Finding Genius

by Kunal Mehta

  While some traditional venture capital firms avoid media-related investments altogether, there have been a handful of prolific VC investors in the sector.

  Lerer Hippeau has been a leading investor in digital publishers over the past decade, with investments including Buzzfeed, Refinery29, Mic Media, Axios, Spanfeller Media Group, NowThis Media, Pando, Green Matters, Herb, Fatherly, and Thrillist Media Group among others. The firm is also investors in podcast studio Wondery and “monster” video company CryptTV.

  Greycroft has seen exits for investments in Huffington Post, Pandora, AwesomenessTV, Elite Daily, and Maker Studios, and currently has investments in sectors such as gaming (Discord, Caffeine, FanAI, Gamer Sensei, Scopely), video (Overtime), XR (TheWaveVR, UploadVR, Omnivirt), and publishers (Axios Media, theSkimm).

  New Enterprise Associates (NEA) has previously exited Snap, SAY Media, Upworthy, SPIN Media, Stitcher, and Tivo, and currently has investments in subscription podcasts (Luminary), video (Masterclass, Philo), publishers (The Players’ Tribune, goop), and gaming (PlayVS).

  Lightspeed Venture Partners previously exited investments in Sna, Flixster, IGN Entertainment, Mic Media, and eMusic, and is currently invested in video (Cheddar), gaming (HQ Trivia, Illumix), audio (Audius, Dose FM), and publishers (goop, Girlboss Media)

  Kleiner Perkins Caufield Byres (KPCB) previously exited media-related investments in Spotify, Snap, Audible, Shazam, and Flipagram, and is currently invested in audio (Audius, Soundcloud), video tools (Kapwing), XR (Ubiquity6), and gaming (Blitz eSports).

  Greylock Partners, which previously exited investments in Pandora and Music.ly (which merged with TikTok after being acquired by Bytedance), has current investments in gaming (Discord, Caffeine, Roblox), mobile video (Mammoth Media), and open publishing platform Medium.

  RRE has invested in a variety of digital publishers (Business Insider, Huffington Post, Buzzfeed, TheOutline, Spanfeller Media Group, theSkimm), video (Vine), XR (TheWave VR, 8i), and blockchain technology (MediaChain).

  Current Trends and Companies

  The founders and startups currently gaining momentum in media are focused on delivering premium content via proprietary distribution channels, building subscription platforms, and creating production and engagement tools for new forms of media and entertainment. Digital publishers have faced difficulties in recent years, as content consumption has shifted to video and third-party platforms have prioritized their own content instead of promoting publishers. Today, the most common high-growth media startups are niche video platforms, content aggregators acting as virtual multichannel video programming distributors (vMPVD), original subscription video-on-demand (SVOD) platforms, gaming engines and platforms, podcast companies, and subscription publishers. It’s unclear whether these challengers will succeed in the long term, as they face direct competition from tech and media giants that can afford to operate similar services as loss leaders and have massive distribution reach. Recent exits in the media and entertainment sector have included widely distributed, advertising-supported businesses such as Pluto TV, Cheddar, Gimlet Media, and Anchor. While these exits were generally viewed as “successful,” they only amounted to $50-$350 million in exit valuations — decent, but by no means venture “home runs” for most investors.

  Pluto TV (founded in 2013, $52 million raised) was acquired by Viacom for $340 million in January 2019. Pluto provides a widely distributed, free, advertising-supported video streaming platform with content from Warner Bros, Lionsgate, MGM, Bloomberg Media, and Cheddar, among others. The platform has over 12 million monthly viewers and partnerships with smart TV manufacturers. Pluto TV was founded in 2013 by Tom Ryan (former SVP of digital strategy & development at EMI Music) and Ilya Pozin (former founder and CEO at Coplex). Viacom, whose businesses have suffered in the age of SVOD, hopes to leverage Pluto to build world-class, ad-supported TV products.

  Cheddar (founded in 2016, $54 million raised) was acquired by cable TV provider Altice USA for $200 million in April 2019. Cheddar is a subscription video platform that broadcasts live networks Cheddar (a business news network) and Cheddar Big News (a non-partisan general news network.) Cheddar was founded by Jonathan Steinberg, the former COO of Buzzfeed, and is available on a variety of over-the-top (OTT) platforms or through a $2.99/month direct-to-consumer subscription. Cheddar reportedly generated $27 million in 2018 revenue.

  Spotify went on an acquisition spree in Q1 2019, acquiring three podcast-related companies: Gimlet Media (founded in 2014, $28.5 million raised) for around $230 million, Anchor.FM (founded in 2015, $14.4 million raised) for about $107 million, and Parcast (founded in 2016) for $56 million. Spotify’s podcast company acquisitions were strategic — if the company can get listeners to more podcasts (and less music), it will pay lower royalties to music labels and publishers.

  Notable venture-backed companies capitalizing on trends in technology and consumer behavior include Quibi, Luminary Media, fuboTV, Philo, Eko, Unity Technologies, Niantic, Discord, and Caffeine. These companies remain private, and although some have found traction, their success is still uncertain.

