This is the Keynote I delivered at CeBIT 2009. In it I describe our business model against a backdrop of how media consumption is changing, which affects the content industry and the advertising business. The motto of this year’s CeBIT was “webciety”, which is why I use the term a few times.
Link: 
At next09 I had the pleasure of being the moderator of a meeting of the titans in social networking, with LinkedIn, XING, and StudiVZ. Conspicuously absent on the panel but present in the discussion were Facebook and Twitter.
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At the next09, Jeremy Allaire and I announced the partnership of Brightcove and sevenload, allowing Content Owners to distribute content with the Brightcove Player on sevenload to reach new target groups. We also discussed the Social Media Revolution and its implication for Media, Content, and Advertising. Our Moderator was one of the lead dogs of the Next Web Conference in Amsterdam.
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In addition to my keynote, I was interviewed by the host of the channel. What exactly are the Web 3.0 changes that lead to a “webciety”? Big questions, small answers: I tried to pinpoint how individuals get a chance to monetize their expertise or at least make it available to a larger crowd/audience.
Peter Turi hat ein Video – Interview geposted, dass er mit mir auf dem DLD 09 geführt haben. Darin stellt er solche spannenden Fragen wie:
1) Ist Rezession eine schlechte Zeit für Startups?
2) Wird sich bei den Startups die Spreu vom Weizen trennen?
3) Wird YouTube sevenload verdrängen?
4) Was ist das “nächste große Ding?”
Hier sind meine Antworten:
Link:
Amidst all the depression caused by the financial crisis, attending SIME this year was like a breath of fresh air. Ola Ahlvarsson worked his magic once again. A very entertaining 60+ year old professor of medicine demonstrated an exciting new technology to create visual statistics called Gapminder, which was acquired by none other than google.org. Rockstar entrepreneurs and investors ranging from Morten Lund to the founders of Bwin infected the audience with entrepreneurial spirit.
Blowing away any clichés about a gambling company, Bwin demonstrated that they have a particularly modern HR Policy.
David Sifry showed how a leading rockstar blogger can become a travel tour guide entrepreneur. Among the most fascinating aspects of the conference was a panel of leading entrepreneurs from exciting international markets such as Vincent Fong for China, Joi Ito for Japan, Mahesh Kumar for India and Michael J. Wolf for the US. That was especially exciting for me as sevenload is in the midst of its internationalization. The most inspiring thing about the conference was the infectious “can do” spirit that the entrepreneurs’ presence radiated, especially those from Holland and Sweden- two countries with a distinct positive attitude that I sometimes miss in Germany.
This weekend a friend of mine called me up, as he was completing – as a leading seed investor – the first round (series A) of a company that I have a minority stake in. He told me that the round being negotiated was just short of Signing, as all main deal elements had been agreed with the investor (a large and well-known VC Fund), but there was one last point of contention left, and – big surprise! – that was Reps and Warranties.
That made me think once again about the peculiar habit of venture capitalists to turn Reps and Warranties almost as much a difficult topic as in M&A. If you think about the term “Venture Capital”, the whole concept is that you venture into something and there is no precisely NO guarantee of success.
Of course it makes full sense to commit founders to proper representation of the state the company is in and to also make them liable for the so-called Title Guarantees, in effect making sure that the shares being transferred to the investor are free of third party rights, are indeed constituted legally and are not subject to any limitations. However, I do not understand why these Reps and Warranties so often go to the core of the risks of the business model, thereby in effect giving the venture capital investment more the character of debt financing, disguised in the Reps and Warranties clause.
Why do I say this?
Because if a founder signs up for – say – a 3 Mil. Euro investment and the company fails due to an event that is at the core of the typical risk of the business model, this may create a warranty case that in the worst of all contract agreements may include full damage to be paid by the founder. This then means that the investor may get up to the total sum of that investment in damages from the founder because of an event that constituted the essence of the typical venture risk.
So put very bluntly, by enforcing Reps & Warranties covering business risks, the investor covered his venture risk by making the founder liable for failure of exactly that risk.
We all know that founders who may be otherwise admirable do not like to focus on legal details and may have bad luck in a choice of their attorneys.
That can be a deadly mistake.
When founders find themselves in such a contract situation, it is not just a reflection of poor negotiation skills on the side of the founders, who – one might argue a bit unfairly – therefore would not deserve anything better.
