A few hundred venture capitalists, largely from San Francisco and nearby Silicon Valley, will visit the Moscone Center this week during the National Show. In one sense, they are the most important people attending the show. Their stock in trade: getting businesses, and sometimes entire industries, off the ground with their investments. They—along with the billions they marshal—can launch technology or programming that can sharpen cable’s competitive edge against DBS, telcos and other electronic media rivals. Will they invest in cable-related ventures at the same volume they invest in other business sectors? It’s an open question, and the odds right now don’t look favorable where the cable industry is concerned. The general attitude among venture capital executives reached for this article is that investment in new cable-related ventures will be the exception, compared to information technology or IT products and health care. That’s in spite of a number of recent cable tech and content deals. San Francisco and Silicon Valley are two of the major U.S. centers of venture capital activity; New York, Los Angeles, Philadelphia, Chicago and Dallas are among the other hot spots where VCs operate. Together, dozens of venture capital institutions invested more than $20 billion in 2,067 new companies last year, an 8% increase in dollars from 2003, according to VentureOne, the Dow Jones subsidiary that tracks VC action. More importantly, the amount of money VCs raised in 2004 for future use was about double that of 2003—$17 billion vs. $8.7 billion. That’s the most money VCs have raised in one year since 2000, when Internet stocks tanked. Shortly thereafter, many venture capital firms suspended their quest for big money, disillusioned with the dot-com and Web tech companies they backed. With renewed positive attitudes for the Internet, IT, health care and nanotechnology, VCs appear willing to fund new entities at a solid clip, if not at the frantic pace of the late 1990s. Along with the money raised during 2003-04, venture capital firms stockpiled about $70-75 billion during the pre-2000 Web boom, according to VentureOne. Result: a giant money pool that can subsidize technology and content companies, which in turn can help cable operators beat their competition, especially with telcos entering the fray. A Solid Platform for Investment Cable-related ventures should be a natural target for funding, not only because of cable’s huge consumer reach, but because of advanced services such as video on demand, high-definition TV, voice over IP telephony and interactive TV. "Cable is a powerful network and a good platform for innovation," says Dick Green, CEO of CableLabs. "With so much capacity into the home, and initiatives with digital, VOD and high-speed data, it’s a solid play." Green’s organization and Comcast’s Interactive Capital unit will co-present a VC forum at the National Show April 5. There has been some movement of capital toward cable, including several cable technology vendors that have picked up millions from VCs since 2000. They include: Arroyo Video Solutions, Cedar Point Communications, RGB Networks, BigBand Networks and Broadbus. These investments have sparked the development of bandwidth expansion infrastructure, VOD servers and VoIP equipment. Digital cable networks, VOD and ITV content were nowhere on the VC radar screen three years ago. Now there’s at least a blip, with TV One, S� TV, College Sports TV, The Tennis Channel, Gospel Music Channel, Gotuit Media and MyDTV among the ventures with VC participation. Soros Capital Fund, billionaire George Soros’ VC enterprise, invested $25 million in College Sports TV. Two other venture capital firms sank millions into the channel before its launch two years ago: Constellation Ventures, operated by investment banker Bear Stearns, and Athlon Ventures, owned by a consortium of sports stars including Minnesota Timberwolves basketball star Kevin Garnett and Olympic gold medalist Michael Johnson. Constellation also is backing Gospel Music Channel, along with Alpine Equity Partners. The High Sign From Comcast and Time Warner Still, VCs are holding back. Their No. 1 hurdle: Any cable-related venture that seeks funding must have a deal in place with Comcast or Time Warner Cable. If one or both multi-system operators isn’t on board, kiss the capital goodbye. "If you’re selling into the cable space and you’re not selling this in with one of those guys, you don’t have a business," says Alan Beasley, a partner in Redpoint Ventures, a Silicon Valley venture capital firm with stakes in BigBand Networks (bandwidth expansion), Entropic Communications (chips) and Meta TV (ITV software). "We’ve gotten to know Comcast and Time Warner very well, along with Cox, and it would be very unlikely for us to enter into a cable venture without their support." Sure, there are other big MSOs and plenty of small or midsize operators VCs could approach with a promising enterprise. "The problem is, so many of the other MSOs wait until [they see] what Comcast or Time Warner does. So that creates a problem," says Gary Lauder, who runs Lauder Partners, a California-based VC firm with a long track record in cable investment. Venture capitalists also haven’t seen much evidence of MSOs embracing new, independent ventures, whether tech or content, Lauder says. "There was a time when cable operators were willing to buy products from small companies," he says. "There was more willingness to take risks with small companies. That’s not the attitude these days." "Operators want to control anything that stands between themselves and their subscribers, rather than foster talent from other companies and let them help the operators’ business," Beasley adds. "That has to change." Lauder’s VC investment portfolio includes ITV application/software players ICTV, Integra5 and Navic Networks; BigBand; voice recognition developer Agile TV; and media processor chip vendor Equator. Like Redpoint, Lauder’s firm chooses not to invest in digital