Corporate VCs and the Platform Fund Approach

Corporate venture arms are increasingly relied upon as R&D crutches. According to CB Insights in 2015 corporate venture investments totaled $27B globally, or 21% of all VC investments. The strategy makes plenty of sense because it provides big corporations access to nimble teams that can go from idea to proof of concept to product without wading through the inevitable bureaucracy that slows down any process at big, successful (complacent?) companies. Investing in an independent business also provides greater accountability in the form of measurable market value for startups compared to the murkier waters of internal project funding.

However, the problem is that many corporate venture arms don’t seamlessly connect back to decision-making business units in a meaningful way, which results in a spatter of investments that, while potentially relevant to the corporation’s core business, are not actionable. In the first instance the corporate venture arm’s independence to invest with a wide lens is an asset, but that same independence can act as a tall hurdle to core business teams taking advantage of the company’s stake in any given startup.

Recent buzz about Intel, historically the most active corporate VC, divesting a significant chunk of its portfolio demonstrates these dynamics. While VC provides a floor to the downside of many internal R&D investments that otherwise may be pouring cash into the abyss, the fact that Intel has to divest investments to refocus on investments augmenting the core business illustrates a likely inability to translate their backing of potentially valuable technology into nearer term business strategy.

More recent examples of companies trying to tie investments to core product and strategy are the Slack Fund and Amazon’s Alexa Fund. Time will tell whether this platform-specific ecosystem approach to corporate venture investing pays off, but at the outset it does seem to accomplish three things that traditional corporate venture strategies fail to do.

  • Marketing – Running the fund in and of itself shows commitment to the core platform (enterprise messaging in Slack’s case and voice interfaces in Amazon’s), and it broadens exposure to one of the platform’s target stakeholders, developers, who can both broaden and profit from the platform and may even be customers of it.
  • Direct Customer Benefit – Supporting developers who enhance the platform, whether Slack or Alexa, makes the product better and more feature rich for customers.
  • Wide Lens Investing with Attention to Immediate Business Needs – In both Slack and Alexa’s case the funds are set up to build out nascent platforms but with flexibility to invest in a host of technologies to achieve that end. Because both enterprise messaging and voice assistants are platform services that can head in many different directions, there is a greater ability shed preconceived notions of core business teams. At the same time, the fund managers have autonomy with a well-defined investment thesis.

This strategy toward corporate VC aligns better with the evolving role of VCs. VCs are increasingly responsible for providing infrastructure and support services for their portfolio companies (BD, HR, Design, etc.), and operating a fund dedicated to a product platform organically leads to many of the same activities.

I put together the slides below to demonstrate the opportunity for the platform fund approach to corporate VC investing using Slack as the example. I look forward to seeing how these funds play out and have an eye out for more of this focused type of VC investing as the venture crunch begins.

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Aereo, SCOTUS, and the Cloud

aereo_scales-justice_content-2__largeThis week the Supreme Court of the United States (“SCOTUS”) heard oral argument in American Broadcasting Companies, Inc. v. Aereo, Inc. Aereo, a startup with nearly $100 million in funding, lets subscribers view live TV through a tiny antenna that can be controlled over the Internet and on mobile devices. The case is one about copyright infringment, and a key issue is whether Aereo is engaged in the “public performance” of copyrighted material. If Aereo loses, it is unlikely it has a tenable business because the licensing fees it would have to negotiate and pay to TV stations would be crippling. The larger concern is whether, if Aereo loses, it would any longer be permissible for cloud services, such as Amazon’s MP3 locker or Dropbox, to allow users to store copyrighted material and then reproduce/call the material from the provider’s servers to the user’s computer.

In light of the drama I looked back at my early thoughts about Aereo, which I shared over email in July 2012. My thoughts on the business case have evolved some since, but it was a fun exercise anyway. Here is the [slightly] edited email:

