The State of Venture Capital and the Internet

Posted on Oct 20, 2011 | 44 comments


Early today I gave a keynote at the VCJ Venture Alpha conference here in San Francisco. I was asked to speak about the topic of “what is going on in the venture capital world and what is the next big thing after social networking?”


Future of VC Internet

Tough topic, but what the heck?

Next week I promised to follow up on PE Hub, one of the main journals VCs read about our industry, with a detail description of some specifics that are happening. Watch out for that – I will have a lot more details.

I’ve listed some great VCs in the presentation. I’ve left off many great ones. It isn’t intentional. You can’t cover everybody in a prezzo. Please don’t read anything into that. Some of the big ones I left off was Tim Connors of PivotNorth and Aydin Senkut of Felicis Ventures.

And all feedback welcome! See you in the comments.

  • Anonymous

    It seems as though you left out the growth of the Angel or Super Angel investor unless you include them in your VC calculations.  It would be interesting to see a chart comparing the decline of VCs to the growth of angels. 

  • http://twitter.com/timbarnes10 Tim Barnes

    I did not realize that in FH’11 80% of LP money went to 7 firms.  That seems unhealthy for the industry.   A cynic may say that this begs the question of whether or not it’s venture capital or growth equity or desire to collect fat management fees.  I liked the investment thesis on the next big thing.  I just got a Roku player and if not for live sports, I could do without my cable bill.  When you mention VCs investing in content, are you thinking that VCs will be more excited to invest in the premium content plays?  You need some premium internet content to disrupt mainstream TV. 

  • Anonymous

    Very insightful explanation of the current VC/Angel market. Thank you!

    YouTube is the new Comcast. lol How funny. We were tweeting about this yesterday but you already had your research all along.

    I agree with you 100% that the next big battle will be TV. I hadn’t really thought about the view counts till now. I didn’t know they were THAT big already. But I just can’t see YouTube as the new Comcast. Will it be? Possible, of course. I also don’t like the idea of depending on YouTube for ad revenue. I know there is another revenue model coming that will be far more profitable. Better to be early in the game rather than late right? I can’t say much more about this because I haven’t looked into how profitable these YouTube videos are. Considering that GRP is an investor in Maker Studios, I am sure you are far more knowledgeable about this but probably can’t comment.

    There will be a MASSIVE shift in the type and way we consume video entertainment. DISCS are DEAD!  By shift I mean: Once internet video entertainment starts giving the incumbents in Hollywood a run for their money. I do believe YouTube is the beginning of that but right now there is no real competition content wise. Hollywood knows this and that’s why they’re not attacking this medium. I know Hulu was a reaction to this problem but they were recently trying to dump the thing. This gives us an idea of what their current mentality is. They just don’t want to give up those SWEET SWEET Blu-Ray and DVD sales.

    Right now I’m seeing early teens not only spending most of their time on Facebook and YouTube, they’re also relying on these mediums for life advice. (I won’t get into the whole parenting issue) All of those personal videos that go up with life stories and life experiences will have a profound impact at this critical age. When this age group reaches a higher level of economic influence, stopping the shift in media consumption will be next to impossible. To me, they will be the ones that REALLY push this shift and the type of content consumed.

    I have more thoughts on content creation, distribution, video formats, and clues of the video “shift” that has its biggest roots in 2001. However, this comment is long enough and I feel like I’m putting too much.

    Cheers!

  • http://twitter.com/davidsmuts David Smuts

    This is too funny Mark. My company elexu.com (pronounced: “elects you”) is building a new platform which meshes a social network with reality TV and competitions. We’re essentially in the IPTV business but are working with some big name advertisers and producers to create interactive real time social television 24/7.

    You are 100% correct about the market opp on this. Not many VCs get that. I recently overheard a good VC say to an Entrepreneur who was in this field “We VCs don’t do creative- we just don’t understand that business very well”. He wasn’t being rude or dismissive and what he was saying to the young Entrepreneur was entirely true!

    Because of that, and because of the huge start up capital required which VC can’t/won’t provide in initial funding we have decided to go down the IPO route. Remarkably, we have the investment banks and several LPs on board with this. They’re all looking to get in early on the “next big thing”.

