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Trends Watch: April 27, 2017

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks to Robert Lasky, Founder & CEO, Media Venture Network.

What is your outlook for venture capital?

The search for unicorns has resulted in a phenomena in which even self-proclaimed “early-stage" VC funds have taken to looking upstream at later-stage startups with validated business models, in-market products, early revenue and validated customer conversion strategies. Exacerbating this shift, even angels have been seeking investment opportunities that are further along in their lifecycle.

Although this creates more opportunity for entrepreneurs seeking A- and B-round financing, especially with many VCs holding back funds for follow-on portfolio investments, it also creates a challenge for earlier stage startups requiring more capital than a friends and family round would typically provide. Failing to bridge the gap that a lack of focus on early-stage investing presents can limit innovation for certain market segments, and create pipeline challenges. One exception to the shift away from early-stage VC investing rests with repeat entrepreneurs who struck lightning once. They are often able to get conceptual stage startups backed.

The recent VC shift from early-stage financing has opened the door for funding alternatives to angel and VC funds that are willing to consider earlier stage companies. One alternative that has received significant attention is equity crowdfunding. Typically, these are investor marketplaces that enable startups who are either pre or post friends and family, and often pre-MVP (minimum viable product), to market themselves to accredited and/or unaccredited investors in advance of being ready to close an A round with angels or VC.

Another is a “fundless” variation on a traditional VC model that operates similarly to an angel network or syndicate. Where a traditional VC raises a fund and then invests in companies according to their investment thesis over a certain period of time, in a “fundless" model, the “VC” identifies opportunities based on predetermined criteria, and presents them to its network of investors as a managed investment opportunity. The investors, in turn, invest in the companies that meet their individual criteria via a single purpose vehicle (“SPV”) which is managed by the “VC”  in a similar fashion to a traditional VC investment.

From a VC perspective, companies pursuing alternative models for their initial source of funding need to be careful to structure their cap tables in a way that remains attractive for future raises. While hitting key milestones in advance of subsequent raises is critical for any startup, for companies pursuing crowdfunded financing, reaching a stage of maturity that angels and VCs will consider prior to depleting raised capital is particularly important due to ceiling and calendar limitations for certain kinds of crowdfunding raises.

Why is investing in media a good investment opportunity for investors?

It’s important to understand that the definition of media and entertainment has evolved beyond the traditional delineations of television, movies and publishing. Streaming and subscription services have changed how consumers access and consume content.  Social media’s erosion of traditional “eyeball” models shows no sign of slowing down across every demographic, and the entire industry is in a constant search for new and innovative ways to monetize via e-commerce, advertising, subscription models and more.

Although investors always talk about IPOs, the fact is that very few companies reach that point and only a percentage of those go on to be successful. One of the interesting opportunities that investing in media and entertainment presents is what we at Media Venture Network refer to as tiered exit channels.

In addition to IPOs, smart media and entertainment startups often have numerous other exit options. Studios that would have looked to crowd out or squash innovators 15-20 years ago now look to strategically acquire companies that flank their offerings (e.g., Maker), and consider collaborations with an “a rising tide lifts all boats” approach for innovative pan-industry companies (e.g., Hulu). Additionally, deep-pocketed tech companies (e.g., Amazon, Apple, Google, Microsoft, etc.) have a seemingly endless appetite for products and services that promise to increase their share of the consumer consumption footprint by enhancing their content and service offerings.

Although IPOs offer the promise of the fabled 10X or more return on investment, having multiple exit tiers increases the likelihood of positive returns for investors.

What is your outlook for the economy?

While people tend to focus on either macro or micro economic trends, we try to look more toward the center at "mid-economic trends" for clues as to what is coming around the next corner. While early investors in companies like SNAP have likely fared well following the initial IPOs, the stock’s post-IPO performance may be dampening the hopes of other would-be IPO candidates in the sector over the short-to-medium-term. If this proves true, many companies with early revenue that haven’t yet reached profitability will either need to bide their time and retap the funding well, or consider less volatile exit alternatives with lower return multipliers in order to survive.

This scenario may force a domino effect, where VCs increasingly hold back funds for follow-on rounds in order to maximize the potential success of portfolio companies, in turn making would-be investors in newer funding models more hesitant that early-stage investments may have trouble raising subsequent bridge or growth rounds, and a more difficult road ahead for earlier stage companies as the result for the short-to-medium-term.

What keeps you up at night?

We’re seeing some early signs of investors becoming cooler to startup and early-stage investment opportunities, even for those generating revenue. SNAP’s post-IPO performance may be causing concerns about whether the unicorn market still exists, and perceived exit options. Although we’ve all seen these pendulum swings before, this can cause a funding draught in the market over the short-to-medium-term. That said, even during feeding frenzies, there’s a constant need to watch and react to market changes.

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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