“I’ve been a proponent of TV anywhere for some time.  I . . . think a 3rd party, [rather than content] programmers or cable distributors, will play a vital role in making it a reality.  The problem with operators like Comcast being the source of TV anywhere is that they are still forced to ink deals with the programmers under the same expensive terms since their current, traditional deals would be put in jeopardy if Comcast tried something more innovative or consumer friendly. 
Between Aereo and Nimble, it is a tough call.  I worked with Chet [Kanojia] (CEO at Aereo) when he sold Navic to Microsoft. With his TV business expertise and [Barry] Diller’s backing, I think Aereo is well positioned. . . If the goal is to get consumers to cut off their cable service providers, consumers will need the combination of Hulu, Netflix, HBO Go and Aereo to fulfill all their viewing needs.  It seems that so far Aereo only gives viewers freely available networks (~20 channels).
[As for Nimble,] on one hand all it does is supplement current cable subscriber’s viewing experience by allowing them to have already-paid-for TV on the go, much like Sling Box.  On the other hand, I suspect Nimble is also trying to provide non-subscribers with access by using Nimble-registered cable accounts to rebroadcast channels to Nimble users.  This type of intermediary behavior was expressly prohibited by Sling Box’s terms of use because of copyright concerns.
Legally, if Nimble pursues the latter model, it stands the risk of being shut down.  Using music streaming as analogy, it would be in the netherworld of Grooveshark.  However, without the latter model, I don’t see much value in a service that merely acts as a portable DVR.  Cable providers can easily replicate that service.  Continuing the music analogy, Aereo is like Pandora because it seems technically to abide by copyright law by using a separate antenna for each user on its service and thereby, not publicly rebroadcasting channels.  The sacrifice is that it [provides] . . . a less customized product [or slate of channels than Nimble].  Finally, I would equate TV anywhere efforts by the likes of Comcast to Spotify because both services require making costly deals with resistant content providers.
Overall, I’m skeptical about Nimble.  But if it is legal and inexpensive, the opportunity to disrupt artificial geographic territories and customize content is the bigger opportunity.  Otherwise, I’d bet on Aereo as the natural evolution toward filling the web TV gap and disconnecting from cable operators.”

Where’s My Robot?

jetsons_rosie

Leo McGarry: My generation never got the future it was promised… Thirty-five years later, cars, air travel is exactly the same. We don’t even have the Concorde anymore. Technology stopped.

Josh Lyman: The personal computer…

Leo McGarry: A more efficient delivery system for gossip and pornography? Where’s my jet pack, my colonies on the Moon?

— The West Wing, “The Warfare of Genghis Khan” (2004)

The exchange above is from one of my favorite TV shows of all time. It is not the first time the sentiment has been expressed. It is a recurring trope in television and other media. There is even a rock band of the name We Were Promised Jetpacks. But the question ventures beyond jetpacks to other types of futuristic technologies contemplated in fiction such as The Jetsons and Back to the Future II.

Where are the hover cars and jetpacks? Where is the phantom renewable energy source that can light cities and power intergalactic travel? Progress with the former seems stunted to small planes with retractable wings that  function amphibiously on roads. Jetpack flights are still seen as dangerous events undertaken only by daredevils. Both are just too impractical. Technologically, making a car stop in mid-air the way breaks function on roads seems to press too hard against the laws of physics. Logistically, taking plane-cars to a runway every day would not save time or speed up travel as expected, and the FAA’s mandate of 1,000 feet of vertical separation between planes would create serious traffic issues. Plus, the safety issues are many.

As for that alternative energy source, finding it might help speed up things with that hover car mid-air stop. But instead, we are relegated to a fight among solar, wind, hydropower, and a host of potentially controversial alternatives. No mystery source seems any closer. Sure there have been positive strides made with hybrid cars and a concerted effort to reduce our carbon footprint. Public market interest in Tesla is exciting but certainly not determinative in any way. (Remember when First Solar’s market cap was 10x what it is today?)

Of course, there has been progress. This entire conversation seems to forget about the tremendous advances in medicine and life sciences. The mapping of the human genome last decade may eventually prove to be the source of cures and remedies for invasive diseases—even cancer. Outside medicine, even if the rapid exchange of information and communications was not as popular a topic among science fiction writers of 50 years ago, it is hard to deny the impact of the Internet.

The frustration with software-based advances stems from their iterative nature. It is probably true that rapid and repeated improvements made to how we socially network, shop, or are targeted by advertisers do not really move the needle on human progress. But the transfer of everything—all our records, behaviors, and conduct— to digital may help us attain one of those futuristic visions from the past just yet: artificial intelligence.

The demand and investment in data scientists can make us better at predicting behavior baed on past and concurrent data. It can make us better at breaking down unstructured data that does not come with neat labels and meta context (e.g., videos or prose).  While I have not spent time with the machine learning folks at MIT or NYU’s Courant Institute, I believe that focusing on these data processes should improve computer generalization, which can eliminate the need for human interaction with data in favor of machines that can navigate new problems or situations simply by learning from experiences with past ones. If this sounds familiar, it should. After all, is that not how we as humans adapt and know how to respond when encountering new, strange situations?

