A VC« Amazing, Fascinating, Hopeful and Wonderful | Main | Brainstorm Bits - Doerr on Going Green »
Scratching My Head
A trend is developing and it's interesting to me.
Bloggers, A-list bloggers, are rasing VC money.
Om Malik, Rafat Ali, and I know of several more that are going to be announcing deals soon.
As Rick, a loyal reader, said in an email to me today, "It's supposed to be affordable to launch one of these things - why do they need big investors?".
I suspect its because Om, Rafat, and the others who are raising VC money intend to turn their blogs into media companies, doing conferences, and developing value added services on top of or in compliment to their blogs.
But Nick Denton hasn't had to raise venture money and he's got something like 15 blogs now.
We've been hearing this "capital efficiency means we don't need VCs" stuff for the past two years and now we see the most capital efficient businesses of all (writing in your pajamas and having FM sell the ads for you) turn to VCs.
It's interesting and worth watching.
Comments (12) | Posted June 28, 2006 in Venture Capital and Technology
Comments
The first think that came to my mind when I read about Om Malik was what happens to their investment if something happens to Om. Do you think they took out life insurance? Is he prohibited from doing certain activities...like riding a motorbike without a helmet?
What would you do?
Posted by: daniel | Jun 28, 2006 11:53:06 AM
Agreed! I don't understand all the giddiness around the VC funding of these bloggers. People seem to believe that because they scored funding, blogs have been legitimized as low-capital-outlay/high-ROI-potential opportunities. But the irony is that these bloggers all intend to use the capital to diversify away from blogs into traditional media company revenue streams like conferences and research. What this says to me is not that blogs are standalone revenue-generators or that "small is the new big" (please!). Rather, blogs seem to be a way for their proprietors to build credibility, experience, scoop flow, contacts, and audience that can then be parlayed into a more traditional media company. So blogs may be a way to bootstrap an upstart media company, but they are not an end in and of themselves.
Posted by: Will Smith | Jun 28, 2006 1:06:01 PM
Hey Fred,
I have a question for you. I'm the founder of Devshop, a soon-to-launch hosted project management tool specifically designed for software teams. I've been humming along with the assumption of bootstrapping and have been spending about 20% of my time exploring financing leads (mostly angel, seed stuff) as a means to do 2 things: a) manage the cashflow risk, and b) scale up the attack
In my travels, I have noticed that many people (VCs included) laugh about how the VC model is so screwed up. They chide it, then go back doing business as usual (i.e. don't do anything about it). Some progressive ones have opened seed funds to dabble in the seed-stage waters. This I applaud.
Now, of those (including VCs themselves) that describe how the VC model is screwed up, many talk about how the reason they do $5m minimum deals is because of the management fees (have to stay competitive) and the fact that they can't afford smaller deals because then there would be too many to manage. And yet, by my calculation and ear to the ground, I figure most VCs have about a 5% success rate at picking winners - that is, 5% of their portfolio makes gobs of money while 95% are dogs (could go boom, or just be in an illiquid stasis = trapped money). This seems to me to be the riskiest investment strategy ever. Wouldn't it make more sense for firms to make many more smaller investments, beef up their management layer such that they're able to pick up many companies that exit at $50m rather than $300 million, but increase the exit rate from 5% to something like 50%? Seems to me the overall return would be higher and you wouldn't have to change management fees (just increase your margins on the speculation). Is anyone even thinking about this?
(Ok, I guess I had a few questions).
Here's something else I've noticed. Of the "progressive" firms that are starting seed funds, at least some of them (one I talked to this morning) said that while their seed fund does invest at a much earlier stage than their traditional VC funds, the investment criteria and terms remain the same. So let me get this straight: When you're investing $5m to $20m in a pre-launch company, you want preferreds, double-dipping, liquidity prefs, veto power and a bunch of other things - well, I guess I can sortof understand that, afterall, it's a lot of money and it's risky. But when you're investing $500k in a seed round, you want the same thing?! My sense is, if a VC convinces an entrepreneur to go for such a deal, congrats, they've just invested in the dumbest entrepreneur ever. Besides, as a % of a VC's funds under management, investing $500k IS less risky that a $10m deal, so you would think the terms would be softened as well.
Would you say the trend in VC seed-dabbling is that they're getting involved at lower amounts with all the same old VC baggage (terms), or being more progressive and truly trying to come to the table in a similar way that an angel would (common shares)? It seems to me that unless a seed fund from a VC behaved like an angel, they would be seriously unattractive to entrepreneurs when doing a common share deal with an angel would be far better. This means only the most desperate entrepreneurs would even be interested in going seed with a VC seed fund.
What do you think?
Craig Fitzpatrick
CEO, Devshop
Posted by: Craig Fitzpatrick | Jun 28, 2006 2:19:51 PM
Doesn't make sense to me for these guys to raise VC, since these types of media companies don't need a lot of capital.
HOWEVER, these are all < $1M investments... so they are seed.
Nick Denton seeded his company himself... Om and Rafat don't have the capital to do it.
Mark Cuban (and I) seeded Weblogs Inc, (although we never really had to tap the Cuban investment since we quickly became profitable).