  Quibi (short for “Quick Bites”) is a new venture launched by Jeffrey Katzenberg (founder of Dreamworks SKG and former Chairman of Walt Disney Studios), and led by Meg Whitman (former CEO of HP and eBay) aimed at creating premium short-form mobile video content. Katzenberg knows first hand the difficulty and expense of creating premium original content, and thus raised an astounding $1 billion for Quibi from nearly every major studio before launching any product. Quibi is producing serialized, movie-length stories told in “bites” of 10-20 minutes. The platform is targeting consumers ages 25-35, and will have a two-tiered subscription, with the lower-priced tier supported by advertising. The company is reportedly looking to raise an additional $1 billion prior to its platform launch in April 2020.

  Luminary Media raised nearly $100 million from investors before launching to the public in April 2019. Matt Sacks, a former Principal Investor at New Enterprise Associates, founded Luminary in 2018 with the objective of bringing a better user experience to podcasts through an ad-free subscription platform with exclusive premium content. Luminary is taking a page out of Netflix’s playbook, acquiring exclusive distribution rights to the most popular podcasts in order to create a compelling consumer proposition. By introducing a subscription model to the podcast industry, Luminary has the opportunity to multiply the annual revenues of podcasts, which are consumed by 48 million Americans on a weekly basis — yet only brought in $314 million in revenue in 2017.

  fuboTV ($151 million raised) is a sports-focused vMVPD offering live streams from the NFL, MLB, NBA, and NCAA, as well as general entertainment from FX, AMC, CBS, and NBC, among others. Subscriptions to fuboTV start at $55/month, and the service has a reported 250,000 subscribers as of October 2018. fuboTV was founded in 2014, and Co-Founder and CEO David Gandler was previously a VP of Ad Sales at DramaFever, a subsidiary of Time Warner.

  Philo ($83 million raised) is a vMVPD with subscription packages ranging from $16/month (40 channels) to $20/month (52 channels). Philo’s CEO, Andrew McCollum, was a co-founder at Facebook. As of January 2018, the service had 50,000 subscribers.

  The gaming industry is also in the midst of profound change and innovation, as technology companies like Google, Amazon, and Microsoft invest in cloud gaming infrastructure, allowing consumers to play games without owning a console or downloading any content. At the same time, publishers are experimenting with business models, such as offering subscriptions to a catalog of titles to users instead of charging a la carte. The video game technology companies that have gained the most traction and attention from investors are developer tools, game engines, communication and engagement technologies, and distribution platforms.

  A recent development in media technology is that of interactive storytelling, or “choose-your-own-adventure” style television and films, most notably demonstrated by Netflix’s release of Black Mirror: Bandersnatch in December 2018. Wal
mart has invested $250 million in a joint venture with Eko, an interactive media company founded in 2011, which previously raised over $36 million from investors including Sequoia Capital Israel, Intel, and MGM Studios. CtrlMovie, another interactive media startup, has partnered with 20th Century Fox to produce and distribute choose-your-own-adventure films in movie theaters, allowing moviegoers to vote on storylines.

  Discord ($279 million raised, $2 billion valuation) was originally founded by Jason Citron in 2012 as Hammer & Chisel, a game development studio, but has since pivoted to create a voice and text chat platform for gamers. Discord is free to use, but for a $4.99 monthly subscription, users can access premium features like HD streams, custom emojis, and animated avatars. Streamers have utilized Discord to build and interact with their followings. Citron has commented on the importance of distribution: “Even if the product is right and the distribution channel exists, if you don’t know how to find the distribution channel and get the word out in the right way, you can have the right product and it doesn’t matter.” As of May 2018, Discord reported having 130 million registered users.

  Caffeine ($146 million raised to date) is a social broadcasting platform for gaming, entertainment, and creative arts. Caffeine was founded in 2016 by Ben Keighran (former Product Design Lead for Apple TV) and Sam Roberts (former Senior User Experience Designer at Apple.)

  Despite the recent hype around eSports — organized competitive multiplayer games and leagues — it isn’t yet clear which assets (if any) are of venture scale. Ownership of eSports leagues and teams are likely to be similar to professional sports teams — more valuable as trophy assets for high net-worth individuals than an entity that can continuously scale and create outsized returns. Further, eSports teams and leagues face something that physical sports haven’t faced: they become irrelevant more quickly as new games are released. Fortnite was an unpredictable success that supplanted the popularity of other video games. As discussed above, investing in content (video game developers / publishers), is high risk — case in point: Telltale Games’ recent fall from grace after initially being heralded as an innovative developer for its video game based on The Walking Dead.

  While the growth-stage companies discussed above represent where investors have made their bets over the past few years, there is no guarantee of their ultimate success. New challengers, startups, and technologies are continually looking to build the next big thing, while investors are continually revising their theses on the sector and hoping to fund the next big thing.

  Perspectives and Theses of Media Venture Investors

  As venture investing is not a consensus sport (and in fact, contrarians are often the victors), I’d like to present multiple theses on investing in media and entertainment companies from venture capitalists.