The theory behind artificial intelligence is vast and machine learning is but one aspect, and both are beyond my capabilities. However, the point is that even though the ability to extract raw data dumps about almost anything imaginable might not seem incredibly exciting, the Internet’s and social networking’s facilitation in creating copious amounts of commercially valuable data for analysis may, as a byproduct, jumpstart interest in STEM education and true innovation. And if the improvement in human knowledge and skill that results from this catalyst is to lead to any of sci-fi literature’s promises, it is most logically going to be artificial intelligence.

Whether going down this road leads us to jovial Bender bots or Matrix or Terminator like robot overlords is for you to speculate. Cue ominous end titles . . .

The Mobile AdScape

With all the talk of mobile ad “platforms,” SSPs, and DSPs, it can be a bit trying to tell mobile adtech companies apart and decipher what they really do (or claim to do). Wouldn’t it be nice to have at hand a neat visualization of the market (e.g., LUMAscapes) whenever the lines started blurring and your head started spinning? Cue mobyaffiliates and its market map of mobile advertising.

The infographic isn’t always 100% accurate or detailed enough for an advertiser or investor trying to dig deeper into a particular adtech solution. For example, Chartboost, which recently raised $19M in funding, appears in the “App Promotion” category. The company also provides ad serving tools and essentially functions as an ad network for developers/publishers with excess inventory. So there is much more overlap than portrayed by the market map below. Regardless, it’s a useful reference tool and a helpful start for anyone looking to learn more about mobile advertising.

Copyright Trolls – Firm Standing or Stuck Under a Bridge?

I recently came across an entrepreneur who was looking into the Righthaven lawsuits in which the copyright troll, Righthaven, suffered fatal blows to its business model of suing alleged copyright infringers.  Righthaven received the go ahead to sue on behalf of partner newspapers for the alleged copying of the newspapers’ content.  The courts decided against Righthaven on the basis that the company did not have standing to sue.

Question 1

The entrepreneur posed the following question:  does the ability to sue for copyright infringement require owning the copyright itself?  In other words, did newspapers have to sell their copyrights to Righthaven in order for the troll to have the right to sue?

In Silvers v. Sony Pictures Entertainment the court held that an assignee (person receiving rights from the copyright owner) who has no legal or beneficial interest in the copyright cannot sue for infringement.  A copyright owner cannot assign/transfer the bare right to sue under the Copyright Act.

Section 501(b) of the Copyright Act gives standing/ability to sue to owners of exclusive rights in a copyright. These exclusive rights are defined in section 106 of the Act.  Because Silvers did not possess any of these Section 106 exclusive rights, such as the right to reproduce or make derivative works from the copyrighted work, she could not sue. Thus, for Sony to have given her the right to sue, it also would have had to transfer a beneficial/exclusive right.

Question 2

The entrepreneur’s natural next question was why can’t the copyright owner simply hand over a 0.01% share of ownership in the copyright and thereby grant legitimate standing to sue?

In abstract theory, this should work.  But as flexible as modern copyright law is regarding divisibility of copyright ownership (relative to older versions of the act), I doubt an owner could draft an agreement that transfers a section 106 exclusive right without jeopardizing the copyright owner’s absolute control over the copyright.  This is not to say that an agreement couldn’t transfer a percentage of profits derived from the copyright. However, such an agreement would not constitute a transfer of exclusive rights under section 106, and then you’d have lack the standing to sue again.

In the end, the problem with transferring exclusive rights, even if done in a de minimus fashion, is that the transferee could then exploit the copyright in a way that is inconsistent with and/or harmful to the copyright owner.  In the Monty Python case (Gilliam v. ABC), the Monty Python writers suffered such an injury.  Fortunately for Monty Python, the court interpreted their contract very narrowly to find that Monty Python had conferred the right to make a derivative movie off their copyrighted script but reserved final approval.  Therefore, they could prevent exploitation of the movie that was inconsistent with their wishes.

However, the outcome of that case was dependent on contract-specific language and narrow interpretation of that language by the court.  Today, work for hire contracts (in which the creator of a script or software gives up ownership completely to the employer) would take care of the uncertainty.

The demise of Righthaven, thus, is a blow to all copyright trolls that don’t own the copyrights they are trying to monetize in court.

Money to Blow . . . on Coursepacks?

When I was an investment banking analyst, the expectation was that I blew my discretionary income on nightlife. As a student, the expectation is that I am cheap.  Still, even students can have indulgences.  Mine are overpriced lattes and of course, new textbooks.

Whatever may be said about the monotony of reading thousands of pages of court cases that is law school, one benefit of spending hundreds of dollars on casebooks every semester is that it is less psychologically unsettling than spending hundreds on coursepacks as I did in undergrad.  Coursepacks (in undergraduate business school anyway) comprised business articles from sources such as the Wall Street Journal, some academic papers, and Harvard Business School (HBS) case studies.  Spending anywhere from $100 to $200 on these materials per course seemed silly—partly because so many of those articles could be found for free online and partly because of the flimsiness of their binding and presentation relative to real textbooks.  (After all, Jay Gatsby didn’t stock his library with shoddily binded computer paper.)

