I’ve been using ExtensionFM almost every day since it first came out in private beta several months ago. It’s a simple, lightweight, amazing web service that organizes all the mp3 you come across on various websites and blogs and puts them into an ExtensionFM Queue (think music timeline) and…
A blight looms on the horizon. An engineering talent blight to be exact. The bumper crop of consumer internet seeds and start-ups cropping up around the country (with concentrations in SF/SV and NYC) and binge hiring of engineering talent by companies such as Google and Facebook are creating a…
As many folks know, I am strongly against employee non-compete agreements. Unfortunately, such agreements are the status quo in the State of MA and are widely used & enforced. I believe they stifle innovation and are simply unfair (for more info check out the Open Competition blog).
People that are in favor of maintaining employee non-competes often intentionally or sincerely confuse non-compete agreements with other agreements such as non-solicitation agreements (NSA) or non disclosure agreements (NDA).
To be clear: employee non-compete agreements are very different than NSAs or NDAs.
I believe in NSAs and NDAs. I believe those agreements are important and they serve to protect the vital interest of the company and their intellectual property. Companies own those things but they certainly don’t own their employees.
At this time there is a lawsuit between Zynga and Playdom related to these issues. The allegation states that former Zynga employees stole documents and solicited Zynga employees amongst other things. (note: I am not a shareholder of either company and I don’t have any insider knowledge).
Essentially Zynga believes those employees broke their NSA and NDAs. Plus, theft of documents is simply property theft which is also addressed by law. It’s illegal.
If those complaints are accurate then Zynga has every right to protect their interests here. And I would do that as well
But let’s not confuse non-competes with other agreements. They are different story.
A big chunk of a VC’s day is spent evaluating new businesses for the first time. These interactions take a variety of formats. Sometimes, it’s an executive summary or powerpoint presentation that has been passed over by a trusted source. Other times, it’s a formal, 60-minute presentation. Often, it’s just a casual cup of coffee that may turn into an impromptu (or not so impromptu) demo.
The bottom line though, is that the format through which the business is communicated is not nearly as important as the depth and clarity of thought that goes into building the business. It’s not about writing the perfect business plan, it’s about planning a business well. Business plans are helpful guides, but ultimately, they are just a tool to show that you have identified an attractive opportunity and that your company has a good chance to be a winner. In planning a business (and communicating that plan to an investor) I would think about it as answering a very simple series of questions:
What is the problem I am trying to solve?
Is this an attractive market opportunity?
Why is my solution so great?
Do I have the best team around the table to win?
What are my competitors doing and how can I beat them?
What is the right business model?
How much money do I need to raise and what milestones will be achieved?
A few more points on each question below:
What is the problem I am trying to solve?
Simple is better: Often, an overly complex problem is a signal that the problem may not be that meaningful. This doesn’t mean however that the problem is obvious. There are many non-obvious problems that may exist in very complicated industries. But all meaningful problems can be boiled down to something quite simple.
Contextualize the pain: Even if the problem is simple, your audience may not be able to identify with it because they are either the wrong target market or are just unfamiliar with the industry. Try to contextualize the problem with data, stories, or realistic examples so that it’s clear that the problem is a meaningful one.
Painkillers better than vitamins: Everyone likes vitamins, but they aren’t a necessity. Painkillers are a different story – when you need it, you really need it. Ask yourself which of these you are. If your solution is a vitamin, it could be discarded when times are tough or when something new comes along.
Is this an attractive market opportunity?
Big Markets: Obviously, it’s nice to go after a market where there are a lot of dollars flowing through. Also, it’s great to have the wind at your back as well, to show that there is a lot of underlying growth in the market. But while it’s important to show that a market is big and growing – it’s more important to think about whether you are going after an attractive market.
Attractive Markets: Some big markets are not necessarily attractive markets. Some markets don’t lend themselves well to small startups. There are many reasons for this – it may be an industry where economies of scale are so important that smaller companies can’t compete cost effectively. Or there may be major players in the supply chain that extract all the value. On the flip side, some markets have great characteristics to show that they are ripe for disruption. New technologies may have emerged to change the cost of doing business or present an opportunity to shrink a market (ie: Craigslist and Classifieds). Slow moving incumbents may have failed to innovate or missed out on a particular customer segment. Make the case for why your market is particularly attractive for the company you are starting.
Why is my solution so great?
Special Sauce or Unfair Advantage: It’s important for entrepreneurs to be realistic and know that there are usually many smart people going after meaningful problems in attractive markets. The question is – why is your product unique and why will you win? Also, over time, margins tend to compress in businesses that don’t have some sort to special sauce of unfair advantage. This can take the form of proprietary IP, proprietary relationships with key customers or suppliers, or network effects if/when the business scales.
