not made as big of an impact as many expected — with 3D content being part of the challenge. Khronos, the developer of OpenXR standard, has recently announced that it is working with a large group of retailers and tech companies to create universal 3D versions of products that can be suitable for AR and VR apps and other online 3D shopping platforms. It’s exciting to think about what the potential is if / when VR takes off — as we continue to blur the line between physical and digital, what is the next generation of “omnichannel” and holistic shopping experiences? What if we can use VR to shop entire stores across the world? Startups like Emerge are even working on “VR touch,” an experience for people to “touch” virtual objects they see. What if one day you can try on shoes from the comfort of your couch?

  It’s these kinds of questions that I think about and focus on as I look at the next wave of disruption in the consumer space.

  MICHAEL RAAB

  SINAI VENTURES

  Apple, Facebook, Google, Amazon, Netflix, Hulu, and Spotify have forever changed the media and entertainment industry. Each of these technology companies, all once outsiders to Hollywood or the publishing world, has disrupted movie theatres and movie rental companies, music labels, book publishing and distribution, and continue to change the way consumers engage with content. New business models, applications, and platforms, such as subscription-video-on-demand (SVOD), mobile gaming, and virtual reality (VR) and augmented reality (AR) have grown in market size and value and threaten to steal market share from companies that have been providing entertainment to consumers for several generations. The media and entertainment industry is a fascinating one given it is how consumers all over the world interact with their mobile devices, share and express their creative interests, and spend most of their disposable income. In China, new forms of media and entertainment are emerging that include holographic imaging. In the US, a popular new model of entertainment is the ‘choose-your-own-adventure’ where TV shows, audiobooks, and podcasts allow the consumer to choose their own ending or storyline as opposed to passively listening to content. As new platforms and concepts emerge within media and entertainment, the opportunity and foresight for a genius founder to predict consumer interests is a meaningful endeavor.

  As I emphasized in earlier chapters, the best investors are often those with the insider perspective, and Michael Raab, an investor with Sinai Ventures, has it in spades. Michael began his career at 20th Century Fox in brand and franchise management and eventually worked with the company’s digital media division. Prior to joining Sinai Ventures, Michael spent time with the Digital Consumer Group at Fox Networks, which focused on the future of television distribution for brands including FX, National Geographic, Fox Sports, and the Fox Broadcasting Network. This division built and managed viewing experiences across platforms and services and was charged with creating 21st Century Fox’s direct-to-consumer strategy. Bringing this deep experience to Sinai Ventures, Michael has been responsible for investments in top media companies such as Luminary Media and Drivetime, while the fund itself has a history of investing in companies such as Pinterest.

  Michael’s take on the media landscape encapsulates the concerns and trends that are actively shaping the media industry in real time. Michael compiles the investments that prominent venture capital funds are making, and their specific theses around those investments, against the backdrop of industry changes. As a former insider to a media and entertainment conglomerate, Michael has a unique perspective on media investing that other venture capitalists do not. He understands the business models that work within this segment and shares what metrics founders should be pursuing when launching a media business in the current environment. Even beyond media and entertainment, the insight and lessons he shares will remain relevant for founders operating in any industry that is beginning to adopt frontier technology like virtual reality, augmented reality, and artificial intelligence.

  INVESTING IN MEDIA & ENTERTAINMENT TECHNOLOGY COMPANIES

  Michael Raab, Sinai Ventures

  Global media and entertainment is a $2 trillion industry consisting of filmed entertainment (movies, television, digital video), audio (music, radio, podcasts), publishing (newspapers, magazines, digital publishers), and video games (console, PC, mobile, eSports). The United States represents a third of the global market — over $700 billion in annual revenue, and has traditionally produced the most prolific media assets, which are subsequently distributed around the world. Media, perhaps more than any other industry, has been radically transformed since the advent and mass adoption of the Internet. Prior to the Internet, the vast majority of media and entertainment content was produced and distributed by a select few gatekeepers: movie and TV studios, record labels, book publishers, and newspapers. This control was necessary, as the costs to produce and distribute content was extremely high and out of reach of the everyday citizen. In the past 20 years, the democratization of distribution technology and falling costs of content production have opened the proverbial floodgates and allowed “new” media companies to emerge. However, industry incumbents have thus far survived and adapted, relying on their high-quality (and expensive) talent networks and capital advantages while ramping up investments in promising media startups.

  Investing in media startups is a risky gamble, as content is highly subjective, and it’s difficult and expensive to produce quality at scale. In fact, entertainment is a hits-driven industry (much like venture capital), where investments in a few “homerun” projects yield outsized returns, covering losses on a majority of other investments. Some venture capital firms explicitly avoid media investments, and founders I’ve spoken with have expressed with frustration that “Most VCs don’t understand media.” The truth is, the media industry is a complicated ecosystem, still dominated by a small number of corporate behemoths that are growing even larger with recent mergers and acquisitions. Today, the incumbents continue to have significant advantages over potential disruptors which can be simplified into two categories: 1) talent and 2) capital. The soul of the media and entertainment industry is the talent: writers, journalists, developers, performers, and directors who conceive of new ideas for projects and execute the creation of them. This talent is traditionally supported and guided by high-paid professionals at studios, labels, and publishers whose jobs are to shepherd projects to commercial viability and maintain close relationships with talent. As demand and competition for quality content have increased in recent years due to the on-demand nature of the Internet, prolific creators have commanded record financial incentives, making it even more capital-intensive to produce premium content — a significant barrier to entry for newcomers.