Honestly, I can’t complain about having to pay for the HBS case studies because a decent amount of sweat goes into collecting the real-world data and organizing it for a small audience.  The limited distribution of the cases relative to a Dan Brown novel forces a price markup with which I can live.  However, the fact remains that you are also paying for many free, publicly available materials.  The other problem is a more general one with education:  in most courses, you only ever reference a couple of the HBS cases but still pay for the other five.

Some renegade professors surreptitiously post supplemental articles on course management websites such as Blackboard.  The more circumspect ones post links to those articles.  But these are rare cases because professors generally have nothing to lose in selecting material and forcing students to buy expensive coursepacks (except a few negative course evaluations); whereas, if they distribute copyrighted material, they risk violating school policies and the law.

While copyright law, through fair use and exceptions for educational uses, gives some room for copying, courts have likely made the practice of circumventing coursepacks by professors an even greater rarity.[1]

There is much talk about education in the United States needing serious repair:

–          In light of the financial crisis of 2008, there has been commentary on the ‘Wall Street brain drain’—the trend of excessive numbers of young and bright Americans heading to work in finance.

–          In response, initiatives in support of science, technology, engineering, and math education (STEM) have been announced.

–          Occupy Wall Street has reinvigorated an argument that has never really gone away, which is that student loans, and implicitly college expenses, are just too high.

I think it is undeniable that education needs reform.  Although the bullet points above are mostly relevant to higher education, maladies infect the entire system.

The last bullet resonates with me most.  The first two issues would directly benefit from the lowering of higher education costs.  Greater financial flexibility means greater flexibility in contemplating different careers and taking courses in subjects of interest.  I think it’s safe to say that a vast majority of folks headed to finance go there for money and opportunity rather than enthusiasm for the vocation.  Allowing people to educate themselves in things that they find exciting is more likely to lead to innovation, opportunity, and an economy that is not dominated by the financial sector.

Our liberal arts education system is predicated upon this diversity of interests.  I will be the first to admit that sometimes too much curricular flexibility causes a neglect of the less ‘sexy’ subjects, such as STEM.  However, I posit that if quality education were cheaper even STEM would benefit from a boost in popularity.

Peter Thiel, former Pay-Pal co-founder, has commented that education is in a cost bubble.  I don’t doubt him.  Paying $200 for 200 pages of paper, of which only 20 pages ever benefited my mind, is appalling.  Perhaps, inflated coursepack pricing isn’t the fault of educators as much as it is the cost of copyright law.  However, it is just another symptom of a bloated and inefficient educational system. (Another example is schools paying premium salaries to professors for their research rather than teaching ability.  Schools again may be the victims rather than the culprits because they are merely trying to improve their reputations, which though superficial, may be just as important as quality education.)

I am not advocating skipping college. (As a grad student, I would be a hypocrite if I did).  Although not attending college may make sense for an elite few, I do think the vast majority of Americans could benefit from the networks and job opportunities colleges and some types of vocational training can create.  I advocate instead for a massive retrenchment.

How?

I have no clue.  Maybe that’s my cue to go occupy Wall Street.


[1] See, e.g., Princeton University Press v. Michigan Document Services 99 F.3d 1381 (6th Cir. 1996)

Facebook is to Zynga as a Clownfish is to a Sea Anemone?

The days leading up to the highly anticipated Facebook IPO have been met with market excitement.  Comparisons of Facebook to Google and speculation about whether the company is over- or under-valued have been rife for some time.  Facebook has convincingly overcome concerns about negative cash flows and lack of a monetization plan that plagued it in the media a few years ago.  However, concerns about Facebook’s business model seemed to have revivified as investors struggle to identify the company’s bread and butter and more importantly, to understand its relationship with social gaming behemoth, Zynga.

I remember hearing estimates in 2009 that Zynga made up 40% of Facebook’s revenue.  That is why I was taken aback by the market’s surprised reaction when it traded up shares of Zynga upon finding out the company composes 12% of Facebook’s total revenue.

A breakdown of Facebook’s revenues from Zynga shows that Zuckerberg’s company derives its revenue from the gaming company through the sale of virtual goods and other add-on features in games (Payments) and through ads that Zynga buys to cross promote its own games to captive Facebookers (Ads).  Moreover, an increasing proportion of this revenue comes from Payments revenue.