Show and Tell: Ultimately, it’s hard to prove that a product is great without some sort of small scale test or demo. This is especially true in web based software businesses where the cost of getting a product up and running is very modest. Programs like TechStars and Y Combinator have shown just how much progress can be made with very limited investment, so the closer you can get to actually demonstrating the product the better.
Do I have the best team around the table to win?
Right people at the right stage: It goes without saying that attracting the best talent is vital for a startup. But the team also has to be appropriate with the stage of the company and the tasks at hand. An early stage technology company does not usually need a lot of overhead, so it’s a troubling thing to see a COO, SVP Strategy, SVP Marketing, etc for a company that is still deep in the product development stage. These folks may be excellent, but they aren’t appropriate for what the company needs to accomplish in the first 1-2 years. Also, it’s important to be mindful that the capabilities of an executive differs depending on the types of roles they’ve had. A great marketing executive at a large consumer company may be at a loss when marketing for an early stage company because they are used to dealing with large budgets, multiple agency relationships, and a big staff.
Pied Pipers: There is something intangible about a founder that can attract great people around his/her company. In addition to evaluating how well suited a team is for their job, a VC is also evaluating how good the entrepreneur is at selling the vision and potential of the company and getting the best people around the table to make it come true. Even if these people aren’t employees of the company, great founders can establish a level of unfair advantage buy recruiting a great advisory board, mentors, or angel investors that will help them win.
What are my competitors doing and how can I beat them?
Every company has competitors: Very often, we speak with entrepreneurs who will claim that they do not have any competitors. This is false. There are always competitors, and even if they are bad, the entrepreneur needs to be maniacally focused on beating them, and everyone else. One helpful way to think about competition is to think less about product similarities and more about the jobs that customers need to get done. For example, in the early days, Facebook was not an obvious competitor to Google. Their products are pretty different. However, for the job of improving ad targeting, Facebook’s user profile and network data is a meaningful alternative to Google’s approach of analyzing page content and search data.
What is the right business model?
Find a model that fits: This is not always very obvious. It’s important for an entrepreneur to really understand the levers of their business, because they ultimately have major implications for the product, team, and strategy. You need to be more specific than just saying that your company will “monetize through subscriptions”. What will the pricing be? What will your cost of acquisition be? How will you manage your churn? What will be the lifetime value of the customer? These are all critical questions.
What do you need to believe?: Clearly, many of the questions I described above are not going to be answered on day one. But the entrepreneur should do some scenario analysis to figure out whether their business model is plausible. Investors will often ask themselves “what do I need to believe for this business to get to $x in revenue?”. Entrepreneurs should ask themselves this same question, and use the answer to pressure test their business models and see if they might do better by taking a radically different (and perhaps more innovative) approach.
How much money do I need to raise and what milestones will be achieved?
Early stage businesses take many years to evolve, and there are always a lot of open questions. It’s unrealistic to think that an entrepreneur will have everything figured out on day 1. Raising money from investors should be thought of as a staged process. Every time you raise capital, you are selling some portion of your business, so the goal should be to get the most bang for the buck given the capital you have raised. This means really prioritizing the milestones that matter the most for the business and will show investors that you have made rapid progress. You don’t want to raise too little money, because it may not allow the entrepreneur enough runway to handle delays in schedule or prove enough open questions about their business. But you don’t want to raise too much money either, because that could lead to too much dilution and possibly poor focus and execution in the short term.
There are clearly many other things to think about when planning an entrepreneurial company or raising money from investors. Please check out other resources section at www.startatspark.com or follow our blog for ongoing discussion on these and other topics.
My partners and I have been pushing to end the use of employee non-compete agreements for some time now.
We passionately believe in this issue and back in late 2007 I wrote that we should end these non-compete agreements. We planned on starting with our firm and then encourage our portfolio companies, entrepreneurs and other VCs to end this practice as well.
Recently the Boston Globe Sunday Editorial took on this issue in their column - Clause For Concern.
I was pleased earlier this year when I was contacted by Rep Brownsberger who was leading an effort for reform on this issue. Rep Brownsberger and a team created House Bill 1794 which as orginally drafted would give employees and employers the same protections that exists in California. I participated in a few sessions and was thrilled with the leadership of this bill. As a result our firm, Spark Capital formally endorsed this bill. I have huge respect and admiration for Representative Brownsberger.
Sometime over the last week or so that bill was modified significantly. The revised draft is on Rep Brownsberger’s website. In our view, the revised changes won’t solve the problem in our humble opinion because they simply don’t go far enough to reform and create real change.
Here’s the principle changes they made last week:
1. Employees who make under $50k are free of non-competes. If you make more than that you are subject to a non-compete
2. The revised draft requires that employers give advance notice that they will require non-competes in their offer letter.