I think Rafat and Om want to scale their businesses and that takes capital.
they already "make a living"--which is the FM model--and now they are moving to the "make a busines" model. If you want to make a business you have to own your ad sales and you can't do that using Federated.
real businesses own the realtionship with their clients (advertisers)... so, i think the model will be:
1. start a blog with adsense
2. become big enough for FM, AdBrite, and Blogads to accept you.
3. become big enough to fire FM/Adbrite/Blogads and sign your own sales force.
You have three stages of media companies, and these two guys are in the third phase... that is where it gets interestin. Phases one and two anyone can do frankly... it's kind of easy to make a living blogging now. There is a huge difference between making a living and making a business however!
Posted by: Jason | Jun 28, 2006 2:44:47 PM
But Jason... it wasn't exactly a friends and family round. There are big time funds involved with these deals.
The amount invested is small and the potential exit is not large. There's no way a VC can make a big gain off of the deal. I wouldn't be happy if I had invested in these funds.
I personally think it's just the VCs looking to make some PR for themselves.
Posted by: Rick Stratton | Jun 28, 2006 4:53:19 PM
Rick: VC firms are looking to make a lot of singles and doubles now. It's not about home runs any more because the IPO window is shut.
Look at Fred and his investment in Delicious. I don't know exactly how much money Union Square made off the investment but I'm guessing 3-5x their money. That's not going to make their LPs jump for joy, but since Fred isn't making the huge bets like he did at Flatiron (think Kozmo) he has less drag on the funds.
Also, Patricof's new fund isn't a VC fund really... he's doing angel investing. So, Rafat isn't an example of a VC putting money to work truth be told. Alan is now an angel investor/mini-VC.
In fact... i think that is what I shall call this space from now on: mini-VC.
Somewhere between angel investing and standard VC bets--mini vc. :-)
Posted by: Jason | Jun 28, 2006 7:05:29 PM
It's so weird reading all these. It just makes me feel i'm coming from Mars. This is what's going on in the states and only there (for a good or bad reason). Have a look in Europe and/or countries like Greece :-)
Posted by: Titanas | Jun 28, 2006 7:16:37 PM
Daniel: yes, when I started my company my partners and I all agreed to take out key-man life/disability insurance on ourselves to protect our investments in the company as a whole. It also provides a mechanism for the company to buy my stock from my heir so controlling interest does not leave the core partner group if I did *gulp* meet my maker.
Posted by: Robert Goodyear | Jun 28, 2006 11:59:50 PM
Echo Titanas' sentiment, coming from another part of the world, its incredible how blogging can attract capital. only in america. its not surprising that all the major internet properties are american.
Posted by: sr | Jun 29, 2006 12:02:00 AM
Fred --
I agree with you in general on the head scratching thing. If Jason is right, and assuming you can get traffic to some critical mass where you can actually sell directly to advertisers -- you should be making enough money to afford to hire an ad sales guy out of cash flow. I know on the Politics side -- I invested in and act as Publisher for RealClearPolitics (not a blog , though) -- I think you need to be at about 10-15 MM page views to afford to hire some outside sales guys, assuming a rpm of $5 or more. I expect that rate to be much higher on the tech blogging side, but the point remains. If your growth is there on traffic, at some point you should be able to fund ad sales guys etc out of cash flow. I think part of it is that according to Om himself he is actually trying to build some services; and not being an entrepreneur in the past he may need help and cash in putting together team to develop stuff. So the cash for him allows him to start developing ahead of the game. I would imagine Rafat, who has already built much more than a blog, is really raising some good old fashioned growth capital per Jason's comment. I do think that the other point here is he is raising less than $1MM which will significantly impact his business -- which is still much much much less than any traditional media would need at the same stage of their lives. To me, these businesses can be started and built for almost nothing, but their capital needs remain very very low throughout their lives. One final thought -- having lived through the last bubble - I would imagine that a lot of people are realizing that there is cash that can be raised at very attractive valuations NOW; and they are trying to take a "bird in the hand" knowing that a recession that hits at some point in the future will really swing all these network ads negative.
Posted by: Al from Chicago | Jun 29, 2006 8:17:09 AM
I'd love to know what Fred thinks about the mini vc idea.
I think that throwing around small investments on media companies like these would be a bad idea.
Do ten deals for like $100k and maybe one works out... then you'd own 50% of a $20m exit.
Posted by: Rick | Jun 29, 2006 10:33:34 AM
In a similar vein, it's interesting to see the number of blogs that reach a certain size and suddenly decide they want to become a traditional media company and "own" their traffic.
These are all blogs that have built up significant traffic by actively linking to other blogs and web sites. Then one day they wake up, decide they want to hire their own sales force and realize that one page view per visitor per month doesn't make for a great sales story.
Good luck on changing your content strategy, but I think most properties will find their traffic plummeting once they start attempting to trap their readers all Web1.0 like.
Posted by: Eric Marcoullier | Jun 29, 2006 9:36:27 PM
Main RSS Feed of All Posts
VC and Technology Posts Only