Such contract clauses are also always a case of misguided priorities on the side of the investor.
While as an investor I have full sympathy for contractual rules that prevent an irresponsible founder from walking away, as in the old adage “with my time and your money to waste, we have nothing to lose”.
However, it is equally unfair to put the investor of a venture in a position where his investment becomes more a case of debt with higher returns and higher default risk than of real venture investment. Moreover, discussions and probable litigation about business risk damage retribution by the founder can divert vital energy from surviving the damaging event, since both the founder and the investor will bes spending considerable time hedging their risks or enforcing their rights. THat can ultimately be much more damaging than the damaging event itself.
Here is my advice to founders in any negotiation about Reps and Warranties:
1) Before negotiation of deal terms, identify the natural risk of your business model
2) Prepare to describe and argue to the investor what the typical risk of the venture is and make it clear from the outset that that risk cannot will not be carried by the founder(s).
3) Make the investor acknowledge these risks early in the process of negotiating the terms
4) At term sheet level make sure that the basic principles guiding an equal distribution of reps and warranties rights between founder and investor include the following
a. Liability of founders is limited to willful behavior and gross negligence
b. There must be a cap of a certain percentage of the investment, in my opinion not more than 50% of the investment sum.
c. For all cases of non-willfull behavior the warranty term should be at most 12 months
d. Each founder is only liable for the fraction of the cap that corresponds to his fraction of shares in the entire company, so a co-founder who has 20 % of shares in a company shall only be liable up to 20% of the cap.
e. All shareholder managers with shares smaller than 7% should be exempt from any liability unless there is a specific reason for that.
f. Damages should be paid only to the extent that the Founder / Manager liable had best knowledge of the Warranty issue.
g. Retribution of damage should be limited to the damage that is incurred directly by the damaging event, confirmed by court ruling and could be reasonably expected. There should be no damage retribution for a loss of valuation of the company, which should be explicitly excluded. Valuation loss is usually covered by downround protection clauses.
h. Retribution of damage should be limited to such damages as cannot be corrected or “repaired”.
i. No damage retribution should be given for damages that are incurred due to lack of cooperation on side of the investor. This could include anything ranging from late payment of investment funds, lack of cooperation in litigation cases, failure of the board members dispatched by the investor to agree in litigating to avoid the damage, and so forth.
k. The most important advice that can be given to any founder signing Reps and Warranties is to put a large amount of energy into the due diligence and disclosure process and the documentation of that due diligence and disclosure process. THis is where attention to detail is a very necessary evil. The contract must include a clause that no events or fact about the company that were or could reasonable have been expected to be known to the investor at the time of the investment can lead to a claim of the investor against the founder. Thus claims are excluded if the the facts that led to the damage were known to the investor.
l. Negotiate all these points, then focus on disclosing well all risks that are part of the business model or lie within the company.
Often investors will present the founders with tough Reps and Warranties basically to incentivize them to puta significant amount of energy in thinking through the risks of the company and the development stage the company is at.
However, founders should rate their investors on the basis on their willingness to accept clauses that correspond with or at least resemble what I advise.
Good Luck!
We spent the past months preparing our relaunch and securing our next, series B round of funding. I am very happy today because we just received confirmation by the German Antitrust Office that our Funding round is approved.
Our relaunch brings us to the next level, where we simplify channel navigation, combine it with social features, and open our business model one step further to content owners, by letting them have a larger share in our advertising revenue. We still have a lot of optimization work ahead, but the metrics of the past weeks suggest that we are on the right track.
The round of funding we just secured will lay the groundwork for our further expansion, and I am happy and proud that we now have French, Spanish, Italian, Polish, Russian and of course Turkish localizations.
Here’s our official Press Release:
http://corporate.sevenload.com/sevenload-secures-new-round-of-financing/
Recently I had the nice experience of being interviewed by the blogger / founder of http://www.easn.de or Everything A Startup Needs. He asked me to relate:
- how dw capital grew out of denkwerk
- what makes our positioning unique
- what are my criteria for investment
- and how much idealism a Founder can sustain
Of course, an [edited] video interview cannot convey all the things and remarkable people that shaped the rich history of 10 years of denkwerk, but maybe the interview gives anyone interested an impression of the philosophy behind our seed venture unit, dw capital. So, here goes:
Video Interview of Axel Schmiegelow
For the record, and because I also have an agency background:
I do believe in Branding, but I don’t believe Branding should be an excuse for bad conversion of a media campaign.