3. Punish overreaching by employers by awarding attorney fees to the employee whenever an agreement is reformed or found unenforceable.
* * *
1. I don’t understand or agree with this new threshold of $50k/year. It will leave out plenty of entpreneurs and employees.
2. The advanced notice doesn’t help if every MA company requires non-competes.
3. Point #3 puts a huge risk on the entrepreneur/employee on the expense front. Who wants to fund a lawsuit? Even if it’s frivolous. Legal fees are expensive and they create a chilling effect. Why? History shows the MA companies pursue these lawsuits and MA courts enforce non-competes more than more than other states according to a UCLA study.
4. Ultimately we believe (especially in this market) it is simply unfair that employees are getting laid off and still subject to a non-compete agreement. That is a double whammy. If employees are that important to the company then you should keep them or at least pay them to sit out of the market. (again you are still bound by NDAs, NSAs, etc).
5. Opponents for change say that their business will be hurt by ending non-competes in this state. I respectfully disagree. Our company, Spark Capital, doesn’t have non-competes. It doesn’t hurt us. I dont’ see CEOs of Apple, Google, Facebook, eBay, Intel, Broadcom lobbying to implement non-competes in California. Companies in CA are able to hire the best people they can under the law. That level of open competition is a good thing.
CA companies know that innovation doesn’t happen in a vacuum. Innovation occurs in an open market where competition & interaction exists. I also believe that EMC & Akamai would be just fine if for some reason they one day picked up and moved to California. They wouldn’t be harmed by this issue. EMC just bought CA-based Data Domain for billions. Data Domain was able to be successful because of their technology and because they were able to hire the best people they could. That’s how this works.
6. This state needs bigger and more successful companies. We are limiting our potential by restricting the labor market. Bigger companies will help small and large companies as well in the long run.
7. Opponents for this change also suggest that the lack of non-competes is hurting California. California is certainly having their economic challenges but it’s not because of this issue. Otherwise, CA CEOs would be screaming from the rafters. California has a meaningful revenue shortfall and their expenses are beyond their ability to meet them. But keep in mind, they are creating valuable and growing companies of all sizes.
We will continue pushing for signficant reform on this issue. We hope that this bill continues to evolve and returns to the idea of ending non-compete agreements and at the same time protecting companies with other current legal agreements & laws.
We will continue pushing on the grass roots efforts. If you would like to show your sign of support please blog about this, tweet about it, tell your local elected officials, tell your VC, tell your colleagues and let us know by joining our list of supporters.
I learned a lot of valuable lessons working with Steve Perlman at WebTV Networks and Moxi Digital.
If you worked or met with Steve you would easily agree with me that his passion is nothing but extraordinary. He is positively obsessed about building amazing products.
I learned other things from Steve as well. One of my favorites is V.S.C.F. VSCF is how he would keep priorities in order.
Those letters stand for: Vision. Schedule. Cost. Features. And in that order.
This is how how Steve explained it to me:
1. Vision. Without a doubt, the founder’s vision of the product is the most important thing. Everything flows from that vision. I couldn’t agree more.
2. Schedule. Steve would often say, “Market windows don’t move”. Shipping the product on time is a big deal. If you slip late the market may no longer be there. Schedule trumps cost & features. Especially in a world of software or connected devices you can always add software improvements later (e.g. iTunes App Store is a beautiful example).
3. Cost. Cost is a bit tricky to think about when it comes to consumer internet applications vs consumer electronics like WebTV or iPhone. Cost is important. But you have to get the vision & schedule right. Cost will improve over time if the product is great along with engineering innovation & volume. We subsidized WebTV in the early days. One could argue that was a derivative of freemium.
4. Features. There is no question that features are important but vision, schedule and cost are more important. I think that’s right. Consider Twitter as an example. They shipped early, with less features and with a powerful vision that drives the company’s every move.
At this point I’ve done my share of deals of all sizes and shapes - equity, partnerships, licensing, JVs, etc.
There is one rule I like to follow that I’ve learned the hard way.
Beware of the complicated deal.
There are times that complicated deals can be rather seductive. For example, a big honking deal with a large company can be extremely helpful. But there is almost always a catch.
Few more examples:
1 - Frequently a large company will ask a small company for equity in a big deal. Their logic: this commercial agreement is going to “make the small” company so they want upside. I guess no one wants to repeat the original IBM/MS-DOS deal. Generally I’m against those equity deals unless they are performance based. If the big company fails to live up to their end of the deal then why should they own equity in the startup.
I often tell our startups that the big company should own 0% or 100% of our stock. Giving them a minority stake makes life complicated. There are reasonable exceptions of course.
2 - Partnership agreements. I’ve helped create and also witnessed some deals that have literally taken a year (or more) to put together. There is something wrong with that picture if a deal takes that long.
