Originally published July 2013
Venture capitalists typically have four walls around the box they ask start-ups to fit into:
· WALL 1: a qualified (and mostly youthful) team;
· WALL 2: a proprietary technology;
· WALL 3: a clearly defined marketplace need and potentially hockey-stick revenue model;
· WALL 4: an exit strategy.
With the average VC-funded company now taking nine to ten years to reach an exit, the fourth wall requirement has clearly become moot with expectations unmet. The abundance of VC-funded companies in every part of the digital media space battling it out with minimal competitive advantage makes it apparent the third wall has come crashing down. A stunningly high percentage of media entrepreneurs who first introduced their ideas to VCs have been bounced out of the companies they founded, and are now known by the seemingly positive, but increasingly demeaning term, serial entrepreneur. Few have even one significant success under their belt. So wall one is mostly irrelevant.
So that leaves us with wall two: a proprietary technology. This of course is preposterous. Unless the business is designed to own and sell patents (a strategy recently struck down in part by the courts), there is little protection offered by proprietary technology. In fact, the greatest financial drag on digital companies has been the need to maintain technological leadership and relevance.
Yes, proprietary technology is valuable, but its lasting impact on the business and revenue growth is negligible unless the resources are available for continued aggressive technological development, implementation, sales and marketing. That's the advantage Google has and the conundrum Yahoo! finds itself in today, along with the vast majority of the companies included in Terry Kawaja's Lumascapes. The refocusing of Yahoo's Marissa Mayer on technological advantage instead of market leadership may prove to be misguided if the company fails to invest aggressively in acquiring opportunistic ad sales, content, marketing support and distribution capabilities.
Companies have been funded based on models and assumptions that bear little connection to the real world, and they now find themselves at a standstill…
· unable to expand without significant added capital;
· unable to clearly define or market a unique selling proposition;
· unable to merge or consolidate because 2 + 2 would need to equal about 16 to satisfy investors;
· unable to scale back to gain profitability because the goal has only to do with achieving a successful exit for investors who are under water – and little to do with building a viable small and sustainable business.
VCs are studying their portfolios and weeding out those companies that require additional funding but are unlikely to scale sufficiently. Waze and Tumblr, with almost no revenues or business model, sell for a billion dollars plus while thousands of companies with solid but small revenues lay fallow. This represents an incredible buying opportunity for legacy media companies, cash-rich digital companies, agency holding companies and marketers that are interested in maintaining their businesses as digital dominates. They should move now and quickly to identify and acquire (or partner with) the best of breed in the categories in which they will need to compete effectively for decades into the future.
There is an ecosystem waiting to be exploited. There are 8,000 to 12,000 VC-funded media and advertising-related service companies today in search of an exit and a more realistic forward-looking business goals. They've been built on misguided principles and false hopes… and with billions of dollars in venture funding that is now seeking the next…the new…the more scalable! They are part of the first ecosystem in history that has been funded primarily with little or no promise of support from the industry they serve. Many have been built on a foundation of technology and by management teams and investors who had little knowledge of the media and advertising business.
These are the golden nuggets that can drive many legacy companies forward. The future is not about the "next new technology.">