  Technologies and innovations that have driven change in media in the 21st century have been streaming video infrastructure, smartphones / mobile video, cloud storage, direct-to-consumer subscriptions / content paywalls, and live streaming. These shifts have primarily affected the distribution and consumption of media, as consumers have a record number of content sources and platforms to choose from.

  Recent, Successful Startups in Media & Entertainment

  Interestingly, the most successful new media companies
to emerge in the past 20 years all found ways to work directly with incumbents, often utilizing their premium content to build audiences and users, rather than creating original content from scratch at inception. This strategy of using proprietary new distribution channels to distribute third-party premium content rewarded Netflix (founded in 1997, IPO in 2002, $154 billion market cap), Spotify (founded in 2006, IPO in 2018, $22 billion market cap), Roku (founded in 2002, IPO in 2017, $10.2 billion market cap), and BAMTech (spun out of MLB Advanced Media in 2015, majority stake acquired by Disney in 2017 at a $3.75 billion valuation), which are some of the most valuable new media and entertainment companies over the past two decades.

  Reed Hastings founded Netflix in 1997 with the vision of delivering movies over the Internet, a product the company wouldn’t launch for another decade — over five years after its IPO in 2002. From the beginning, Hastings realized two things: 1) it would require content from major studios to make a compelling consumer proposition; and 2) this content would be relatively expensive (for a startup.) So, in the meantime, he built a massive DVD-rental-by-mail service, raising over $100 million in venture funding before IPOing in 2002. In his initial meeting with Ted Sarandos (now Chief Content Officer) in 1999, Hastings reportedly relayed his vision by explaining: “Postage rates are going to keep going up and the Internet is going to get twice as fast at half the price every 18 months. At some point those lines will cross, and it will become more cost-efficient to stream a movie rather than to mail a video. And that’s when we get in.” Hastings was then able to license streaming rights from major studios, which viewed the revenue as incremental to their bottom line and didn’t foresee the massive change in consumption that Netflix was heralding. Always one step ahead, Reed additionally foresaw that studios would eventually pull their content from the platform in order to offer competitive products and began producing original content in 2013. In 2019, Netflix will spend $15 billion on content, reaching well over 700 original series and releasing 80+ original films in an attempt to remove their dependence on third-party content from Disney, WarnerMedia, and other suppliers. As of May 2019, Netflix has a market cap of $154 billion.

  Daniel Ek and Martin Lorentzon founded Spotify in Sweden in 2006. Ek, having experienced the ability to access the entire world’s music catalog through Napster, realized that “you can’t put the genie back in the bottle,” and believed that this on-demand access would eventually prevail in some form. At a time when music labels were combative with and threatened by any music download or streaming service, Ek found a way to de-risk their cooperation with Spotify: he guaranteed them the equivalent of one year’s worth of revenue to launch in the Swedish market and prove the model. Spotify launched successfully in Sweden in 2008, later gaining the attention of Sean Parker, the co-founder of Napster, who invested in the company through his role at Founders Fund in 2010. Parker joined Spotify’s board and personally negotiated with Warner and Universal Music Group on behalf of Spotify, which launched in the US in 2011. After completing a direct listing on the New York Stock Exchange in April 2018, the company has a market cap of $22 billion as of May 2019.

  BAMTech, the video streaming infrastructure platform originally pioneered by MLB’s Advanced Media Group to stream MLB baseball games went on to take on third-party clients beginning in 2005, including CBS’ March Madness, The WWE Network, HBO Now, Playstation Vue, PGA Tour Live, NHL Live, MLS Live, and Hulu Live TV. After officially spinning out of MLB Advanced Media in 2015, Disney acquired a controlling stake in the company in 2017 at a valuation of $3.75 billion. Today, Disney is utilizing BAMTech’s streaming infrastructure technology to launch Disney+, their forthcoming direct-to-consumer product set to launch in November 2019.

  Other notable media technology companies pioneering distribution technology relied on someone other than incumbent media conglomerates to produce content: consumers themselves. YouTube, founded in 2005, enabled anyone to upload videos to its platform, and was quickly acquired by Google in 2006 for $1.65 billion. Twitch, spun off from Justin.tv in 2011, enabled video gamers to live-stream their gameplay, and was acquired by Amazon in 2014 for $970 million.

