<videovortex> Where Did VCs Go Wrong In Online Video?

[Geert Lovink]

Where Did VCs Go Wrong In Online Video?
By Ashkan Karbasfrooshan
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From: Techcrunch

http://techcrunch.com/2010/02/12/online-video-vcs-wrong/

Editor?s note: The following guest post was written by Ashkan  
Karbasfrooshan, founder and CEO of WatchMojo.You can also read his  
series on the state of Online video (Parts I, II, III, and IV) video..
Yesterday?s final implosion of video site Veoh, which declared  
bankruptcy after burning through $70 million of venture capital, was a  
long time coming. A lot of so-called smart money went into Veoh:  
investors included Goldman Sachs, Time Warner, Intel?s venture arm,  
Spark Capital and former Disney CEO Michael Eisner. And it was hardly  
an isolated incident. Joost, another high-flying video startup  
launched by the founders of Skype, went through $45M in VC money  
before ending up in a fire sale.  Who?s next?

More importantly, why is so much venture capital that funded video  
startups going down the drain when the number of videos watched on the  
Web is going through the roof?

Nowadays, it is fashionable to discredit VCs as financial engineering  
hacks with no operational talent who lack the moral compass required  
to lead people; but that would be unfair. VCs, it turns out, are  
neither the problem nor the solution: good ones might offer more than  
cash, bad ones will kill your business.  And once killed, they?ll  
blame everything and anyone but themselves.

Fish Out of Water

Last year I was speaking about raising capital with a fellow CEO,  
Brightroll?s CEO Tod Sacerdoti, and he mentioned that the ?video  
industry is more media than technology?, to which I added, ?that is  
why VCs come across like fish out of water?.

Indeed, most VCs tend to lack any meaningful background in  
advertising, publishing, sales or media.  Selling software doesn?t cut  
it.  Building chips is irrelevant.

In fact, the very same things that make technology companies  
successful are often weaknesses and even threats to media companies.   
For example, a tech company?s contract for recurring licensing fees is  
not as attractive as a series of contracts for recurring advertising  
deals. This merits a post in of itself, but the kinds of things that  
VCs were drawn to in video have all become commodities, namely: video  
aggregators, content delivery networks and content management systems,  
which are capital intensive, low margin areas always at the risk of  
getting cancelled and shifted to a competitor.

Making things worse is this ?crazy ass backwards? investment thesis  
that they should invest in 10 companies and watch seven burn to the  
ground, hope that two do ?ok?, and pray that one will be a ?grand  
slam?.  Forget the theory of diversification, which underpins all of  
finance, VCs keep aiming for the fence and let?s face it, finding  
winners in business is as hard as finding them in Hollywood.  You win  
with singles, doubles, triples and occasioanlly home runs. basing your  
strategy on grand slams is futile, which takes us to VCs odious track  
record in online video.  Online video startups tend to fall in one of  
the following categories, with some overlaps:

	? Content management system (CMS) platform technology companies
	? Advertising creation and management companies
	? Content aggregation and distribution
	? Video file hosting and sharing
	? Video content editing
	? Content producers
	? Content delivery network (CDN)
Where are the grand slams other than YouTube?  There aren?t any.

The Elusive Media VC

True media VCs just don?t exist.  One explanation could be that most  
high ranking media executives who were working in big media with high  
salaries but little or no equity, never experienced the massive  
paydays that would give them a path to investing their own money and  
subsequently setting up a fund to invest on behalf of others.  There  
are exceptions, of course.

But the entrepreneurs who have made fortunes in media tend to reinvest  
in their own empires rather than dole out the money to potential  
startup competitors.  Media moguls like Rupert Murdoch, William  
Randolph Hearst, Sumner Redstone, SI Newhouse and the like who never  
sold out retained their earnings and built empires.  Once they became  
the Establishment, it made little sense for them to finance the  
disruption.

Mr. Murdoch (who bought the company that bought my last company)  
bought MySpace when it was convenient, generated a windfall from the  
Google deal, and now that its fortunes have soured, he is divesting  
from the medium: first Photobucket, then Rotten Tomatoes.

Conversely, most VCs were technology founders and executives who sold  
companies and came into cash.  They set up or joined VC funds to  
reinvest their money and continue the cycle of disruption.

The Web is Entering a Period of Massive Content Consumption.

There seems to be a massive wedge between media and technology.  One  
side doesn?t get the other and the result is wasted investment dollars.

?There?s no one in the record company that?s a technologist,?  
Universal Music Chairman Doug Morris once explained. ?That?s a  
misconception writers make all the time, that the record industry  
missed this. They didn?t. They just didn?t know what to do. It?s like  
if you were suddenly asked to operate on your dog to remove his  
kidney. What would you do??

Well, alternatively, VCs have no clue where the advertising money will  
go in media but all VCs seek to invest in the Google of Video.  
Incidentally, Google?s initial business model was based on licensing  
its search technology, a unit which generated hundreds of millions of  
dollars.  But today, Google is foremost an ad-supported business.   
However, it?s one of the only successful ad-supported technology  
businesses in the world.

Google lucked out by benefitting from a perfect storm and is now  
limited by its free, ad-supported worldview (Apple understands that if  
there is one thing people love to do is actually spend money ? but  
again, separate post).

Regardless of whether the Internet will be larger on Mobile or PC, the  
nuts and bolts are starting to matter less than the content that is  
consumed, and how that content is monetized.  More likely than not,  
the model will be advertising based.  Today, fickle media companies  
have less faith in ad models, but consumers continue to shun paying  
for content.

Regardless, VCs keep investing in the next crapstr, whereas they  
should be investing in content, which is missing piece for advertising  
to take off in online video.

Content is King

?The real barrier is content and the model necessary to make more of  
it.  Cable TV suffered from this same fate early on?, states Broadband  
Enterprises? Matt Wasserlauf.

We?re still in the early days of online video content and history is  
repeating itself.  The film industry initially recreated theater and  
added a camera to record plays; early TV recreated radio and added a  
camera as well.  Online video content has much room for improvement,  
but what is missing is the kind of investment required to create  
compelling content.  VCs keep throwing out clich? after clich? and  
just show their lack of understanding of that fact. Sure, some of the  
aggregators such as Veoh did scale quickly but it wasn?t all that  
defensive.  Despite all of this, VCs seem to be making all of the same  
mistakes over and over again: investing in the technology and not in  
the content.