22/11/10

By Modwenna Rees-Mogg, AngelNews

Modwenna Rees-Mogg speaks exclusively to Brent Hoberman, co-founder of PROfounders Capital and previously co-founder of lastminute.com about what is going on in the world of digital media

What is Digital Media and where is it all going?

To be honest, we don’t really use the phrase “digital media” as such. Here at PROfounders we are looking for deals with a strong digital angle in an area which will be disrupted, catalyzed or enabled by the internet. Today it’s all about making content dynamic, updatable, real-time and location based. Video is also core to any opportunity. To us the idea of printing something just once, in a way that cannot be updated automatically is the past.

We don’t see digital media as a sector, but as something that can be used by any sector to create a game-changing experience for the customer or user. One day every sector will be using digital media in some form or another. We want to be in on the deals that achieve this on a global scale.

Are there new paradigm’s to be had in digital media and hi-tech?

One model is to obviously transaction revenues. You can then give everything you can away for free and to adopt the most sophisticated forms of targeted advertising for your visitors to generate revenues. I think this is the strategy that will win in online media and let’s be honest, live and online is the future in news. The trick is to have the dynamic content online that is impossible to achieve in print. If you cut off your site via subscription models you cut off the volumes of audience you require to achieve the high volume advertising revenues you need to make the model pay. If there is a new paradigm, it’s in the speed of content delivery and having the best information — over and above your competitors’ and it’s one of the reasons we backed TweetDeck. The more online mobile penetrates, the more important this will be. The power and manipulation of user driven content is paramount both in new forms of media but also in other sectors that are adopting digital hi-tech solutions to problems.

Does US have an unbeatable lead today or can we build a Google in the UK?

I never like to be so pessimistic as to say “never”, but at the end of the day it is platforms that count and the leads that Facebook, Twitter, Google, LinkedIn, and Facebook have are way ahead today. Not a single one of those is a European company and this inevitably makes it harder for companies in Europe. My view is that European based companies wanting to build a platform should concentrate on dominating across Europe. That is very, very hard not least due to regulation, intrinsic national protectionism and cost (not least trying to deliver growth in the context of countries with lots of different languages). I think here in the UK it would be wise for entrepreneurs to look at opportunities around expanding into India as a first international step rather than just heading for the US. I am pleased that the Government is pushing hard on building links with India. I am still a firm believer that our entrepreneurs are better than most in a global context; they just need to think very smartly about how they are going to grow a world class business.

Can angels/VCs help us “make a Google”

Beyond the money, I think the most helpful thing investors can do is help create the eco-systems that generate world-beating businesses. It would be great if all VCs were able to add more value to businesses to expand across geographies. They also need to balance the need for “proof of revenue” models as evidence of success vs. overall growth potential. Often investors will push too hard, too early and they are over simplistic in the targets they want their portfolio companies to meet. They have to understand what direction a business needs to head in, in the short term, to reach a long term win. And they need to understand that in the online world things develop very quickly and companies need to be extremely nimble if they are going to ride the wave and win. I think some UK investors do not really understand what it takes to win globally and just how much local knowledge you need to achieve this. They need to point entrepreneurs in the right direction and focus them on exploiting cultural subtleties. Global domination does not come cheaply and does not happen by being short-termist, especially in terms of funding.

In that context, what should investors back and why?

The new trend is to find low capital intensity start-ups. Online businesses typically don’t need much start-up money to get going, but very quickly they can need very significant sums of money. Just look at the later funding rounds at Facebook et al. So it’s all about raising enough to prove a point and then move on in the understanding that fast growth, especially when there is no immediate revenue model, costs. Personally I think that the £50k cheque can be the most dangerous of all. It does not leave any room to experiment or to make mistakes and companies only achieve game-changing results by experimenting.

What are the macro validating factors when deciding which digital deal to do — as an entrepreneur and as an investor?

I want to back people who may be very inexperienced, but are very passionate and very good at strategy. They mustn’t be in it just to make money. I want to back people who fall in love with their product. They also need to be exceptional salespeople. After all you are selling all the time in business, whether you are fundraising, managing, buying supplies and services or dealing with customers. They need to be able to sell the dream credibly, but be humble enough to get help from the right people and to exploit the right business development partners. I am also impressed by people who are always looking to de-risk a situation and who know that being a small part of something bigger is better than having a big part of something small.

In terms of valuation of a business, often you will give away a1/3rd of your business so you may as well raise as much money as you possibly can. To raise a large sum for 1/3rd of your business you need to have a big plan.

Do you need millions to succeed as an entrepreneur?

While it always depends on the scale of the business, for many of them the answer is “yes.” You very rarely build a global consumer brand without serious investment even though most of the money will go into marketing. Guerilla tactics work for a while, but at the end of the day many companies need to be able to spend to grow big, especially if you want to grow fast and in the online world you have to grow fast because the world is moving ahead so quickly.

How quickly should you try to monetize your business?

If you have the luxury of phenomenal growth and backers, you don’t need to monetize quickly. But you have to get big enough fast enough that when you do monetize the numbers will be significant. So as long as you have an investor that believes in your growth potential and you are providing evidence that you will achieve the growth along the way, you can wait to turn on the revenue model so when the cash is generated, it will make a real difference, quickly. If you don’t have an investor you need to monetize as quickly as you can. In that situation, you need to be selling the dream to your customers, not your investors and remember that you can leverage a lot of growth by doing business development deals with bigger companies: that’s about spending your time in the right way!

Do you agree with the Getting to Plan B theory that no successful business ever succeeds on its first business plan? If so, should you bother to write a business plan if you are starting a business and what emphasis should investors place on one in this context?

I still think it’s a good discipline to write down your plan. Everything will be wrong, but it makes you think in a structured way and gives you focus. The answer is not to over-analyse everything against that plan. That is a waste of time. As an investor, I abide by the rule that you should see if you would be the customer and if not can you visualise the customers? Market demand is the single most important factor in a business opportunity. If there is no market, there is no business, plan or not.

Tell us a bit about PROfounders Capital and why it is different.

Our strapline says it all really. We are a venture capital fund for entrepreneurs powered by entrepreneurs. Between us, we have either founded or backed lastminute.com, Bebo, , TouchLocal, 365media, BetNow, Pipex and wayn.com. So we know what it is like to be a start-up entrepreneur, to grow a business extraordinarily quickly and to achieve flotations and exits. We also have experience of MBIs, so know what it is like to take on an established business and grow it quickly. And now we all sit on the boards of established large businesses, so have insight from that angle too.

We invest personally all the time as well as investing as a fund manager. And we know what is going on in the US, especially around the internet. This gives us a 360º perspective that will be invaluable to the right entrepreneur with a new idea.

We typically invest £0.5-£2.5m as an initial round which gives a business real money to move forward, but we can support later rounds too and we are keeping our European focus.

We are also investors in businesses that use internet technology to create game-changing businesses operating in other sectors. A good example is made.com which brings high quality, high end, made-to-order furniture, at low prices, to the UK market. Products are sent directly from the manufacturer to the consumer, cutting out any middlemen. Also, the items they sell are available only online, keeping prices 60-80% lower than traditional retail stores.

We can offer the right entrepreneur our experience and time, as we have a pretty extensive network to leverage. We are passionate about entrepreneurialism, especially where it can create long-term value. And we want to meet companies that have disciplined and innovative management and which address large potential markets, using technologies that are new or clearly differentiated from any incumbents to generate identifiable revenue streams that can be scaled.

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