SBJ/20090126/SBJ In-Depth

Print All
  • Making the pitch for venture capital

    1) Social media
    There is no shortage of companies attempting to build “the Facebook of sports.” Some companies, such as Watercooler and Citizen Sports Network, build sports-related applications that reside directly within Facebook and other major social media networks. Others, such as SportsFan Live, exist as separate destinations with social media functionality built within them. But the core similarity among these and the many dozens of others is an attempt to harness the power and repeat user visits of social media and apply it in some way to sports fandom.
    2) Fantasy
    This is another no-brainer in which entrepreneurs are simply looking to chase the numbers. Research points to nearly 30 million people in the U.S. and Canada playing fantasy sports, many of whom spend at least several hours per week managing their teams and interacting with rivals. Venture capital pitches run the gamut between actual games, roster management tools and software, and news and information for fantasy players.
    3) Prep sports
    A few older, more prominent online players for prep sports and recruiting, such as Rivals and MaxPreps, have been purchased in recent years by major media hubs. But this space remains incredibly fragmented, not surprising given the vast number of American youth involved in high school sports and the wide variety of interested parties. Many recent pitches to venture capital firms have sought in some way to tie together several elements surrounding prep sports and digital media — including social media, video photo sharing, scheduling and results, and news content — in a bid for broad scale.
    4) Blogging and user-generated content
    This is another fast-growing segment that seeks to fill in the content gap being created by the steady demise of mainstream daily newspapers. The core principle here is simple enough — fans still hunger for content, and if their local paper can’t deliver it, then there’s an opportunity for somebody else, particularly somebody who might have a more passionate and locally aware voice than a wire service outlet. But with the national ad market for all content currently in freefall due to the recession, the tougher trick here is creating a viable business model that doesn’t solely rely on the vagaries of selling ads.
    5) Mobile
    Similar in concept to social media, the core thought here is taking what’s great about mobile and the dramatic advancements in handset technology over the past year and applying it to sports. Much like online media, however, startups generally need to build products outside of the confines of intellectual property held by the major sports properties and teams, as they, too, are eagerly aiming to exploit new wireless opportunities.
    6) Advertising and monetization strategies
    Not necessarily specific to sports, plenty of people in and around the digital media industry are actively searching for new ways to generate revenue online and tie in better metrics than third-party panel measurements. Activity here is particularly fervent in the mobile space, which has yet to generate any mainstream, commonly accepted advertising platform, but boasts very high measures among both reach and engagement with users.
    — Compiled by Eric Fisher

    Print | Tags: In-Depth
  • Sites reach into own pocket

    Tom Carter, founder and chief executive of a portal of sports fitness Web sites, boasts a growing amount of user traffic, material from a battery of prominent sports physicians and trainers, and a productive content-sharing relationship with Golf Channel.

    Carter

    And Carter for now is self-funding his startup business, unable to close a deal on venture capital investment.

    “There’s simply a lot less conversation on that front now than there was a year ago,” Carter said. His Connecticut-based SportsMD.com portal includes health and fitness areas devoted to golf and tennis, and has three more sites devoted to cycling, running and action sports set to launch later this year.

    “There’s no question this is something we’re spending more time on than we expected,” he said. “It’s really sort of a perfect storm in our space — it’s a lot harder to get [venture capital] money and a lot harder to get the kind of ad buys that help you get that money.”

    Such is the other side of the recession, with the much-discussed “flight to quality” as big content brands position themselves as safe harbors for advertisers in the economic storm, leaving behind smaller, less proven operators. The result is a rising number of self-funded operations such as SportsMD.com, as well as more distress calls for funding from startups running out of cash to sustain themselves.

    SportsMD.com is one of many sites
    that are self-funded because of
    limited venture capital.

    “There’s still no shortage of ideas out there, but I’m definitely seeing a lot more reliance on angel financing, friends-and-family type of things as opposed to formal Series A, Series B type of deals,” said Chris Russo, chief executive of Fantasy Sports Ventures. “Just in the last 60 days, we’re getting lots of calls from smaller sites looking for capital, looking to affiliate, looking to merge — anything to keep going. Twelve months ago, it seemed that about 80 percent of the [venture capital] deals out there were focused on growth opportunity, capital development, and 20 percent were these distress-type of things. Now it’s reversed.”

    One likely avenue for several startups will be business development and partnership alignments with big portals in which a formal equity investment is not made. Rather, the common deal structure is a revenue-sharing alignment in which the larger media hub serves as the advertising and back-end business entity for the smaller content developer.

    “A lot of smaller sites don’t necessarily need to build out a full infrastructure,” said Mike Marquez, CBS Interactive executive vice president for strategy and corporate development. “So there are a lot of interesting things beginning to happen in that [business development] space.”

