Venture capitalists are lured by the huge potential of Internet content. If they could only overcome its huge obstacles.

Ask a venture capitalist about financing Internet content, and chances are strong you will get a shrug. It usually comes after a wide-ranging discussion about how the Web will change the way we are entertained, informed and even socialized.

Pressed on what that change will look like, the VC might perform various forms of the shrug. It may be a physical shrug of the shoulders. It may be a verbal shrug. It basically means the same thing: Nobody knows. Not even the VCs who are supposed to know the Internet Economy inside and out.

"The direct creation of content is a hard thing," says Kevin Wall, whose media incubator, Shelter Ventures of Westwood (WNMP) , Calif., launched last week. "We have yet to see any entertainment content on the Web that's changed anything culturally."

Despite the similarities between the ventures and the content creation businesses – in both, you're only as good as your last hit – the two worlds have yet to come together in any tangible way. Yet many people with content backgrounds are starting Internet venture funds, and many Silicon Valley VCs are sniffing around Hollywood.

In addition to Shelter, former Times Mirror CFO Tom Unterman recently set up TMCT Ventures and Sandy Climan, a former agent and executive at Universal Studios, has launched Entertainment Media Ventures.

If Internet content was just a black hole for venture capital, it would be easier for some to walk away. But many have trouble shaking the notion that content will inevitably be a part of the Internet – a big part. Much of the new bandwidth being brought to the Internet will allow higher-quality sound and images to be piped into homes and offices, creating a vast potential market for new content. America Online's purchase of Time-Warner dispelled doubts that content wasn't hurtling toward the online format.

Wall, previously vice chairman at iXL Enterprises, is among those looking for that magic content. He formed Shelter with Art Bilger, who made his name in the 1980s when he helped run Drexel Burnham Lambert's legendary corporate finance department under Michael Milken.
Wall is looking backward for a solution; he sees a parallel with the music business in the 1960s and 1970s, when landing a record deal with the likes of Columbia or RCA meant a labyrinthine process. A crop of independents like A&M, Geffen and Electra took advantage of the garage bands blossoming on nearly every block. They scoured the clubs and got the talent before the giant labels did.

"The basic model you'll see change in Hollywood is this: Hollywood is reactive," Wall says. "The people who will make money on content will be the people who are proactive and go out and look at what is bubbling up to the surface."

As encouraging as that sounds, Shelter is selective about its content investments for now. Wall says the closest Shelter would get to directly funding content is perhaps a content portal of some kind.
Others, like East West Capital, are avoiding content investments. East West has all the credentials to be a media investor: It's based in Westwood, only a few miles from Hollywood. The lead partner of East West is Merv Adelson, cofounder of Lorimar Telepictures and former vice chairman of Time Warner. His son, Gary, who produced TV shows like Eight Is Enough and movies like Hook, is also part of the firm.

"We all have a lot of insight into content and we are the most content adverse," says Ravin Agrawal, a partner at East West. "Having to create new properties that are funny or tragic is a truly difficult thing."

Web content has hardly wowed Wall Street. Many of the media sites that have been the most celebrated as success stories – Salon.com and TheStreet.com, for example – are trading more than 30 percent below last year's offering prices. Even a relative success story like CNET (CNET) has risen only 14 percent in the past 12 months, while the Nasdaq has nearly doubled.
And no content company offers the kind of performance VCs dream about, multiple returns of skyrocketing stocks that seem almost routine in the Internet infrastructure and business-to-business sectors.

Even the unfashionable online-retailing stocks are seen as a more-promising realm for venture capital than online content. From 1998 to 1999, investments in venture-backed e-commerce companies jumped from $400 million to $4 billion, while investments in venture-backed content companies rose from $450 million to a comparatively smaller $1.6 billion, according to Venture One.

Not all venture-stage investors are shunning content. Jeff Brody, a partner with Redpoint Ventures in Menlo Park, Calif. says it's not a question of whether to invest in content, but how.
Redpoint's roots are strongly in the Internet industry, where the view on content is a little sunnier. The fund was created by a group of VCs from Brentwood Venture Capital and another group from Institutional Venture Partners.

"It's our bet that the world has changed. And if you are clever on how you monetize, create and repurpose content, then there are ways to create profitable content businesses," says Brody, who is tight-lipped about Redpoint's approach. "We have created a hypothesis and we are testing it, but to be honest, it's nothing we'd want to share," he says.

Redpoint's recent investment activity may offer some hints, though. In January, the firm funded Fusient Media Ventures, a content incubator headed by former Time-Warner exec Brian Bedol, former deputy baseball commissioner Stephen Greenberg, and Tom Lassally, former executive VP of Warner Bros. Redpoint partner Geoff Yang sits on Fusient's board.

In hedging its bets by funding a content incubator instead of separate content companies, Redpoint took a page directly out of b-to-b incubator Internet Capital Group's roll-up strategy playbook: When investing in a risky market, the best way to lessen the risk is to spread it around.

Another way to invest in content is to ride its coattails. East West's Agrawal mirrors many investors in their preference for investing in the infrastructure that will deliver content. This helps them focus on the growth in content's quantity, without having to worry about its quality. "There will be billions of audio and video files accessed every day," Agrawal says.

While Internet content has been around since before the Web, most feel the sector is still in its infancy and has yet to show what the definitive model will be. That's evident in the opposite investment approaches of East West and Redpoint. While East West, a company with years of content experience, is shunning content investments, Redpoint, a Silicon Valley-type firm, wants to invest in the changing content world.

Redpoint's Brody hopes it changes into a less frustrating process. "The great thing about the Web is that you can tell what people want instantly," he says. "Shit, you should be able to do something with that."
 

Source:  Jim Evans, The Standard, March 2000