  First, my own perspective as an investor at Sinai Ventures:

  As demonstrated by the past 20 years, the most valuable venture-scale media companies have three things in common — what I refer to as “the three Ts”: technology, timing, and team. These companies realize that shifts in technology and consumer behavior are the major opportunities to creating multi-billion dollar companies, and that it’s imperative to time your go-to-market correctly. It’s very difficult to beat the incumbent media conglomerates at quality content, but if you can leverage their content (or convince consumers to produce content for you) on your proprietary distribution channel, you have an opportunity to acquire consumers on your platform and scale quickly. Reed Hastings knew Netflix streaming wasn’t feasible in 1997 — so he built a company that was ready to take advantage of technological shifts in 2007. Daniel Ek took the risk of guaranteeing music labels their revenue to gain their trust and prove the subscription music streaming model. Since many people and companies usually have the same idea and vision, ultimately success or failure is determined by the execution of a strategy. The strength and experiences of the team behind an early-stage company is the best indicator of the likelihood of strong execution and ultimately, success.

  My thesis in the media space is simple, and twofold: 1) Make something people are willing to pay for; and 2) Own distribution. Netflix, Spotify, Roku, YouTube, and Twitch are historic examples, with Unity Technologies, Discord, Caffeine, Drivetime Media, and Luminary as likely future success stories.

  Other investors and venture firms have publicly commented on their own theses in the media and entertainment sector. Here is a sample of viewpoints:

  Nicole Quinn, Partner at Lightspeed Venture Partners has publicly commented:

  “Success in media isn’t about churning out content to attract as many eyeballs as you possibly can. It never was. It’s about finding the right audience. It’s about building a community of common interest and then connecting its members to products and services. It’s quality, not quantity.”

  “There isn’t just one way to generate revenue for a media business. Advertising revenue alone may not be the way forward but there are multiple other ways in which media founders are able to grow and monetize their customer bases.”

  On the future of media: “We don’t yet know what the next technology platform will be but we do know that people in any community will continue to buy things (physical, digital and experiential.) Companies will transcend across platforms if they have a true brand and a strong enough community.”

  Jon Goldman, Venture Partner at Greycroft has publicly commented:

  On gaming: “If you’re a media company and you’re not taking gaming seriously, you’re being shortsighted. Historically, there’s just been a coterie of media executives who’ve looked at video games as options for merchandising. In their heart of hearts they really just want to make movies or TV. That’s a mindset that, in terms of hours of engagement, the opportunities around social, around cooperative and competitive play — it’s the most important form of media. You can’t ignore it.”

  “I’m excited by the potential of that technology to allow multi-genre gaming. You really could have a game where people can drive and shoot and explore, where you combine all different types of gameplay. That would enable an even more social experience, where people could be involved in the game together, but play the genres they like, play the role that fits their interest.”

  Rick Yang, Partner at New Enterprise Associates (NEA) has publicly commented:

  On NEA’s investment in PlayVS: “As the venture industry searches for the next wave of consumer social innovation happening outside of the established players, we believe that gaming is at its core. Gaming has always been a huge market, with 2.2 billion gamers and $109 billion in revenue worldwide in 2017. But something’s different now as it’s become mainstream. A larger part of the population is now not only playing a wide range of games, they’re also watching via Twitch and building strong communities via Discord. While the broader ecosystem is still nascent, it’s clear to see the pieces coming together across consumers, publishers, brands, publishers, and the infrastructure required to take off. There are also more and more studies showing the benefits of gaming for kids and the multiple types of positive impacts: cognitive, motivational, emotional, and social.”

  NEA’s blog states:

  “The media world has undergone a dramatic shift over the course of the last decade, and the $40 billion sports media market is (finally) undergoing its transition from traditional to digital distribution. This tectonic shift creates huge opportunities for new entrants to compete for audience and market share in one of the most valuable and largely untapped markets for start-ups.”

  David Sze, Partner at Greylock Partners has publicly commented:

  On their investment in Roblox: “Over the past several years, the gaming industry has undergone a transformation driven by technological advancements, such as mobile and cloud, and new gaming tools and platforms. Historically, consoles and PCs dominated the gaming market, but the rise of mobile and online games and live streaming services have ushered in a new generation of players and game creators. The traditional game
company model relies on internal or contracted developers building titles to be published primarily as standalone games. The goal is to make hit games that can be turned into brands and franchises with many sequels or extensions (think Call of Duty, Star Wars Battlefront, or even Overwatch and Fortnite.) These models are heavy on top-down game design, expensive development costs and are hit franchise driven. Roblox is a completely different mode — more YouTube than Netflix. Roblox lets anyone create and play interactive, 3D multiplayer casual games. Individuals or indie developers can easily create and build new games for a massive community of Roblox users who are constantly looking for new content. And players can immerse themselves in the Roblox platform world of these games while also making social connections and playing with friends. Most importantly, Roblox functions as a social network — users can friend other users to interact and play games together. It’s one of the core reasons many people decide to stay and spend time in Roblox. Players can play with friends and make new friends while discovering new games. And, as players become more engaged, more developers build for the platform, which in turn creates more game variety and more users. At Greylock, I’ve spent much of my career investing in companies and products that have strong network effects that connect people together. Roblox has built just that — a platform that garners a community across the world, which continues to organically grow month over month.”