Frank Huber recently tackled my post about Monetization in his Blog
http://blog.firstmedia.de/?p=763 (in German)
and contradicted my views of the subject based on 2 reasons: in his opinion, YouTube has shown that “size does matter” and sevenload hasn’t followed my recommended strategy at all. Here’s my reply to his post:
1) It’s undeniable that the “natural market leader”, who’s the one that goes for reach first, is the one who can win the rat race for size. I did point this out myself in my own post. However, it would be wrong to believe that the YouTube strategy and more specifically the YouTube exit is something that can be replicated. Ex post, Google’s investment in YouTube makes a lot of sense for a company that gave up a fraction of it’s shares. But there is exactly one buyer fitting that profile, and that is Google. There’s always exactly one worldwide or www-wide dominant company per segment that can be successful with a sheer “reach” priorization and with such an Exit strategy – so it’s hardly good advice for startups to emulate that model unless the startup is entirely sure of being the first one in its category.
My argument wasn’t that reach or the number of users/clients won is irrelevant- in fact, it’s the opposite. I just think that it is healthier to achieve this reach or customer base with a working and efficient business model than without one. And XING is a good example of this: From its first day back in 2003, Lars Hinrichs (Founder of XING) was already charging 5- € in monthly membership fees, even though at the time subscription models were still widely perceived as unfeasable in the German internet market.
2) sevenload’s strategy is NOT that of gaining a gross increase in our reach at all costs. We’re following an approach of pure, organic growth (up to now we haven’t spent a single € for advertising) which allows us to best offer a differentiated platform and cover the “Long Tail” of content. This allows us to offer advertisers rates that are up to a factor of 10 greater than those of normal video portals – and of most most conventional internet portals as well. Because of this difference, we are the market leader as measured in:
- Unique Visitors (> 10 Mil real unique visitors per month),
- active registered users (> 300,000),
- average visit duration (> 25 min. per visit and registered users > 45 min),
- content volume and
- revenue (we will be the Web 2.0 company with the highest turnover in Germany this year and most likely the only one that will be profitable). We achieve all this thanks to a revolutionary advertising model that is highly effective for advertisers.
Interestingly, though gross reach was not a primary target, this strategy has led to an sustained increase in precisely our gross reach and has put us in second place in the German market in terms of gross reach, right ahead of Clipfish, despite Clipfish’s massive cross-media subsidisation by the leading German TV Channel, RTL, and a full integration in DSDS, Germany’s “American Idol” Format.
In my opinion this once again proves the wisdom of Al Ries’s main marketing theorem:
Create a new category, then dominate it
My post on monetization does nothing more than offer a methodic approach to defining the category a startup strives to dominate in business model terms rather than in media terms.
As a Founder of denkwerk Group, I have been involved in marketing, media, the internet, and start-ups for the past 15 years. I have seen the New Economy come and go (and come back again). At denkwerk, we founded the world's first bookmarking and tagging startup, oneview, in 1998, and rolled it out in 16 countries and 10 languages. denkwerk has always endeavoured to make innovation happen and attract some of the brightest talents (and start-ups) in our industry.
As a seed investor, I am an active Board Member of the company shaping the future of travel commerce, itravel, and a Board member of the exciting local search and rating company, Qype. As an investor in armedangels and an Advisor to betterplace, I support endeavours to make the world a better place.
In December 2005, I met Ibrahim "Ibo" Evsan and Tom Bachem. They had just developed a ground-breaking technology for an online Video Player. With seed funding from denkwerk we incorporated in April 2006, and in Summer 2006 I became CEO of sevenload!. In 2007 Andreas Heyden, the RTL in-house Founder of our main competitor, clipfish, left RTL group to join us as COO, and Andreas and I developed a licensing and business model that will help shape the future of TV and internet media, while Ibo and Tom turned their technology sights to Social Gaming when they left sevenload step by step between late 2008 and Summer 2009. Today sevenload is headed by a brilliant management team which I find exciting and rewarding to work with and learn from.
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