  21st Century Challenges and Learnings

  Companies relying on original content and third-party distribution channels have had a tougher time reaching and sustaining scale. Founded in 2007, Zynga, the social and mobile video game studio made famous by “Farmville’s” viral success on Facebook saw explosive growth — raising over $866 million in venture funding in just over four years. After IPOing in December 2011 at a valuation of $7 billion, the company has shrunk to a market cap of $5.7 billion as of May 2019. Ventures focused primarily on advertising-supported business models have not fared well compared to subscription businesses. Native digital publishers have yet to exit with valuations over $1 billion, and the most successful exits occurred as acquisitions between 2010-2015. Business Insider (founded in 2007) was acquired by Axel Springer in 2015 for $442 million. The Huffington Post (founded in 2005) was acquired by AOL in 2011 for $315 million. The Bleacher Report (founded in 2007) was acquired by Turner Broadcasting in 2012 for $175 million. Digital publishers that weren’t acquired during the heyday of Facebook’s publisher-friendly algorithm have struggled in recent years. Mic Network (founded in 2012) was sold in a fire sale to Bustle for a reported $5 million in November 2018. Mic had previously raised over $60 million in venture capital, and was at one point valued over $100 million. Mashable (founded in 2005) was acquired by Ziff Davis in 2017 for under $50 million, after raising $46 million in venture funding and being valued at $250 million in an investment round led by Time Warner in 2016. Vox Media (founded in 2003 and last valued at $1 billion during a 2015 fundraising round) and Buzzfeed (founded in 2006 and last valued at $1.9 billion during a 2016 fundraising round) have both faced layoffs and significant revenue target misses since their last fundraises.

  The struggles of these companies highlight the challenges facing newcomers in media and entertainment over the past decade and still today — FAANG. Facebook, Amazon, Apple, Netflix, and Google. Digital publishers that depended on ad-driven revenue models found that Google and Facebook sucked the proverbial air out of the room, amassing over 50% of the digital ad market. Amazon’s impressive entrance into ad sales is also projected to skyrocket over the next few years. Further, the startups that depended on these platforms for distribution — Buzzfeed (Facebook), Zynga (Facebook), AwesomenessTV (YouTube / Google), and Maker Studios (YouTube / Google) — found that depending on third-party distribution channels could put their business at risk with the simple change of an algorithm; and they had no control over that. The two primary concerns of media companies — content and distribution — face tough competition by FAANG, which own the largest distribution networks in the world, and are now self-interested media companies, investing billions of dollars in original content annually.

  Strategic Partners and Prolific Venture Investors in Media & Entertainment

  Media startups face an interesting dynamic: since the vast majority of premium content is still produced and distributed by a small number of legacy media conglomerates, there are few exit opportunities beyond scaling large enough to go public. Content isn’t a defensible moat, as media companies have superior talent networks and capital to invest in popular content trends. Incumbent media conglomerates also have active corporate development teams, and routinely invest in startups to either: 1) secure a stake in a high-growth media technology company; or 2) learn from savvier technology challengers to innovate on their own strategy.

  Notable media investments and acquisitions by media incumbents include:

  In the past five years, AT&T has made mega-acquisitions of Time Warner (home of Warner Bros., HBO, TNT, and TBS, among other properties) and DirecTV. This combined entity also has investments in the video space (Quibi, Cheddar, Philo, Eko), gaming (Discord), and XR (Magic Leap, 8i, NextVR). The company’s investments in the digital publishing space (Mic Media, Mashable, Refinery29) have str
uggled in recent years.

  Disney has a fantastic track record of acquisitions in the 21st Century, most recently acquiring 21st Century Fox. Other acquisitions have included IP holders (Marvel Entertainment, Lucas Film) and production / distribution technology (Pixar, BAMTech). Disney also owns a controlling stake in Hulu, and has invested in Roku, Quibi, Caffeine, FuboTV, along with a handful of XR companies (Dreamscape Immersive, Jaunt, Within) and daily newsletter theSkimm. One of Disney (and Fox’s) early digital media investments, Vice Media, has been written down in valuation significantly by the company in recent years.

  In the past 15 years, Comcast NBCUniversal has acquired video distribution companies (Sky), content companies (Dreamworks Animation SKG, Oxygen Media) and advertising technology (Freewheel). Comcast has also invested in video companies (Quibi, Cheddar), gaming (Upcomer, FanDuel), digital publishers (Axios Media, NowThis Media, Vox Media, Buzzfeed, Re/Code, PopSugar), and XR companies such as Baobab Studios, NextVR, and AltSpaceVR.

  While AT&T / Time Warner, Disney / 21st Century Fox, and Comcast NBCUniversal represent the most active strategic investors in media and entertainment companies, other media companies have also made select acquisitions and investments. This includes Discovery Networks (acquired Scripps Networks, Oprah Winfrey Network, HowStuffWorks; invested in Philo, FuboTV, Group Nine Media), Sony (acquired Funimation; invested in Quibi, Eko, and Soundcloud), Viacom (acquired Pluto TV, AwesomenessTV, and VidCon; invested in Quibi, Roku, DEFY Media), CBS (acquired Last.fm, CNET Networks; invested in Syncback), Lionsgate (acquired Starz; invested in Quibi, Immortals, Tubi TV, TellTale Games), MGM (acquired EPIX; invested in Quibi, Dreamscape Immersive, Eko, Tubi TV), and AMC Networks (invested in Philo, FuboTV, Dreamscape Immersive, MiTu).