3 - Employment agreements. I really don’t like complicated employment agreements. I understand that both sides need to be protected or whatever. But when employment agreements start generating lots of legal fees then there is something wrong.
4 - Good vs great. There is an old saying: “don’t let a great deal get in the way of a good deal”. There is much wisdom in that one. You can interpret it in several ways but I take it to mean - keep it simple, give yourself some flexibility and go execute.
5 - Financing. I like simple straight forward venture investment structures. Straightforward rights for the VC and clear rights for the founders & common shareholders. When the structure of the deal and legal fees of the deal start becoming a significant percentage of the actual equity financing…..well that too should be a yellow or red flag for both sides.
6 - The bad deal. There is nothing worse than a bad deal excepted a messy bad deal that is hard to unwind. I like deals where there is a natural reason to go forward and a natural reason to terminate.
I’m sure I’m going to do a few more complicated deals in my life. But I always go into them with reservations.
I had an interesting conversation last week about the media and entertainment landscape with a guy that advises people running the major media and new media companies. We discussed the state of the market and where things are headed. We talked about what’s happening with the traditional media companies i.e. the studios, the TV networks, the radio stations groups and such. The conversation turned to the rapid fragmentation and disintermediation underway in the Industry. This was not a revelation. We’ve known this for a while and we’re seeing the evidence every day. What did surface was the observation that a powerful trend toward real-time information is underway. We concluded that information has a shelf life and information about what’s happening “now” trades at a premium.
The real-time flow of information is enabled by digital distribution and is further fragmenting the media landscape. A kid with a cell phone video camera, for a brief moment, can produce information that’s more valuable than what is available on CNN or in the New York Times.
Of course the quality of the information is a determinant of value. An investigative article in the New York Times that breaks a major story is valuable information. However, the flow of real-time information over ubiquitous networks is increasingly stealing the thunder of the traditional publishers. The premium paid for “new” information is true with most content. A first run movie or new episode of a TV series are more valuable than the same exact content available later. Why are books published first in hard copy? So that publishers can charge more for the book when its new. Real-time stock quotes cost money but quotes delayed by 15 minutes are free. Few people care to read a day old newspaper, and so on.
There’s an old joke that highlights the value of timely information. It goes something like this-
A man visits the hospital for a check-up and receives a call from his doctor 1 week later. The doctor says ” I have bad news and worse news.” The man says “give me the bad news first.” The doctor says “you have 1 week to live.” The man says “what’s the worse news?” The doctor says ” I forgot to call you last week.”
Our society is becoming more and more real-time. We want to know what’s happening now. We also want content that is relevant and meaningful. That means local content that is contextually relevant and targeted is the most valuable information of all. Kids value information about what their friends are doing and thinking NOW more than anything else. Advertisers will pay a premium for an impression that is attached to real-time, relevant information because the viewer deems this content to be highly valuable.
So what does this trend toward real-time mean for the Industry. First of all, it means that advertising rates will move to match the value of the information. Real-time content will command higher CPM than older content. Search results that incorporate real-time search results should be more valuable than search results that are based on older information. Publishers will increasingly steal from their traditional pre-recorded, programmed, and on-demand content to feed the real-time beast.
Conclusion- advertising will increasingly flow to real-time information and content. Publishers will pursue real-time information and try to provide relevancy. This trend will further fragment the media industry because content will come from everywhere and go everywhere filtered by viewers’ preferences and tastes. Portals will become irrelevant. Newspapers, magazines, and local TV stations, will evolve to navigation and filtering platforms along with original content that is creative and original. Premium content will bifurcate between real-time information and original content. There will still be a market for professional content. The last hold-out for the TV and Radio networks will be live sporting events. Once again, the Live i.e. new content-based sporting events will carry the greatest value and the highest CPM. Great creative content will still be in demand. Great movies, TV series, and Creative content will continue to be monetized. However, anything that has anything to do with news or information will increasingly have to be real-time or find itself relegated to the archive crypt.
Education is one of the broad themes we are hoping to pursue with Start@Spark. It’s an area that we think has huge potential to be transformed by technology, and where the lessons learned in the media, entertainment, and consumer internet spaces can and should be applied aggressively. Moreover, improving the access and quality of education (both domestically and across the world) is a priority we all believe in at Spark.
There are a lot of folks who write great analysis on the education system – it’s obviously a complex and meaty topic. But there are three primary observations that drive our enthusiasm for this segment:
1. Gaps in performance and access
Much has been written on the performance gap in the US public education system vs. the rest of the world. I won’t rehash all the data here (there is a nice Mckinsey study that is available with some good analysis here). But some interesting points:
- We are well behind our peers internationally: 17 countries have both higher average achievement AND lower income based inequality than the US.