cable networks. "When you look at the background of these venture firms and what they are good at, typically the background is engineering or technology. That’s why they look for a sustainable play in either area that offers a competitive advantage," he says. VCs also still feel burned by the investments they made in Web content companies, which makes them even more resistant to investing in cable content companies. The cable industry should invest in its own infrastructure and content, they say, not venture capital firms. Redpoint’s Beasley wants cable to tackle the interactive threat from DBS—specifically DirecTV—head on. News Corp., which owns DirecTV, has an advantage over cable because it also owns ITV software/applications vendor NDS. DirecTV will implement its interactive services later this year. "There’s more than enough operators out there to partner up with VCs and support an indie software vendor to develop all the ITV content or applications they need to win out," Beasley says. A Long Haul to Paydirt Apax Partners is exploring cable opportunities, and so far has made an investment in ITV games provider TVHead. Another cable-related investment is under review. Jacqueline Reses, who directs U.S. media strategy for Apax, says content or tech start-ups can interest venture capitalists, despite their reservations about cable. "If you have a good idea, you can sell it," she says. "You have to be creative, have the right management background and build the right affiliate partnerships with MSOs. It’s a hard business to build because of the capital required and barriers to entry, but it can be done." For S� TV CEO Jeff Valdez, getting enough venture capital to launch his network in February 2004 was a six-year quest. Valdez won’t say how much capital he needed, but he ended up with a handful of providers in his corner: Syncom, Rho Ventures, Columbia Capital and DND. "We were rejected a lot before we scored," Valdez says. "It took a lot of research and educating people on what the investment could provide." Part of that education includes explaining to VCs how they can exit the scene down the road, once a venture is profitable, says Glen Friedman, a former MSO executive who runs Ideas & Solutions, which develops marketing strategies for media companies. VCs encourage their investment targets to reach the breakeven point within six or seven years and profitability within nine or 10 years. One way to bypass venture capitalists’ hesitation is to highlight cable’s innovations, such as the eventual migration to all-digital/Internet protocol infrastructure, says Comcast Interactive Capital managing partner Sam Schwartz. Comcast’s VC division has invested more than $250 million since 1999 in technology ventures, including Arroyo, Cedar Point and home networking prospect Intellon. "Cable is moving to a place where it looks like the rest of the Internet," Schwartz says. "As things become IP-based, we can utilize routers and other technologies associated with the Internet world—leveraging them on a large scale at cheaper cost. If we can show the ways we can take full advantage of those capabilities, including content strategies, that’s a strong argument for VCs." Start-ups also should showcase the independently owned content and vendor companies that have succeeded with the support of VC firms. "You need more poster children to show that the investments can be attractive," Friedman says. "Then operators [will make] more success stories out of new ventures." Cable start-ups should increase their exposure at VC industry meetings. VentureOne, which holds its annual VC conference next week in San Francisco, isn’t covering cable, although Cedar Point will demonstrate VoIP at one session. Comcast’s Schwartz has approached the National Venture Capital Association about making a presentation at its New York conference, to be held May 4-5; it would be the first time the NVCA highlights cable opportunities. (NVCA president Mark Heesen did not respond to requests for an interview.) Green, Schwartz and Valdez say that cable trade groups should stage VC events at their annual conferences. Green wants to feature content as well as technology at VC presentations that would be held at The Cable Center in Denver. "As TV becomes much more interactive, ITV content and advertising will be extremely important," he says. "That [enables] us to invite a wider range of VCs and new content companies." Green says that cable has not been successful at piercing the consciousness of VCs. "The bottom line is that we can do better at this. Because of competitive pressures on the industry, innovation is very important and funding innovation is critical." "For the companies that get funded, there are plenty of others that didn’t," says Friedman. "If you want to be attractive to VCs, you have to go back to the old days of cable and get the operators to make it a better entry environment for entrepreneurs. Make the payout for them more attractive."
No Cable Category for VCs
There’s no easy way to calculate how much VC firms invest in cable content and technology start-ups. For instance, VentureOne, the Dow Jones unit that follows VC activity, doesn’t break out cable deals into a separate category. Instead, technology initiatives fall into several categories, depending on the nature of the tech. "Some run under multimedia networking software, others run as electronics," says VentureOne research manager Matt Garlick. As for digital cable network and other content investments, they are grouped with broadcasting network deals. In 2004, VCs invested $175 million in broadcasting plays, up from $115 million in 2003, according to VentureOne. Although the dollar amount grew 52%, the number of deals did not budge. Nine deals were completed each year. Multimedia software VC investments reached $287 million last year, a jump from $211 million in 2003. —S.A. Attract Venture Capital in Six E-Z Steps Trying to get VC funding for your cable content or technology start-up? Here’s how: