14/04/2011

Lessons from LOVEFilm

By Modwenna Rees-Mogg, Founder & CEO of AngelNews

Clever old Alex Macpherson and his team at Octopus Ventures. They have just announced the final exit from LOVEFiLM to Amazon (already a major shareholder) for an undisclosed sum, but rumoured to be c£200m. It’s another bit of good news for the UK VC (Venture Capital) industry. The Brits can and do build and sell successful businesses, even if they do not typically allow them to get to the monster size their US counterparts seem to accept as normal.

The LOVEFiLM deal is not really interesting from an exit perspective for the price it achieved. To my mind what makes it an interesting exit is how it got to be large enough to exit in a serious way at all and what the sale tells us about the attitudes and abilities of the European venture scene.

LOVEFiLM did not just grow to an appetising size for Amazon by organic growth. It was massively assisted by a deliberate and strategic merger of at least eleven online and other DVD rental businesses in the UK and elsewhere in Europe, all of which were subscale and many of which were VC backed and one of which comprised the acquisition of Amazon’s European DVD business. It exemplifies the European challenge — how on earth can one company grow organically at a fast enough rate to become global, especially in the relatively low entry cost/highly competitive market that is digital media today. They can still do it in the US, but that I am sure is because of the masses and masses of funding such businesses can access. I am sure the challenge for European businesses is not so much the size of their domestic territories or even language or employment barriers — the often cited reasons — but instead it is quite simply the access to serious amounts of capital domestically and internationally that enable you to go for it at all cost and win.

It’s also worth noting that the management team at LOVEFiLM, headed by the highly respected Simon Calver that was celebrating the other day, was not the team that managed the original LOVEFiLM business. They were part of Screen Select which Octopus (then Katalyst) angels backed in 2003. One up for Octopus, I say, over the VCs that backed the teams at the other businesses that disappeared into LOVEFiLM. But it is interesting that it was the catchy LOVEFiLM name which stayed on. Another lesson for us all - the sensible entrepreneur knows not to be too proud of their own business’s brand if they have the chance to capture and adopt another one that’s better. Call me a cynic, but I cannot help wondering if a business called Screen Select would ever have been seen as a competitor to NetFlix on brand values alone.

Names apart, the clear message to entrepreneurs is that, to win, you need to be part of the final team, not necessarily the early one. And probably the same is true for investors. The details of how much money individual angel/VC investors in any of the companies that corralled themselves into LOVEFiLM will probably never reach the light of day, but I suspect many a deal was cut, the details of which are best left in their respective lawyers’ safes. I can only hope that the Octopus Venture Partners as those original investors are now called, have good reason to celebrate and were not squashed out too badly.

There are other people who now matter thanks to LOVEFiLM. Notably there is Alex Chesterman who moved on from the company to found the incredibly successful Zoopla — a gem in the Octopus Ventures Portfolio. Personally I am looking forward to Alex becoming the next UK internet billionaire. If you are not already a fan of Zoopla, you may not understand the context of my comments, but if you are, you will agree with me I am sure. It is a truly brilliant interpretation of property on the web and deserves to join the likes of Cadbury, BP and others on the UK corporate wall of global fame.

LOVEFiLM itself did make it out of the UK which gives us another reason to celebrate and deter the naysayers who think that it is impossible for a British business to escape off these shores in this day and age. It is currently operating in UK, Germany, Sweden, Denmark and Norway. It remains a bit of a technology star having pioneered digital film delivery in the UK and has launched streaming services and freemium download models that will have provided lessons to all those people struggling to work out how to monetise the web. Again reasons to shut up those who do not think Britain should keep its epithet of Great. We still “do technology” pretty well.

But the lesson is that to make a large exit sale price, you cannot hang around in the UK waiting to be offered a date. You need to get overseas.

As well of course as international reach, LOVEFiLM mastered the art of gaining financial leverage through the formation of strategic partnerships with organisations far larger than itself. LOVEFiLM has deals with Tesco, easyGroup Odeon and Vue in the UK alone. Achieving leverage of this type will be one of the reasons why Amazon will have taken the decision to own rather than invest.

It’s interesting to note what the US press have said about the LOVEFiLM deal. They have majored on the threat it poses to NetFlix and suggest that Amazon take its cheque book to France and Germany. But as the Huffington Post pointed out, perhaps the real threat to online digital service providers is not other online competition, but the group that still holds a great chunk of the spending power of the average western consumer in its grasp — the big retailers such as WalMart. Given that LOVEFiLM has already mastered how to do business with these Behemoths in the form of its Tesco deal, perhaps the real clue to this exit lies here.

Meanwhile, the deal is a shot across the bows of European VCs and angels. Presumably, despite the potential of LOVEFiLM, the thought of an exit was just too exciting compared with the pain of funding a global growth campaign and taking on at full throttle a big US competitor such as Netflix.

Maybe the challenges of building global businesses in Europe is not so much about the ambitions and vision of the businesses and management teams we back, but about the lack of syndication of financial firepower. If even Facebook is turning to Russian oligarchs for really serious rounds of funding may be we too need to look abroad for the stonking money. For my part, I would be heading for India, followed by China and then Brazil. If Mr Cameron is listening, perhaps he should worry less about the domestic enemies of enterprise and concentrate his efforts on doing deals with the billionaires in the BRICs (grouping acronym that refers to the founding member countries Brazil, Russia, India, China and now South Africa), to fund what his own citizenry and their close cousins do not have the stomach to cope with.

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