- There is a very wide gap based on socioeconomic factors: A nine year old from a low income family is already 3 years behind their high income peers and has a 1 in 2 chance of graduating high school and 1 in 10 chance of finishing college (see more from Bijan’s blog post on his lunch with US Senator Michael Bennet)
- Closing these gaps have huge economic potential: By linking education to output, the Mckinsey study estimates that closing the income achievement gap could boost GDP by 3-5% annually
2. High (and increasing) cost across the education value chain
- The cost of delivering K-12 education in the US is the highest in the world: The US spends more per point of achievement than any other country, and 60% more than the average for OECD countries
- The cost of higher education continues to grow rapidly: From 1982-2007 the cost of higher ed has increased 439% while median family income only rose 147%. And the pace if increase is accelerating. More from the New York Times here
- The cost of textbooks are increasing rapidly as well: Textbook prices have been rising steadily by 6% annually (well ahead of inflation) as textbook publishers struggle to maintain margins. Moreover, the pace of new editions has accelerated to combat the prevalence of used textbooks in the market.
3. Pace of Innovation Has Lagged
The way that education is being delivered has not changed nearly as much as other forms of content and information. 10 years ago, music was largely delivered through physical CD’s and online file sharing was in its infancy (with no legitimate options). 10 years ago, news content was delivered largely through print or local television and the content that was available online could not be easily shared or syndicated. 10 years ago, entertainment content on television could not be time shifted and was not available on demand through the internet and on mobile devices.
Today, these industries and many others have been radically transformed through the increase in broadband penetration and capacity. However, the delivery of education content has remained largely the same. Students still largely receive instruction from teachers in a 1-size-fits-all broadcast fashion. Physical textbooks are still the core educational tool. Collaboration is largely confined to students within the same classroom in person, when the same content is actually being learned across the country and the world.
Thus far, our education system has not taken full advantage of technology to deliver education in a way that is as personalized, interactive, and collaborative as it could be. We think that this is bound to change in a big way. We are already seeing the beginnings of this with innovative forms of content deliveryand online educational experiences. In our portfolio, we have invested in a company called 8D world, which is developing an immersive virtual world for language learning that has a heavy emphasis on listening comprehension and oral fluency (something largely missing from the language learning curriculum in the company’s target market). But these are tiny steps in an industry that is in huge need of reform. We hope that through Start@Spark we can find great entrepreneurs tackling some of these problems and others that we haven’t yet begun to think about.
There are a few ways online content is paid for today.
Advertising. Subscription. Pay per download or use.
There are others forms of monetization making inroads but these are the big three at this time.
Many content owners are still struggling with their digital efforts & strategy. And as a result we (all of us) are still at the early days of figuring all of this out.
1 - Books. Yes, the Kindle is amazing. Many of my friends that own the Kindle tell me that that Amazon’s Kindle library of content isn’t great yet. So first they try to buy content thru Amazon. But if the content isn’t there they get a pirated version online somewhere and send to the Kindle as a PDF. I’m told it’s super simple to do.
The NYT has a piece about book piracy today. Many authors are concerned about finding their published works on Scribd and other places. Then you have Cory Doctorow who makes his works free online at the same time as the published book. Cory has this classic line in the article:
“I really feel like my problem isn’t piracy,” Mr. Doctorow said. “It’s obscurity.”
I love that line.
2 - Television. I wish Hulu and others would completely open up. Right now there are three big problems with Hulu in my opinion. First, the library of content is getting wider (thanks to new content deals like ABC) but less deep. It’s well known that many shows don’t make it to Hulu until a full week after the broadcast. Second, many shows are taken down quickly as well. Third, Hulu limits 3rd party distribution. We don’t have a storage or techical problem. We have a fear problem. But as my friend Jamie Siminoff points out, Hulu should be able to monetize better than old fashioned tv.
3 - Banner ads. Saul Hansell has a story in the NYT today about new super-sized ads that are actually 468 pixels wide for “premium” content sites. Oy. The most interesting thing about the story is the comments where most people say that they don’t care about these super-sized ads.
Why don’t they care? Because they use Ad-blocker extension on Firefox and they don’t see any of those ads. That’s a problem isn’t it.
4 - Music. We still don’t have music right yet. For example, we don’t have an easy way for me to pay for my own radio station. Yes, Apple dropping DRM was a big step forward. But I’m finding more and more soundtracks online are only sold as full album instead of a la carte. Even on iTunes. Haven’t we moved beyond this by now?
Plus, music labels are still suing startups into oblivion that are trying to save the labels not hurt them. There are a few well known killer music discovery startups that I’ve been dying to invest in — but won’t at this time. I worry that the day I invest is the day they will get a lawsuit. Even if they don’t have a case — they will sue.
I know of a startup that has a contract with all of the major labels. They include minimum payments and even warrants (don’t get me started on the latter). The contract is up for renewal and now a few of the labels are trying to shake down this startup. It’s just gross.