    Print | Tags: In-Depth
  • Sites that got deals done

    SB Nation
    In part the brainchild of former AOL programming executive Jim Bankoff, this network of local sports blogs last fall received roughly $5 million from a group of industry luminaries including Accel Partners, Allen & Co., former AOL colleague and Washington Capitals owner Ted Leonsis, and former San Francisco 49er and current venture capital industry executive Brent Jones, among others.
    One Season
    This new virtual sports stock exchange, which incorporates some of the trading concepts of Citizen Sports Network’s existing ProTrade but involves real money, earlier this month closed a $3.5 million round of Series A funding led by Charles River Ventures. The venture financing outfit has a significant presence in Boston and the Bay Area and focuses on earlier-stage companies.
    Challenge Games
    This Texas-based outfit, which produces a series of online games that incorporate both fantasy gaming and virtual card collecting, in the fall received $10 million in Series B funding in a round led by Globespan Capital Partners. The MLB Advanced Media licensee, whose game titles include Baseball Boss, had just completed a $4.5 million Series A round a few months earlier, in July.
    Bleacher Report
    This Bay Area-based outpost, which has quickly made its name in a form of citizen sports journalism, in November garnered a $3.5 million round of Series B funding led by its original backer, Hillsven Capital. The site is buttressed by content distribution agreements with both CBSSports.com and FoxSports.com.
    Play Hard Sports
    Another producer of casual online sports games, earlier this month it garnered $8 million in a second round of funding involving Valhalla Partners, TriplePoint Capital and New Enterprises Associates. While the established console-based software companies such as EA and Take-Two currently dominate sports video gaming, this outfit is after a less serious player. Its PC-based games are designed for short periods of play but also incorporate elements of massive multiplayer games popular in other genres.

    Print | Tags: In-Depth
  • The venture capital well runs dry

    Matthew Bromberg, the outspoken president and chief executive of Major League Gaming, is typically blunt about his recent dealings with Oak Investment Partners. The venture capital outfit recently supplied the competitive video gaming league with $7.5 million in funding, pushing the league’s total investment to $42.5 million.

    “It was definitely a big relief, and we didn’t even necessarily need the money,” Bromberg said of Oak, a longtime backer of Major League Gaming. The new investment will help fund further expansions of league operations. “But it’s an absolutely brutal environment to be raising money right now, and we were very fortunate to not have to make another phone call [to another venture capital outfit].”

    Major League Gaming’s anecdote represents only part of the venture capital story as it relates to sports, particularly entities with a heavy digital media focus. The league is established, has ably survived the demise of most of its direct competitors, and boasts a viable business plan buttressed by relationships with ESPN, Dr Pepper, Hewlett Packard and other corporate heavyweights.

    For thousands of smaller, upstart operations and entrepreneurs yet to form a full semblance of a company, however, the story is very different. Even before last year’s collapse of the commercial banking industry and the deepening recession, digital media startups frequently relied on private venture capital outfits for funding to launch their businesses.

    But those venture capital operators — by definition more long-term focused with their money and less risk-averse than a typical bank — have now also winnowed their spending considerably.

    Major League Gaming has been among the fortunate
    sports entities to land venture capital.

    Venture capital investment in all American companies fell 8 percent in 2008 to $28.8 billion, from $31.4 billion the year prior, according to Dow Jones VentureSource, with the total deal count similarly falling from 2,823 in 2007 to 2,550 last year. Information technology investments of all types in particular took a 15 percent fall during 2008 to $11.6 billion.

    Liquidity at the back end of the venture capital cycle also plummeted in 2008, as venture-backed companies regardless of industry sector generated $24.1 billion through either initial public offerings, mergers or acquisitions, according to VentureSource, down 58 percent from $57.6 billion in 2007.

    The same trends are all at play specifically within digital sports media, industry executive say.

    “This economy has caused everybody to take a big step back and really recheck their existing portfolios,” said Brian Grey, executive-in-residence for Polaris Venture Partners. The former head of FoxSports.com and Yahoo! Sports joined the venture capital firm last summer. “And it’s definitely fair to say the bar [for new deals] has gone up.”

    The funding well has not run completely dry, though. New investments are still being made (see story). But the criteria used to evaluate those companies has stiffened up, with funds now generally reserved for companies with more mature business plans that are already showing evidence of sustained revenue and audience growth.

    “The capital is definitely more constrained and it’s much harder to raise funds, but there’s also far less competition for that money,” said Josh Swartz, chief operating officer for Wasserman Media Group, whose properties include Sportnet, an aggregator of sites devoted to action and Olympic sports. “It means fewer deals getting done now, but the ones that are getting done are better ones, and that’s definitely good for the entire industry.”

    New criteria

    Even amid the current economic slowdown, venture capital firms funding new entrants in digital sports media are looking for a few critical elements: an innovative product or service that isn’t replicated elsewhere, particularly among the mainstream national sports sites such as ESPN.com and Yahoo! Sports; a fleshed-out business plan that will generate sustaining revenue, typically within a year of launching the business; and a distinct level of passion about sports.

