Sheppard Mullin VC Outlook/Draper, Hornik, Lasky, Chang/Let The Good Times Roll

13Oct09

Not even the threat of a gusting hurricane, 280 flooding or trees flying could keep eager startups from the Sheppard Mullin Venture Capital Outlook this morning as valley rockstars Tim Draper of Draper Fisher & Jurvetson, David Hornik of August Capital, Mitch Lasky of Benchmark Capital, Tim Chang of Norwest Venture Partners, and my client Riaz Karamali of Sheppard Mullin gathered to talk about the state of funding and where money is going in digital media.

As the producer of the event, I was thrilled with the level of exchange – fresh, fun, enlightening.  Hanging out in the green room, the speakers enjoyed catching up with each other, laughing while comparing notes on foursquare, buying virality on StumbleUpon, Hulu‘s opt-in ads, Zynga‘s looming IPO, and the future of VG.  When I asked if we could possibly be in a consumer spending bubble on VG, I got major pushback.  Listen grasshopper.  Tim Draper  – you buy songs online, that’s VG.  Tim Chang – you buy Kindle books, that’s VG.  Mitch Lasky holding up a dollar bill, smiling – even this is VG.  Tim Chang nodding assuringly, in time game mechanics will overlay all we do, interwoven into the fabric of our lives, from entertainment to the social good, and will likely be what saves the music industry.  Tim Draper added, the future won’t look so different from the movie Surrogates and who wouldn’t support a VG economy if it meant we could send avatars in our place whenever we wanted.

W
ith that, they took the stage.  Riaz asked about deal flow, exits.  Hot areas of investment:  gaming, real-time internet, search, viral marketing, and social collaboration, placing bets on platforms and repeat entrepreneurs.

Tim Draper, Founder & Managing Director, Draper Fisher & Jurvetson
Harvard MBA with Stanford BSEE.  Named #52 of the Top 100 most influential Harvard Alumni sandwiched between Matt Damon and Frank Gehry, #7 on the Forbes Midas List, #1 on AO VC Dealmaker List, and winner of the Commonwealth Club’s Distinguished Citizen Award for achievements in green and sustainable energy.  DFJ $6B under management, portfolio companies ranging from Meebo to Glam/Tinker.  Prices have clearly come down, less money out for same number of deals across the stages.  There are these cycles where the private equity business has a big run, and then they crash and then we have a recession, and the the venture capital business grows and it crashes, no recession, then private equity grows, every business grows and crashes, there are about 8 years between each 16 year cycle and in this case we’ve had the crash and it looks like its a very good time for venture capital, it looks like its the beginning of a big wave, we’ve had an 8 year drought led by SOX regulation, used to be entrepreneurs word hard 5-7 years to $20mm rev/$3mm profit we’ll take you public and everything will be great, you’ll finally get some liquidity, by a house, your life will be great, but now SOX will cost you $3.5mm and you will no longer be a profitable company if you go public now, put head back down another 4-5y, you have to be doing $100mm rev/$10mm profit so the $3mm doesn’t affect you quite so much, and then its not worth it for Goldman Sachs to take you public until you’re worth $2B so its probably now a 15-20y program for you, was that worth it (Mitch – so he says I’m selling to Google). SOX kills incentives to start a company if it now takes 15y to go public and that’s if I just nail it, that’s not right.  So not waiting around for things to change, in response, Draper is launching Xchange in January, a private exchange for institutional investors to trade shares of start up companies, the exchange will provide some liquidity as a stepping stone to what is now a very long term IPO.  (Riaz – at IPO the average company is now 8.5y – 9y, it used to be much less than that, by contrast average M&A target has been 4.5y, so to exit at an earlier point they go M&A).  Looking at new types of search, don’t find it all on Google, betting on more collaborative search experiences, ShareThis, Wowd, CastTV, anything that has a new business model, easy to spread quickly, viral marketing.  Glam became the first ad network by selling ads on all the bloggers sites, not it’s big.  Meebo similar, experience media, IM your friends, watch it together, from any site, ads served on it.  It’s not right to criticize Twitter’s $1B valuation on no revenue, people said the same thing when Microsoft bought Hotmail.  Hotmail was a a whole new platform for email, a marketing machine, they paid a lot but it was a coup.  FB and Twitter created new platforms, marketing forces have real serious value, the money follows.  Referral, advertising, wherever, there’s going to be a lot of money to be made, when you have a platform, you can do a lot with it.  We are looking for ecosystems.  Wigix social network around buying and selling goods on an exchange, time for eBay to get knocked off, they’ve been lazy, home page hasn’t changed since it started.  DFJ has a global network to fund any stage anywhere, we see more.  There’s a lot of great content out there, more than ever before, cheaper and easier to make, use to be created by monopolists, now we can choose, create our own, fight back, blog, not a few guys creating content for everyone, it’s everyone creating content for everyone and the best will rise to the top.  Check out Valley Girl, kid interviews Ron Conway, Eric Schmidt, Craig Newmark.. all pretty in pink but has nichy audience, there a market for that. (Lasky to Draper – that’s the opium dream of the valley, Mad Men is not UGC quality, costs lots of money require some level of aggregation to guarantee audience, Hornik – for a long period of time three networks owned the audience, artificially constraining the market produces a lot of crappy shows too, and then the dialed opened up, capacity to see shows when you wanted to broadened the market, disaggregation brought AMC into existence and made Mad Men possible.)  [Editors note:  For great direct-to-fan content with production value that rivals Curb and The Office, follow Easy to Assemble, the story here]  Microtransactions can be so cheap online that you can make money at it.  We will start to see more interesting things in the digital world, more avatars, more VG, that will draw us in.  As well as macrotransactions where enthusiasts will pay for big money to access to the content. [In the audience todocast.tv which monetizes events via macrotransactions]  VC industry has changed – going global and networked, a number going after cleantech which is capital intensive, struturally being massaged by regulators, SEC – insane – what are they going to look at – its about private money going into companies taking risk.  We’ve had 8 cold years and now the sun is coming out.  (Keep up with Tim’s blog here)

David Hornik, General Partner, August Capital
Harvard JD with Stanford AB Computer Music, Cambridge M Phil Criminology.  VC, blogger, producer of The Lobby, an autumn invite-only unconference on the Big Island where industry thought leaders bond amidst word finds, tradewinds and treasure hunts in search of the future of media.  $1.3B under management with portfolio companies ranging from StumbleUpon to Six Apart.  Bargain shopping 2-for-1 startups this week only.  I guess I need to shop where you guys shop because my prices are not coming down, its business as usual, when it gets tougher, still have consistent number of entrepreneurs feel worthy of funding, but don’t have to sift through as much dreck, the intereresting companies still finding multiple offers, still lots of pressure, so prices aren’t really coming down, when you’re an early stage investor how far down can it really go, when its super early interesting young the price is not $40mm, still looking for interesting companies that are going to build big businesses.  Its definitely harder to get follow on rounds, etc. but good companies are finding capital to build, been surprisingly busy, funded 5 new companies in the last 12 months, hugely unreasonably pace, don’t anticipate it will continue, the firm has 9-10 deals in the last 12m for 6 people that’s a pretty hefty pace but its only driven by meeting great people, meeting great entrepreneurs.  Invested in social gaming space:  Aardvark with Google alumni, Ojai with FB, Everquest alumni, StumbleUpon with ebay Alumni, #1 factor was the team, Blue Rover Labs with MySpace alumni, in that case it was only about the team because they had nothing else, lost $5mm on them, bill.com with PayCycle alumni – about great entrepreneurs doing it again.  If we see something that is a platform business that is big and interesting, we fund it.  If we haven’t funded it we either think it isn’t that interesting, or we tried.  Platforms have the capacity to be a big win.  Splunk, search engine for datacenter.  Build apps on top, ecosystem that grows.  FB, Twitter, Skype – broadly applicable infrastructure – lots of people attached to it, building on top of it, but value goes to the underlying platform.  Fund lots of smart 22y, no real traction, private beta, controlled who they let in, but when you talk with them, they have thought in smart, interesting ways about problem that needs to be solved, most can do one good hour of comedy, but worked a lifetime on that one hour, don’t have the next hour, but if hour two is exciting, by hour 3 you’re done, you had me at hour 2, then happy to make a bet.  Teach a class at Stanford B School on IP & The Impact on Business – patents do not create value on their own, but creates a defensible space, being part of the ecosystem and plugging into it, when someone comes knocking and says I have these patents that control your world, you can then say I have these patents that control your world, and then there is Intellectual Ventures, contribute your patents, join the goon squad or we’ll kick your a–

