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You Can Have the Rules, I’ll Take the Exceptions

April 21, 2011

Brad Svrluga

I had breakfast this morning with a friend and colleague who is a partner at a firm I’ve worked with a few times. He’s a great guy and a smart investor. We were discussing a deal that I had recently seen in the music business. It’s an interesting opportunity – not without its complications, but a potentially ‘big idea’ started by some very credible music biz heavyweights.

As I described it, my friend said something I’ve heard dozens of times in recent years, “the music business is too screwed up – you just can’t make money investing in that market.”

I smiled to myself.

Then at lunch I was chatting w/ another fellow investor – a partner at a venerable Valley firm who, prior to his venture career, had been an entrepreneur in the music business, and done quite well at it. Without prompting from me at one point, he said the same thing, “you can’t make money investing in the music industry.”

I smiled again.

I think the only hard and fast rule in investing is that there can be no hard and fast rules. Apply standard rules and suddenly you’re playing with conventional wisdom, and it becomes pretty damn tough to find unique, truly disruptive opportunities. Ours is a tough business – we’re forever looking for the next new thing that isn’t being done by a dozen other people. Given that challenge, if the companies we back don’t seem pretty contrarian when we invest, it would be foolhardy to expect that we’ve found anything that important.

So I try to look for investment opportunities that run counter to conventional wisdom. It is in that spirit that I pay attention when I see a music opportunity. And I pay attention knowing that, fortunately for me, it’s unlikely that many of my peers in the business will also pay attention. After all, “you can’t make money investing in that market.” But there are exceptions to every rule, and it is in the exceptions that opportunities lie.

Our biggest investment success of recent years was an investment I made in Pump Audio, a business that used a better mousetrap user experience and internet distribution to disrupt the music publishing and licensing business (the soundtrack and background music business). The company was extraordinarily successful, selling to Getty Images less than 18 months after we invested. A great win for all.

It is indeed difficult to make money picking artists and pushing albums or digital downloads, and a real challenge to figure out the economics of streaming services, and the like, given the need to dance with the record label wolves. But those valid concerns should not taint the entire music industry. If we had let the broader challenges of consumer distribution of music obscure the opportunity inherent in providing a better solution for soundtrack music to an explosion of video content for rapidly proliferating cable networks and web video businesses, we would’ve missed a real winner.

As I considered the flood of music deals that came in following the Pump exit (good entrepreneurs know how to seek out investors who have some demonstrated affinity for what they’re doing), I saw very little that interested me. But I kept in mind what Pump founder/CEO Steve Ellis had said to me, “Most of the music industry is for shit, but there’s two places you can make money – licensing and live.”

In the summer of 2009, I had the great fortune to meet Andrew Dreskin and Dan Teree, co-founders of Ticketfly. Ticketfly has the audacious goal of knocking Ticketmaster from its perch as the unchallenged hegemon of the live ticketing market. They’re doing that by very effectively doing two things – (1) harnessing the power of the social web to provide a better experience for consumers while helping venues sell more tickets and (2) starting out by catering primarily to small and medium venues – customers whose needs are very different from the big venues and teams, like Madison Square Garden or the Chicago Blackhawks, where Ticketmaster is understandably focused.

I was fortunate to lead Ticketfly’s Series A financing late that fall. The company has been on an extraordinary run ever since. They had a pretty aggressive budget for 2010, their first full year in business. By April, the board had to approve a reforecast – up 40% from the original. At the end of the year, they beat the reforecast by nearly 20%. Their plan for this year forecasts greater than 100% growth over last year. I’ll be damned if they didn’t beat their Q1 number by 40%.

Earlier this week we were excited to announce that Mohr Davidow Ventures had led a $12MM Series B financing for Ticketfly. It was a relatively simple fundraising process and it led to a lot of term sheets. The MDV offer wasn’t the highest price, but it was clear they’d be a great partner, and it was still more than 5x what we had paid for the Series A 16 months earlier. I eagerly re-upped for this round, as well.

It’s important, of course, that we never confuse successful financings with successful investment outcomes in this business. We’ve merely put more fuel in the tank and raised expectations for our ultimate outcome at Ticketfly. But the company’s strong financial performance, and the fact that we had multiple offers for that financing that would have bought us out completely at multiples of our original investment, leaves me confident calling Ticketfly an interim winner, anyway.

So we appear to be on our way to being two for two in an industry you allegedly can’t make money investing in. (NOTE: As I trumpet these contrarian successes, I am obliged to report that I’ve also more than once managed to find the loser in a sector where others have made it look easy to make money before.)

As Warren Buffett famously said, “The time to get interested is when no one else is. You can’t buy what’s popular and do well.”