Here’s the thing that all of these have in common. They try to do something that is artificial with the web. You can’t be half way open. Content owners can’t set the bozo bit on us. We want to pay for content. Please make it easier.
It has been six weeks since our launch and we have been very pleased with the response we have received and the excitement of entrepreneurs about Start@Spark.
One question that we are often asked is “what kinds of deals are you looking for”. Usually, the person is asking what sectors we are interested in or what kinds of problems we think need to be solved.
At Spark, we think about this question in a few ways:
1. We Invest in the Conflux of Media, Technology, and Entertainment
Spark Capital has a broad area of focus that we are committed to. We invest in the conflux of media, technology, and entertainment. The core belief of the firm is that the movement of content, consumers, and commerce online is creating unprecedented levels of opportunity.
The misconception about Spark is that we are a “New Media Fund” and only focus on consumer facing entertainment companies. However, looking at our current portfolio only about half of our companies are consumer facing and a few more of our companies touch the consumer, but are actually platforms that are utilized by enterprises (ie: KickApps or Inform Technologies).
The reality is that we see opportunity across the entire value chain including content, online applications and services, platforms, mobile, devices, advertising technology, and infrastructure. We also look at verticals that are being transformed by this shift of content, consumers and content online like travel and education.
2. We Are Opportunistic
Although we have a broad area of focus, we are quite opportunistic within this focus based on the big problems that entrepreneurs have identified and are tackling. As investors, we have a great deal of breadth in the areas that we invest in. But entrepreneurs and operators have a great deal of depth, and are much more keenly aware of the problems that exist, the way customers and suppliers think, and how decisions are made within their industries. Often we are exposed to meaningful opportunities by our portfolio companies and the entrepreneurs we know before we would ever catch wind of these opportunities ourselves.
For this reason, we hope entrepreneurs are not deterred by the fact that we may not have made an investment in their particular space previously. If you have identified a significant opportunity, it does not matter if we have not made an investment in that area. The more important question entrepreneurs should ask is whether the Spark is likely to be helpful as an investor and advisor. If you are developing a new kind of cancer drug, we are likely not the most helpful investors around. However, if you are starting a company in our broad area of focus, we would be helpful investors, even if we haven’t made an investment in your specific sub-sector previously. Additionally, seed stage companies often have to evolve and experiment in the early stages, and our breadth and relationships in media, technology, and entertainment can help with that as well.
3. We Have Themes and Talk About Them Openly
In addition to #1 and #2, we also occasionally pursue specific themes, but in an informal way. We aren’t completely wed to these themes, and they always evolve as we learn more. But there are areas that get us particularly excited from time to time.
The best way to hear about these themes is to follow us on Twitter, read our blogs, or meet with us. As I’ve said above, if your company does not fit into these themes, that does NOT mean that we are not interested in speaking with you. But we share our thoughts to just give a flavor of how we think and where we are spending some of our time.
In our FAQ’s page, we list a couple areas of particular interest for us at the moment. In the coming weeks, we’ll expand on some of these areas a bit more to provide more insight into why we think these areas are ripe with opportunity.
Most of our investments are early stage. For these startups, our investment will not bring the company to cash flow break even. And many times our initial investment will not even bring the company to initial revenue either.
That is just fine with us.
There are many other things we want our companies to accomplish with our initial capital. Such as product, learn & engage with their users and staffing.
It’s easy for young startups to deal with task list at hand. Nothing seems more important than the product release that is 6 or 8 weeks away or the fires at the moment.
In a startup, sometimes its best to start at the end and work backwards.
What does that mean?
Think about what you want your company to look like a year from now. Then work backwards and figure out what you have to do & the timeframe (and how your board can help) to achieve those goals.
I’ve found that it this approach can help big time. It helps measure how your company is doing against those goals. It also provides transparency to your board so that everyone is on the same page with those goals.
But most importantly, it helps keep everyone focused on the big stuff.
In a startup you will always be understaffed and too little resources. That is just how it goes. And it can be overwhelming at times.
So I encourage you to try this approach and start at the end. It should clear away much of the noise.
There are clear signs that the content distributors (MSOs, Telcos, Wireless) are making careful little plans to limit the distribution of rich content (video being the main item) over the web. Witness AT&T’s desire to limit the flow of video over their mobile networks. Time Warner Cable is planning to go to tiered pricing for bandwidth in an attempt to charge more for video and music downloading. What may seem to be a cost capping exercise may actually be an attempt to exert control over who gets what content where. The FCC needs to be on the ball here to make sure things like net neutrality and equal access are not thrown asunder. A battle is quietly waging over how to restrict access to content. through the web. That’s the battle. The war is between free and paid.
At the core of the inherent conflict is the carriage fees that the distributors pay to the producers for the right to distribute their programs and the availability of these same programs for free over broadband networks. Why should Comcast pay Disney for the right to broadcast programs that are streamed over the web for free. That’s part of the reason Hulu demanded that Boxee not browse Hulu content. NBC and Fox were worried that their TV shows would be streamed onto TVs. Imagine that- TV shows on TV.
The Cable guys are now working with the Content guys to figure out how to charge people for the content whether they get it over cable networks or through the web. There seems to be some momentum behind putting in place content management systems that would tie licenses to consume content with personal identity. Imagine subscribing to a service offered by Time Warner that entitles you to view any Fox or NBC content you want when you want it whether you get it on cable or through the web. Even on your mobile phone. The reality is that someone has to pay for the content. Premium content isn’t cheap to produce. A TV episode can cost $5mm+ to produce. We all know that with DVRs and the Web, the 30 second TV spot is “dead man walking”. Technology is rendering traditional ads ineffective. Advertisers are starting to realize that they are paying for trees that fall in the forest.
One example of the problem is the emergence of ZillionTV. ZillionTV is supported by Disney, NBC, Universal, Sony Pictures Television, and Warner Bros. You can buy a new ZillionTV box for around $50 and get on demand access to network TV shows through your broadband connection- if you are willing to watch the commercials. This is akin to the old behavioral testing boxes in which as rat received a food pellet if it pressed a bar. If you watch the ad, you get the TV pellet. This is just one attempt by the content guys to fight the erosion of traditional TV advertising.
The reality of today’s video entertainment industry is that audience fragmentation is increasing. Viewership is dividing more and more as more choice of on demand content makes its way onto cable networks (600 channels and nothing to watch) and the web (6 million channels and hard to monetize). The fragmentation issue is not going away. The producers and distributors need to embrace new technology and policies to monetize the fragmented viewership and cross platform distribution. We have passed the point where a TV show can command a higher CPM on the web than it can on broadcast TV. Hulu has proven that even if it is having trouble selling more the 60% of its inventory.
The key to success in retaining viewers and monetizing same as TV converges with the web will be to employ technology to target and measure the response of advertising. The closer an ad matches one’s needs, the less it is an ad and the more it is content. With this technology will come a new level of transparency that will illuminate the actual viewership channels are receiving. The current ratings systems such as Nielsen’s are wholly inadequate to track the true viewership of the multitude of channels being broadcast and streamed over the web. When the actual viewership of some cable channels is know, there will be a major reaction on the part of advertisers. The convergence of broadcast TV and the web will enable this transparency and the Darwinism that will follow. The result will be fewer cable channels and more accurate measures of the effectiveness of advertising. Then, the fragmented audience will be mapped and matched with ad dollars.
Not only is the audience fragmented across channels but also across media. We have seen the teasers of a TV viewer watching a show on a TV set, moving to a computer and then a cell phone while never missing a second of the action. The technology to enable such as journey is nearly here. The policies and content management systems to enable the content to be delivered, tracked and monetized is being developed. My belief is that within a couple of years we could see viewers having access to a “right to use” content . That’s different than Today’s model of access to channels through your cable package, video subscription or pay per view ala Comcast, ITunes or Netflix. In all likelihood, the incumbent distributors and networks will be the gatekeepers of these “licenses”. The content guys will find it difficult to cut the Cable, Telco, and Wireless guys out of the equation given that they own the connections to the viewers. So, if you subscribe to Verizon FIOS entertainment package, broadband service and have a Verizon Wireless phone, you can watch whatever content included in your subscription on demand across all three screens. You get it when and where you want it and the producers and distributors of the content get paid. Seems like a fair deal to me. Of course we aren’t there yet.
There are lots of issues and technical hurdles to be worked out. The biggest challenge is implementing the multi-platform “right to use” licenses. Policies, business models and technical systems need to change. The content producers will worry about “analog dollars turning into digital pennies”. The distributors will fuss about how to maintain ARPU and what they have to pay for the distribution rights. The tension between these two camps has been there for decades and will continue. Given the velocity of change driven by new technology such as high speed broadband, streaming video, file sharing and social networking, change is inevitable. The old system of tethering content to specific devices and media will become obselete. The new paradigm will be linking people to content regardless of device, network, medium or location. At the end of the day, consumers should be considered along with the rights of the content producers and distributors to make money.
Risks of taking seed investment from a Venture Fund
We have had a number of people ask for clarification on the proposed terms of the seed program.
The seed investment we’d make is up to $250,000. We would consider investing more, participating along side angel investors or share the seed with another venture firm on a case by case basis. Our standard investment is a non-recourse convertible loan. The key benefit of structuring the investment as a loan is that it minimizes the length and complexity of the legal process. If for some reason, things don’t go as planned the company or the founders are not personally liable in the end.