    Within that evaluative framework, the fiscal belt-tightening has manifested itself in two key ways. The first is a heightened emphasis on existing relationships in which venture capital firms are now much more hesitant to invest in someone unknown and instead prefer to make their bets on someone who’s already proven themselves elsewhere.

    “It’s always been about investing in talented, top-quality individuals for us,” said John Kosner, ESPN.com senior vice president and general manager. The company has made nine digital media-related acquisitions in the last three years, including funding rounds for Active.com. “We see that as a seminal part of being successful.”

    The second is a near-universal demand for a diversified revenue model that does not put all its eggs in either an advertising-based model or a subscription-based one.

    The reasoning on the latter is fairly simple. The ad market has plummeted for established media entities of all types, making the marketing pitch from an unknown startup that much more difficult. Premium content-based operations, meanwhile, typically find it difficult to generate meaningful scale because so much sports information and sports-related social media have become basic commodities online.

    “In a market like this, ad dollars are the first to go, so wrapping an idea around just that is going to be real tough [to generate funding], but the subscription model can’t carry an entire company, either,” said Brent Jones, former San Francisco 49er and now managing director of Northgate Capital, a Silicon Valley venture capital firm. The company has invested in Citizen Sports Network, while Jones has invested privately in SB Nation, a blog network chaired by former AOL executive Jim Bankoff.

    “There’s too much free information out there,” Jones said. “So you have to have some balance. But the bigger question to me is how you create the next generation of passionate fans. That’s the sort of thing I’m looking out for.”

    Downward pressure

    In this new economy, valuations ascribed to companies in venture capital investments are also down considerably. Deals that might have gone for $8 million to $10 million are now down in the $5 million range, $5 million deals are down in the $2 million to $3 million range, and so on.

    But those dropping values also have venture capital outfits looking to seize an opportunity to buy into new companies at relatively cheap levels.

    “There’s definitely buying opportunities out there. We see 2009 as a year with still a lot of upside,” said Doug Perlman, general partner of Accrue Sports & Entertainment. The former NHL executive last year joined the firm whose partners also include Bryant McBride and Steve Solomon, both of whom were involved in the formation of Fan Nation and Scouts Inc. before they were sold to Sports Illustrated and ESPN, respectively.

    “The general conversation is obviously a little different now given the pressure on valuations. That’s the marketplace talking. But you want to be perceived as entrepreneur-friendly, so we’re out there and we’re seeing deal flow in early-stage companies,” Perlman said.

    There’s much more to the story here than a vulture play on distressed companies looking for funding. While no one knows for certain when the recession will be over, the unofficial consensus is that by mid-to-late 2010 or 2011, conditions will be different.

    And by that point, publicly traded companies will likely be under rising shareholder pressure to show growth again. Among the simplest ways to do that will be to buy companies currently being founded on the backs of venture capital.

    “I’m still very long-term bullish on this space. All the trends we’re seeing in terms of content and activity moving from offline to online have not abated, even with the economy,” Grey said. “So you have to go in with that orientation. Early-stage companies, for example, are probably not going to pay off for three to five years. But with costs pretty reasonable, this can be a very good time to invest.”

    Print | Tags: In-Depth
  • Venture capital glossary: Some key terms to know

    Angel investor — Individual or organization providing funds to a startup or early-stage company. Angel investors are often not involved in day-to-day management, but can be critical resources in terms of expertise and industry contacts.

    Deal flow — The number of potential investments reviewed by a venture capital operator within a given period.

    Exit strategy — Process by which venture capital firms intend to recoup their original investment. Also known as a liquidity event.

    Seed capital — Money used to help form a new company. The provider of seed capital, usually some form of angel investor, gets equity in the new company. Funding amounts for seed capital are often small given the relative infancy of the company.

    Series A round — An initial private, preferred stock offering of a company previously funded by its founders and/or angel investors. Later rounds are termed Series B, Series C and so forth.

    Print | Tags: In-Depth
  • Venture capital glossary: Some key terms to know

    Angel investor — Individual or organization providing funds to a startup or early-stage company. Angel investors are often not involved in day-to-day management, but can be critical resources in terms of expertise and industry contacts.

    Deal flow — The number of potential investments reviewed by a venture capital operator within a given period.

    Exit strategy — Process by which venture capital firms intend to recoup their original investment. Also known as a liquidity event.

    Seed capital — Money used to help form a new company. The provider of seed capital, usually some form of angel investor, gets equity in the new company. Funding amounts for seed capital are often small given the relative infancy of the company.

    Series A round — An initial private, preferred stock offering of a company previously funded by its founders and/or angel investors. Later rounds are termed Series B, Series C and so forth.

    Print | Tags: In-Depth
Video Powered By - Castfire CMS Powered By - Sitecore

Report a Bug