So I’ll continue to pay attention to the music business with an open mind, and look hard for other markets where “you can’t make money.” And if you’re an investor yourself, feel free to set and religiously follow your rules. I’ll be glad to have the interesting ideas left in their exceptions to myself.


Beware of Killer Whales

April 8, 2011

Brad Svrluga

Unfortunately, I’ve been forced to reflect a lot of late on the dangers of big, seemingly “company-making” deals for early-stage companies. You know, the relationship with the huge whale of a channel partner. . .that company that, when sketching out the strategy for your start-up you thought, “if only we can get a distribution deal with WhaleCo, we’ll be golden!”

I long ago learned to run for the hills anytime a prospective investment I was talking to started talking about a relationship with WhaleCo as central to their go-to-market strategy. Logical as they may seem, it just never makes sense to rely on those relationships, because they never happen the way LittleCo thinks they would or should. They can be great boons for your business if you get lucky, but if you don’t have a sustainable business model on your own, you’re unlikely to make it.

I stumbled across an excellent old Marc Andreesen post on this topic recently. It’s lengthy, but enlightening, and he describes a great many of the ways that WhaleCo can suck the life out of you while meandering its way to maybe, or maybe not, consummating a deal with LittleCo.  It’s an important skim, at least.

Regrettably, a good friend founded and runs a company that I’m an advisor to, and which is involved in a situation that Marc doesn’t contemplate, but which is equally perilous. His company landed, signed, and implemented their deal with WhaleCo two years ago. Total company-maker, we were all convinced at the time. We raised a substantial Series B at a great valuation on the heels of signing the deal.  It was a brutal process getting to that point – the twists and turns and starts and stops to the discussions were as torturous as anything Marc outlines. But we got there. Big press release, lots of attention for the company, CEO named to lists of key industry innovators, etc. etc.

And then, the deal quite literally sucked the life out of us. And that’s where Andreesen’s post stops one rule short of being complete.  He needs a ninth rule for dealing with big companies:

Ninth, NEVER, even after the ink is dry and money is in the bank, assume it’s going to roll out the way they said it would, and make DAMN sure you’ve still got plenty of eggs in other baskets.

When my friend’s LittleCo landed its deal with WhaleCo we all strapped ourselves in for an exciting and lucrative ride on their coattails. Sure, we had some discussion about not counting on it too much, and the importance of building other relationships and other go-to-market channels. But as WhaleCo put $2MM on our balance sheet – a non-dilutive up front payment negotiated to support implementation – it became understandably hard for management to think about anything else. Clearly these guys were committed, and they were forecasting $10MM of annual revenue coming our way as a result of the deal! So LittleCo scaled up to deliver, and took its eye off almost all other balls.

And then. . .silence.

WhaleCo pulled their big launch of our program at the annual industry conference just a day before it started. We were told it was just a temporary delay – some internal something-or-other. But ultimately, nothing ever happened. NOTHING.

For two years, WhaleCo kept making small, minimum monthly payments, kept talking about when they were going to launch, kept sharing with us revised versions of their internal models for the relationship. They even started to plan the international rollout of the thing they hadn’t yet launched domestically. Surely they were serious if they were devoting resources to expanding the program!

They did just enough to keep our hopes pathetically alive, just enough to keep us distracted from running full speed against a range of other opportunities. Finally, after two years, they stopped paying, and stopped returning calls.

Time will tell where LittleCo ultimately ends up, but wherever it is, it will at best have taken a lot longer to get there, and most likely be a place that is not nearly as exciting or lucrative as the one we would’ve gotten to had we navigated this dance with WhaleCo more effectively.

So what’s to be learned? Looking back at it, Marc’s post sums it up pretty well – you just can’t depend on anything when dealing with WhaleCo. There are a million reasons that deals get done and not done. I’ve seen big companies get crazy excited about things that seem idiotic to us on the outside, and I’ve seen them not do things that seem like no brainer, bulletproof, totally strategic, obviously huge ROI decisions. The point is, you can never know what’s going on inside WhaleCo, and you can almost never even trust the people you’re working with on the deal to really know. Even if it’s the CEO saying he’s all in, there’s a million ways that the winds of change can suddenly blow through a big company, and he might for good reason no longer care about you tomorrow.

Navigating these deals is one of the most challenging elements of building a startup. As a rule, I generally root against WhaleCo opportunities even presenting themselves early on, especially if pursuing them would require any shift in core strategy. As we saw with my LittleCo, our big, company-making deal presented itself at a time when we didn’t have our core business model sorted out yet. As a result, we got knocked off of what should be the A#1 priority of every young company – designing, executing, and proving a repeatable and sustainable business model that is not overly dependent on any individual actor.

Had WhaleCo come along a year later, we would’ve had our feet under us, a business model that had started to really work, and a better sense of our own priorities. But they approached us early, and shame on us for not reacting the right way.


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