When will the investment money come back? That is the question I have been asked most often by producers, software designers and content creators since the tech bubble not only burst but wasconsigned to the ninth circle of hell – where Dante sent those guilty of ultimate betrayal. (“Heeello Mister Lay and Mister Blodget! Meet Satan. Yes, it is warm, isn’t it?”)
Lack of seed corn investment is a serious issue when it comes to innovation in new generation media – a blend of breakthrough technology and software applications and media products and services. The problem is that many investors feel betrayed by all those jolly hockey stick presentations that showed their returns growing faster than a beanstalk and are walking away from late stage investments in companies with proven technologies and products, let alone start-ups.
Several companies I am involved with have been raising funds to take their businesses to the next stage. One, YooMedia, an interactive TV gaming and chat company, has been successful and we have hopes for the others. But it is tough out there, especially for businesses associated with the so-called new economy. And yet, the irony is that it’s getting tougher just as the internet and digital networks are becoming ubiquitous, creating the conditions for pioneering content and service providers to drive value from networks.
We’ll never party again like it’s 1999, but even to get back to a reasonable level of seed money, new generation media companies will have to look to the market to solve major structural issues, while they must strengthen their businesses and bring investors back.
One of the biggest structural difficulties is that venture capital has massively retrenched. In the US, venture funds have invested a fraction of the $108bn (pounds 66.4bn) they ploughed into new companies in 2000, and Europe has suffered a similar meltdown.
The reasons are not hard to see. A large chunk of the $150bn of new funding that went into companies in 1999 and 2000 just disappeared, like summer snow. Also, although there is around $100bn in uninvested funds, given the low prices around at the moment, the fund managers are investing it in later stage companies with a track record, rather than in risky start-ups. But capitalism needs start- ups, just as it needs failure, to drive innovation.
Without the thinking and development time bought by venture funds, entrepreneurs and intrapreneurs within big companies, will not be able to radicalise value chains in such areas as healthcare, content distribution and communication. But investors are not charities. Even assuming the structural problems go away, why should fund managers back consumer-focused new generation media companies instead of sticking their cash into IT or biotech?
One of my investment banker friends said recently that investors tend to look at the internet as a kind of upmarket telephone. But this misses the point. Networks – voice, data or steel – create unexpected consumer markets. Just as the railway boom created mail order firms that used the network to cut out high cost rural stores, so innovative ways of addressing and serving customers will be at the heart of driving the real value out of interactive networks.
Therein lies a problem. “We know nothing about consumer markets,” said Jean-Bernard Schmidt, the chairman of the European Venture Capital Association in a recent interview -prompting the thought that the bubble was created by former investment bankers who knew little about consumers funding MBA graduates who knew even less. New generation media firms must provide investors with solid evidence they know how to serve and extract revenues from consumers – and the money will come back when brilliant ideas are embedded in real businesses.
David Docherty is former managing director of broadband content at Telewest and is non-executive director of three interactive media companies