  • http://www.facebook.com/people/Jeff-Peel/799379151 Jeff Peel

    You neglect to mention that a huge amount of the video content that’s watched is watched on mobile devices.  The nature of content consumption is changing – traditional TV’s are not necessarily the access method.  Moreover, while video consumption growth is enormous in the consumer market it’s also transforming B2B content – although with a lagged ramp-up.  But, interesting perspective.  

  • http://zeebox.com Max Bleyleben

    Totally agree on the next big thing.  But in my view the battle over content distribution is only half the story.  What we haven’t yet done is ‘Google-ized’ video content.  The TV — where Americans spend 5 hours and Brits 4 hours per day — is the last dumb screen in the house.  Imagine if your TV knew just 3 things: where you are, what you’re watching, and what your viewing history is.  Then it could bring you as much personalisation, targeted advertising, relevant information as the browser does — either on the TV or on the ‘second screen’.

    The market that connects the Internet with TV content, and serves up contextual, relevant stuff from the Web remains untapped and ought to be as big as Google + TV Advertising. The folks at Google seem to have missed this completely, even though it’s totally analogous to the only real business they ever succeeded in!  Instead, Google is wasting time entering the content licensing battle via Google TV and You Tube — both doomed efforts in my view.  

    Zeebox knows what you’re watching.  We launch the app and web service next week, so stay tuned :-).  Would love to brainstorm this market with you some time, when you’re next in London.

    Max

  • http://pulse.yahoo.com/_TPESQLI7U6G7TX6KPPFJQ3AFGA Seattle Dev

    Mark – Excellent presentation until you get to slide 27. 

    Slide 27: Americans watch 5.3 hours of television a day. What does it tell us?  We are becoming TV zombies. It’s an epidemic. Reading this should push all of us in the tech community to work on disruptive technologies that decrease TV watching rather than take advantage of this trend. We need to invent creative technologies to get people away from TV and out of their living rooms not encourage people to consume more and more digital content.

    I 100% agree TV is ripe for disruption but is this really the area that we should all focus on? Is this really the area that top minds in our industry (VCs, entrepreneurs) should work hard to disrupt?

    There is no question– areas like TV consumption and casual gaming are poised to see a tremendous amount of accelerated innovation over the next several years. The problem, however, is that this innovation is also likely to have the greatest net negative effect on our societal fabric.

    As VCs and entrepreneurs, we may not have full control over macro trends in our society but we do have some power to influence the direction of these trends. Let’s start and fund companies that push people to get out of their living rooms and away from big screen TVs. Let’s have more of BrainNook or FitBit or and less of Hulu.

  • Brian Trautschold

    My question is when will (or if) content and cable/ satellite providers unlock the screen and allow consumers to control the largest visual portal in the home for socialization, personalization, and more rich individual experience. We all want apps on our TVs, but without content providers on board – a giant youtube player or netflix box is not worth a multi hundred $$$. We need both live content and overlay ability, plus delivery and interaction on the level of a computer or tablet to seamlessly launch apps, choose content or  stream media – simultaneously.  Currently, providers own the screen and don’t want to give up that real estate. 

    When that disruption point happens and cable/ content providers have to open up and give consumers the keys – some amazing innovation and interaction can take place.  

    Love the post.

  • http://twitter.com/Sterner Christian Sterner

    Mark,

    My team has been focused on web/mobile video (with a focus on platform products for high-quality, professionally produced content) since YouTube first came out. Your statements about the TV opportunity are right on, but I would add that YouTube is not going to be the platform beneficiary of this revolution. A very low percentage of the views that occur on YouTube are sourced from YouTube searches. Rather, video viewers are coming from Google, Facebook, Yahoo, Bing, Twitter and on down from there. What I am saying is that there will be platforms that emerge that serve content creators and owners in a much better way (to be read: views will occur on their turf). This trend away from the false idea that YouTube is a search engine (ie…they are not referring traffic anywhere unless by chance) is gaining a lot of steam. And, I would add that they have nowhere near the lock on the entertainment space that Comcast was able to garner (via proprietary software/hardware/capacity installations). There is absolutely nothing keeping YouTube safe other than the false idea that it is a search engine.

  • http://twitter.com/jameshbailey James Bailey

    The most dramatic slide is the one of the right sizing of the industry. 2/3rds of the industry going away is incredibly darwinian. It backs up my belief that the top 10% of all funds (mean average) make 90 percent of the returns. Incredibly prescient on all topics, Bravo

  • http://www.ospreyvision.com/blog Steve Finikiotis

    Very insightful. Thank you.