 

In some ways, the Payments model is not very different from the way Apple charges iPhone application developers a cut of the revenues made from the Apple App Store.  Facebook’s cut of Zynga’s Payments revenues is reported to be 30%.  Facebook’s relationship with Zynga deviates from Apple’s relationship with its app developers in at least one key respect—Facebook also reaps ongoing benefits from Zynga’s success in the form of advertising revenue.  The larger Zynga’s customer base grows, the more it is willing to invest in advertising and the more people that fall into the target audience Zynga wants to reach.  Increased advertising by Zynga benefits Facebook.  Additionally, while iPhone app users pay once for an app (say $0.99), Zynga users may keep buying add-ons within the same game (say $0.99 per virtual good).  Finally, while I have not searched Apple’s financials to confirm, I seriously doubt any one app developer makes up 12% of Apple’s app store revenues, let alone 12% of the diversified company’s total revenue.

Thus, Facebook’s near-term future is highly levered to Zynga’s success.  This leverage presents problems in the eyes of some for several reasons.  First, sustaining revenues from gaming alone is not Google-esque.  Google effortlessly fused the worlds of media and technology in a revolutionary way.  It was able to use its technology to appeal to advertisers very broadly.  A dependence on gaming leaves Facebook less diversified, less appealing to advertisers universally, and potentially vulnerable.  This factor doesn’t bother me much because other apps will fit into the Facebook ecosystem as the social networks becomes increasingly ingrained into the way we think about the Internet and computing.  Plus, there is a trend in various sectors to solve problems through gaming anyway.

The bigger problem is a more general business issue.  Dependence on one company can become unhealthy if the equilibrium is rattled.  Right now Facebook and Zynga have symbiotic interests.  Both businesses align well with each other.  However, if Facebook were to decide to invade Zynga’s turf and start competing with the game developer, or if Zynga can successfully create its own network of users outside of the Facebook platform, the relationship won’t be quite as hunky dory.

Some have countered that Facebook has an exclusive arrangement with Zynga whereby Zynga agrees to use Facebook currency and develop certain games only for use on Facebook.   I don’t really see this arrangement mitigating the concern.  Prohibiting development on other social networks is a useless demand since Facebook has won the day as far as general interest social networks go, and gaming is not a fit with other popular social networks such as Twitter, LinkedIn, and foursquare.

More significantly, Zynga has always had a disconnect between its mobile apps and its games on Facebook.  I once tried playing Mafia Wars to get a better idea of what the craze was behind Zynga’s games ahead of an interview with the company.  My profiles on Facebook and the iPhone app could not be synced.  Whether this incompatibility is still an issue with Zynga’s games, I do not know.  However, the recent success of Words With Friends at the very least shows that Zynga is capable of finding success outside of Facebook even with an exclusivity agreement in place.

The fact that the ads portion of Facebook’s revenue from Zynga is decreasing is reassuring, but it still raises issues about Facebook’s ad monetization strategy.  Google found a direct way to relate ads to subjects that directly interests users.  When searching for a person’s profile on Facebook, it is less obvious which ads should pop up than if someone conducts searches about an upcoming vacation on Google.  (This explains why so many people complain about dating advertisements on Facebook.)  The display ads on Facebook are commoditized, and the company’s current advertising strategy is just as shaky as a non-premium online ad network.

These concerns about Facebook’s advertising revenue is not to say the company won’t eventually get it right.  The rich data Facebook collects is highly valuable.  The challenge of utilizing it in a way that doesn’t sound off alarms about privacy remains.  Personally, I thought Beacon was a promising first step, but it was introduced in such a disastrous way that Facebook has been unable to broach the topic again in a privacy-friendly way.

Still, Facebook has to figure out the ad scheme fast.  Other social networks, though not at all threatening in terms of scale, are carving out niches that are more advertiser-friendly.  Pinterest, for example, can make money on ads in a very direct way not too different from Google, and foursquare can capitalize on location-based audiences and local deals.

Utlimately, Facebook is well . . . Facebook.  I don’t think many can imagine life without it, and it is hard to bet against a company with that type of stickiness.  As long as the Facebook-Zynga symbiotic equilibrium does not shift, the fact that 12% of Facebook’s revenues come from Zynga isn’t too troubling.

I’d also note that while I may have painted a rosy picture about Zynga over the medium term, it too has long term concerns, namely the danger of becoming less data-driven/disciplined and more like a media company.  Additionally, while the exclusive arrangement with Facebook might be a pro for the social network, it displays Zynga’s subjugation to Facebook’s terms and power.

In the meantime, I leave it to you to decide which company is the Clownfish and which the Sea Anemone.  For help and more information, see the epic video below.