If there is a subsequent financing, that’s when we as investors get certain rights. We get to convert our loan to the new round of financing at a 20% discount - in other words our $250,000 magically becomes $300,000. For example, if you were to issue stock at $1 share instead of getting 250,000 shares of stock, we would get 300,000 shares of stock for the loan.
The other key term in our loan document is the right to particpate in 50% of the round. Let’s say you were going to issue $4M of new stock in your company (i.e. raise $4M in Series A), we get the right to invest at least $2M.
Some may consider this term potentially controversial. The logic goes, if you are seeded by a venture fund and if for some reason they decide not participate in your Series A financing (or participate for less than half the round), that is a major red flag to other investors. The argument follows that you may be better off taking money from a seed only program that has no venture ties and not have that risk when you fund raise again.
That’s clearly a valid concern, one you’d have to live with when you take seed money from a Venture Fund regardles of a participation clause or not.
The other side of the argument is that we take seed investments, like all our investments, very seriously. In my opinion, as an entrepreneur your most valuable asset is your time. The seed investment is a great way to spend your time to find out if you want to dedicate the next 3 to 5 years, maybe more, to your great idea. The best use for seed funding is to prove first to yourself, then to your investors that your idea is worth pursuing for the long term.
Over the last 10 years, personally as a venture investor, I have made a total of 17 investments including 7 seeds. In other words 40% of my investments started with 2 guys, a great idea and sometimes a power point. Of the 7 seed investments, only 2 have failed to get to the next step. In both failed cases, after going at it for a while, the founders decided to call it quits. In one case, it was the wrong product for a good market and in another, a great product but a lousy distribution channel. I still worry if there was anything more I could have done to prevent the 2 failures.
We see it as much our job as it is yours to make you successful. First, we would only make the investment because we are believers in what you are pursuing. We would agree upfront what reasonable milestones we as a team would need to achieve to get the company financed further and we’d be there with you every step of the way. And when you are ready, you’ll have us - your first investor - locked in, which should potentially make finding a second investor to fund your company easier with us behind you all the way.
We are very excited about the enthusiastic response we have received just a few hours after announcing Start@Spark.
One question that has been coming up is whether there is a specific application deadline for the program. The answer is no. Start@Spark is an ongoing program and we will be reviewing applications and meeting with entrepreneurs on a weekly basis.
You can read more about the details of Start@Spark here.
Today we are launching Start@Spark, a new initiative focused on seed stage investments in the New York and Boston areas.
When we launched Spark Capital in 2005, we were convinced that a revolution was taking place at the conflux of media, entertainment, and technology. Four years later, the pace of that revolution has exceeded even our own expectations, as the movement of people and content online has driven innovations across all segments of the value chain. A lot has happened in the past 4 years and we have been right in the middle of the action. Yes, we are in a global economic recession and yes the new media markets are being impacted. The current environment has made it difficult for entrepreneurs seeking capital to start companies. Investors, including VCs, Angels and Strategic Investors are distracted from early stage investments due to a combination of portfolio triage, concern about capital availability, and downright confusion over where to invest. The options for starting new companies have evaporated along with financial markets and market caps.
So, this must be a terrible time to fund a start-up company. Correct? Au contraire. This may be the best time in the last 8 years to start a company. While capital is scarce, the tectonic plates continue to shift creating major rifts. The walls are coming down and the barriers to entering new markets are falling along-side.
We don’t expect the economic woes to evaporate soon; however, we are long term investors. We are looking forward to what will happen in 4 years rather than in the next 4 months. We see a clear opportunity to partner with talented entrepreneurs who possessing the vision and commitment that transcend current market conditions. We have prided ourselves on being aggressive and funding disruptive, early stage companies.
Start@Spark is a new program but it is also a formalization of what the Spark team has always done as early stage investors. We began working with companies like AdMeld, OneRiot, and Tumblr (among others) in their earliest stages and love partnering with entrepreneurs to build something out of nothing. While we invest at all stages, we have a bias towards early stage companies because that’s where we have the greatest impact on the success of a company. We hope that Start@Spark is a platform for us to connect with you - the entrepreneurs and provide you with the capital and support to build the next great start-up company.
Start@Spark is also part of a broader effort by Spark Capital to drive greater innovation in the Northeast. Our initial focus on the Boston and New York areas is predicated on our belief in the talent in these areas and our desire to foster collaborative start-up communities. In addition to Start@Spark, we helped to form the Alliance for Open Competition - an organization established to eliminate non-competition agreements. We are also proud supporters of Tech Stars Boston. In other words, we are dedicated to fostering entrepreneurism and innovation.
We hope you will join us to build something great. Please submit an application, follow this blog, or follow us on Twitter.