  • http://twitter.com/davidsmuts David Smuts

    Exactamundo Christian!

  • http://twitter.com/davidsmuts David Smuts

    As Darwin once famously said:
     “Species adapt or they die”Same thing can be said for VCs. Time for the next gen of VC species. Mark and a select few are the new emerging VC species who have adapted to new environments. Long live the evolution!

  • http://www.billda.com Bill DAlessandro

    Great deck Mark – but wouldn’t “” make more sense on the last slide? :)

  • http://twitter.com/entrepreneurdan Daniel A. Bernal

    Good Stuff

  • http://www.alearningaday.com Rohan Rajiv

    Interesting you are betting big on online tv. 

  • http://www.justanentrepreneur.com Philip Sugar

    Vast, vast majority is passive consumption.  In my household the TV is on for at least 6hrs a day.  Actual viewing time is an hour before bed, other than that it keeps one company.

    http://synchronize.tv/blog/2010/4/30/what-does-watch-tv-mean.html

  • http://zaru.co Nathan Zaru

    Great post and I totally agree, TV is going to be huge.  But how do you figure Music is going to factor into future investments opportunities?  I’m talking in particular about the concert/live music experience because it’s a totally offline event just begging to be brought online — and watched! I know a couple small companies doing some very big things in this space.

  • http://pulse.yahoo.com/_TPESQLI7U6G7TX6KPPFJQ3AFGA Seattle Dev

    Philip – Great point! Still, the trends are disturbing. Personally, I am especially concerned with behavioral shifts in TV and video game consumption by young children.

    While there is place for innovation in every industry, I am wondering whether innovation in this particular area has such a net negative effect on our already brittle society that it’s simply not justified. I do recognize that there instances where TV-related innovation has a positive impact on our society. For example, there is now a whole new crop of sites that provide a new distribution platform and a new revenue channel to independent producers of indie and foreign films. But for the most part, things look very bleak to me when it comes to TV and video watching.

    I hate to sound like an old man (I am in my 30s!) but I feel that we won’t even know the full effect of TV taking over our households (whether in active/passive or background mode) for another 10-20 years, when it may be too late to reverse the course.

    Mark– I would be really interested in your interdisciplinary perspective on this issue.  Do we, as members of the high tech entrepreneurship ecosystem, have any influence on and have any responsibility to change or at least slow down the deconstruction of the societal fabric which is a byproduct of disruptive  innovation in Television-related industries? 

    Is this something you could address on your blog or perhaps as a side note on  your “This Week in Venture Capital” show?

    Cheers!

  • http://www.attractv.com Tzahi Sofer

    Great post. Thanks. 
    About the next big thing – Internet is all about enagaged viewers, no? I would add “Interactive” to “Internet TV”. For decades it’s been tried on traditional platforms and failed. It wll now happen, big time, thanks to the Internet fast and global connectivity, social nature and plathora of services.

    Tzahi, 
    CEO, attractv.com 

  • http://www.justanentrepreneur.com Philip Sugar

    Agree with your points.   Have you seen the video where a one year old is trying to swipe a paper magazine like an iPod???

    Might however be a good point for Mark’s thesis.  I am now typing this with the TV on ignoring it, but if I want to watch a video I have to watch the trailer.  (but I don’t because you can flip to a different tab in your browser)

  • Michael Gnanakone

    Mark I think YouTube is going through a transformation that won’t be realized until its too late for the competitors. The scale is there, and advertisers are willing to pay. 

    But you probably know more than most because of that deal Maker Studios signed with Google last month.. when are they going to announce their partnership? 

  • http://www.kidmercuryblog.com kidmercury

    you guys keep ignoring the debt problem — the global sovereign debt crisis drives everything. that doesn’t negate the trends highlighted here though it does greatly impact the trajectory by which these trends will be actualized and thus which startups will succeed and which will fail. 

    specifically, in order for the “internet disrupts tv” dream to really become true, broadband needs to be much more accessible so that content from the internet is just like content from tv. government is not able to fund this even if they wanted to (see the aforementioned sovereign debt crisis). are there legal/governmental impediments that block startups from filling the gap here? IMHO such gaps will increasingly occur provided startups do not acquire significantly greater political will, which most entrepreneurs and investors sorely lack. 