Mitch Lasky, General Partner, Benchmark Capital
UVA JD & Harvard BA History/Literature.  JAMDAT founder, former EA EVP Mobile/Online.  Benchmark $2.5B under management with portfolio companies ranging from Vivox to Riot Games.  Be greedy when others are fearful and fearful when others are greedy.  Aggressively trying to invest at a higher pace in the current environment, entrepreneurs turtling up, because of the valuations and perceived difficulty of fundraising, would invest in more if we could.  Looking for ventures with a better path to a Series B, C, can’t rely as much on follow-on finance market being as robust as it has been in the past.  # deals 2009 less but not so material that its worthy of comment, would have invested at a similar pace had we seen the deals.  Most recent, relevant deal was Riot, digital goods/electronic distribution model robust for core gamers who have the highest willingness to pay, spend $1000y on games, going after the packaged goods industry, contrary bet to casual gaming.  Is email dead?  For kids in the relevant demo, email is to them what the post office is to us, they’re watching real-time stream constantly refreshed, participating in it, consuming it.  We we were in the first round of Twitter, my partner was #5 at FB.  Real-time stream won’t replace email but as a principle means of e-communication, it’s already happened. FB only way for magic to happen is if someone friends you back.  Twitter asymmetrical following allows it to scale as a monetization engine.  When Zynga goes public it will prove you can build an interesting business on a platform, in advance of FB themselves going public, look at Amazon cloud, amazing platforms monetized with microtransactions, allow others to build a business on it.  Businesses come in rocketed to 500,000 in 3 days through virality but not good businesses vs. those that take time to build defensibility, scale.  I’m the content guy, do these deals, pay for content.  Value comes from aggregation and exclusivity, many deals killing this aggregation, destroying institutions that create this content, ability to amass audience that can support expensive productions, great content is expensive to make, Comcast pays ABC $1By in carry fees that supports programming.  Some will agree great new content will come from primordial soup but I doubt it.  (Draper to Lasky – you’re right on Twitter but completely wrong on content!)  VG is the companion business model of the unbundling of media, when you consume songs one at a time instead of bundled in an album, or games one at a time instead of bundled in a $60 package, you need a business model like VG that’s suited to that.

Tim Chang, Principal, Norwest Venture Partners
Stanford MBA with U Michigan BSEE/MSEE.  NVP $2.5B under management with portfolio companies ranging from ngmoco to myYearbook.  Shifted toward a multi-stage model with an eye towards China, #deals 2009 more than previous years because valuations are down, pace at one-a-month, but bigger checks going out because later stage, looking for repeat entrepreneurs on the Series A side, seen a lot of superangels and VCs pull out of early stage.  Bet on ngmoco because as the industry shifts from downloads to gaming as a service, apps as a service, where smartphone games start to amass Zynga-like social game dynamics with sizable daus, we’ll need a platform with a backend that Apple’s not going to build.  Regarding Twitter’s valuation, when audience engagement becomes so valuable you can’t afford to lose it, there will be those willing to pay big money for it.  Never been a better time to be an entrepreneur to quickly launch a lifestyle business, monetizes quickly through VG on FB.  Looking for big platform play, right team will figure it out, scope of their ambition.  Technology unbundled disaggregated the market into a million niches, no one is making money on iPhone, not even EA, doubt there will ever be a mainstream band like U2 again, rather a thousand Arctic Monkeys, apply investment filter to it, technology changes formats, formats change distribution, distribution drives business models, change in business models creates startup giants.  Distribution dictates how much aof a ceiling you can spend on your content.  So is VG a fad, one look at Tencent’s $1.2B a year, market cap bigger than Google and EA combined, all they do is VG, show scale of that, and you know its not a fad, it’s a format to make money, model that works well in a frictionless environment, get users to try something with no registration, no credit cards, then can upsell later.

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One Response to “Sheppard Mullin VC Outlook/Draper, Hornik, Lasky, Chang/Let The Good Times Roll”


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