  • http://reecepacheco.com reecepacheco

    i can’t help but laugh right now…
    ;)

  • rogger ladislau
  • http://twitter.com/excapite Nigel Scott

    As you point out if the Global FTA and Subscription Markets can be disrupted there is a significant opportunity. After all the 2010 global TV advertising industry was estimated to be worth in excess of US$175. Meanwhile Online Video constitued just 2.5% of these revenues.

    The question is, now that the current generation of Super8 and Betamax enthusiasts have a DIY distribution deal, will this fundamentally change the economics of TV?

    I say that because the internet has been the future of TV for at least 15 years.

    We know this because if JenniCAM and her fellow “performance artists” hadn’t put their 24/7 lives on the (dial up) line back in 1996 there is a good chance we would have been spared the gnawing banality of Reality TV (e.g. Big Brother).

    Which raises the question I would suggest. Is the future of the internet television? or is the future of TV the internet?

    You see the disruption of print was about changes in technology. Disruption of TV is more about screen size and signal to noise.

    The problem for the internet of course is it is all noise and no signal (Until you Google that Keyword) while TV on the other hand is all signal in search of a noise…

    I think if the first 15 years of the internet has taught us anything it will be about trying to discover a signal (any signal) lost within the noise. Simply because when media is reduced to just data buried in a network of databases then pattern navigation and analysis is all that is left.

  • http://bothsidesofthetable.com msuster

    There is not such thing as a “super angel” – if you invest your own money you’re an angel, if you invest somebody else’s money you’re a VC. I call them Micro VCs. And I listed some in my prezzo and didn’t list others. The category is very small compared to the total industry.

    Angel investing has grown – certainly. But in aggregate it’s also small dollars. It is not a zero sum game. The rise of angel investing goes in cycles and doesn’t skew the numbers much.

  • http://bothsidesofthetable.com msuster

    I think there will be “low cost premium” that is different than traditional TV. Think Innovator’s Dilema – lower cost, lower quality but higher consumption.

    re: growth equity – that’s exactly what I implied in the deck.

  • http://bothsidesofthetable.com msuster

    re: YouTube is the new Comcast … yes, I’m often saying things in discussions / Tweets and then months later they find their way into a blog post. I’ve been test-driving “YouTube is the new Comcast” for about a year. I’m not convinced it holds.

  • http://bothsidesofthetable.com msuster

    Now I know why you wanted me to be more engaged in the comments section ;-) I was in an all day board meeting for UCSD. Sorry.

    re: VCs … they have said, “we don’t invest in hits driven businesses” for years. What they haven’t realized is that video is no longer just a hits driven business. And ironically many consumer Internet businesses are just that!

  • http://bothsidesofthetable.com msuster

    That’s a great point. On some YouTube videos I’m seeing up to 40% viewed on mobile. It’s astounding.

  • http://bothsidesofthetable.com msuster

    Hey, Max!

    Turns out Google didn’t miss it as you say. My wife worked at Google and that’s what she was working on 4.5 years ago! Just that the cable operators and other MSOs have blocked it all through lack of innovation on STBs.

    But in the future it won’t matter because as we go OTT the STB won’t matter any more.

    My bet – Apple does TV sets and kills it. Then Google does them. And while we go through a 5-year replacement cycle they start to feel more like extensions of our computing environment / media centers.

  • http://bothsidesofthetable.com msuster

    Look – you can’t change people entirely. I might lament the fact that people read USA Today and not The Economist or that they eat McDonalds and not grilled fish. It’s a simple fact.

    So I do entertainment – Maker Studios AND education – Treehouse.

  • http://twitter.com/davidsmuts David Smuts

    What’s cool about OTT and this emerging market is it is also a product business. When you have mobiles, remotes, voice control, laptops, tablets, LED screens, stereo etc.., all interacting with the visual component (the OTT-TV) you have a significant increase in potential revenue streams and engaged users. 

    I saw a comment here from someone saying that “you forgot mobile”- they just didn’t get it. Mobile is part of OTT- it goes without saying. The historic verticals of: this is for mobile: this is for TV; this is for internet; this is for social; this is for tablet etc.., are coming to an end- it’s all meshing together around video and user interactivity and inter-operability.

    What’s got me excited is the platform we’re working on to bring all this together (not that we’re inventing anything new here, rather that we’re piecing it together). In our discussions with the BBC, they said if you guys pull this off you’ve just discovered the holy grail. OTT is also a huge collaborative gold mine. No company can do this on its own. So Apple going ahead and making a TV won’t be evolutionary unless, Apple also works with content makers and other manufacturers to facilitate broader user engagement.And say goodbye to cumbersome text- it’s going to be voice soon or the press of a button in real time and on impulse which consumers will interact with TV/video content in future.

    Sorry to go on a bit here…., but your insight in this domain is very rare and it’s at the heart of what I’m building our business on.  Mazel Tov OTT-TV!Btw…, are you going to the OTT World Summit in London next month http://ottworldsummit.com/? We’ll be there. If this sector really interests you I would suggest you need to be there.

  • Thomas Mullooly

    Mark,  I do not understand the change in branding with YouTube.  What did I miss?

  • Dave W Baldwin

    Just finished the trip to Bridge Day in Beckley, WV and working back thru Kentucky to my brother’s… offers analogies related to this (WV vs. V) across many perspectives.

    The more important infrastructure issue is broadband.  There are government funded developments happening, but the push needs to be expanded. 

    At same time, the coming of “internet disrupts tv” will follow through (it already is) as the tools to ‘make your own show’ become more accessible to the wider market… kids will get it.  Now that we’re finally going into the experiment of oral command, the tools/toys to produce/post video will improve.

  • Dave W Baldwin

    Have to disagree.  Back when I was young, that box was the focal point every evening (days of MASH, WKRP, Dallas…) and you watched the show as a family (unless you went out behind the barn ;)).  I bet you’d find hours watched daily back in the 70′s not much different.

    We are in a transition today that brings the feel of zombies due to lack of content.  In the commercial art world, things are copied/imitated.  So the ‘reality’ show that is edited for ‘wow’ is proving lackluster looking ahead. 

    Otherwise, we just have to put up with lackluster ideas out of Hollywood.

    The bigger change related to Internet Disrupting Television will be related to attention span.  The half/full hour program will begin to dissolve… and that will not disrupt advertisement.  Though Broadcast lost so many viewers to Cable, they still get advertisement… moving into the arena of more fluid television/internet will offer spots for ads.

  • Dave W Baldwin

    On the money.  Everyone should remember that with the Jobs wanting to kill Android, there will be more to it than current downloading Virtual Assistant.

    The change of entertainment centers/ports over the next 5 is exciting and will lead to a slightly smaller needed square footage in house.

  • Anonymous

    @davadija:disqus Friend’s sisiter  makes $82/hr on the PC. She has been out of work for 7 months but last month her paycheck was 6980 USD just working on the internet for a few hours. Go to this site………http://alturl.com/qfhrp

  • Philipp

    Hi Mark, loved the presentation, just a quick question about Slide 31: Where do the production costs for Youtube TV come from? $ 100 – 400 per minute seems  very expensive to me… Thanks!

  • Anonymous

    Mark,  I initially thought your emphasis on video was over blown. Then I read the following article. The first paragraph simply changed my mind. (quality source as well)
    “For the first time in history, mankind is developing a universal language: video. People now communicate with video on two billion computers and more than one and a half billion television sets, and by 2013 you can add another one billion video-capable people regularly accessing the web from their cell phones. The most popular spoken and written language is English, with 1.8 billion users. Looks like video already wins.” – Dave Marsh http://www.cjr.org/feature/fade_to_black.php

  • http://dissertationtoday.com/ dissertations

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  • http://www.linkedin.com/company/web-promo web promo

     Cool article. Thanks for sharing

  • http://twitter.com/soumitra1 Soumitra Paul

    Television is sure gonna be a great space to invest but I’m little uncomfortable with the phrase “After Social Networking”. Social networking is never going to end as the food industry would never end. Social networking is going to re-invent itself in every few years and make opportunities for investors.

    So a nice discussion would have been “What is the future of social networking?”

    I made a few predictions here myself. Disclaimer: I’m just a toddler in this industry. http://spaulify.com/2011/11/11/future-of-social-media-and-policing/