By Modwenna Rees-Mogg, Founder and CEO of AngelNews

Earlier this year, there was singing from the rooftops of VC city about the successful exit for a number of the UK’s leading investors, including Balderton, Index, DFJ Esprit, Arts Alliance and Octopus Investments from LOVEFiLM through a sale to Amazon.

Although individual returns were not made public, there was all round great satisfaction with the multiples of original investment achieved. The VC exit whilst a good news story for UK venture investing, hid behind it was a more exciting story still — that where a global corporate through a long term corporate venturing strategy helped to achieve a superlative result for all concerned.

LOVEFiLM established itself as a leader via mergers with a number of other DVD rental businesses including Video Island and Screen Select. Praise for achieving this strategic consolidation of the sector must be handed to the VC community. It led to a powerful No. 1 brand which had the critical mass to grow at a time when DVD rental was in its heyday.

On checking with Jim Buckle, COO of LOVEFiLM, on how it achieved its first 300,000 customers when the brand was in its infancy, I discovered that the company made itself big partly by piggybacking on bigger businesses. Its early business model was highly dependent on fulfilling white label contracts for Tesco, Odeon and The Guardian, amongst others, and from marketing partnerships with a wide range of other leading brands. In fact the LOVEFiLM brand was not promoted to the mass market until 2007, which hardly seems believable today. This gave the management early experience of the challenges and opportunities of working with “big business” quite apart from delivering rapid critical mass.

Buckle speaks with great enthusiasm about the support Arts Alliance Media (the specialist digital media arm of Arts Alliance) gave the young LOVEFiLM in its early days. The investment team were closely involved and the company benefitted from the support functions of its investor, though Buckle was quick to mention that the management team remained independent at operational level.

Arts Alliance also took LOVEFiLM into the infancy of digital distribution. Arts Alliance Media developed a separate digital distribution business for cinemas and, in 2005, through a partnership with LOVEFiLM, launched an early desktop based download manager for its customers to buy or rent films. It may have taken an hour to download a film, but it was the beginning of the future.

So by 2007 LOVEFiLM, now merged with Video Island and Screen Select, had become a tempting morsel and in 2007 discussions commenced with Amazon which had been growing its own rental business in the UK and Germany. Amazon approached LOVEFiLM because it realised that its core focus was to provide superlative customer value and service. LOVEFiLM, it believed could do a better job for its customers in DVD rental than its own operations. The deal was struck — LOVEFiLM picked up the Amazon rental business and some more investment in return for a significant minority equity stake by the American giant, in one step becoming LOVEFiLM’s largest shareholder.

Buckle told me how the negotiations took place between the Amazon corporate development team in Seattle and LOVEFiLM in London, with the operational teams at the German and UK rental businesses being kept in the loop. It was clear that this deal was seen by the Americans as an investment not a commercial deal, at that stage. Thereafter, it was inevitable that Amazon’s long term strategic view on the “at home” movie market would have to be balanced with the VCs more tactical ambition to time their exit to maximise cash returns for investors. The deal was unusual for Amazon which typically made 100% acquisitions of businesses, but it worked well for all concerned. LOVEFiLM had access to Amazon’s powerful marketing and other insights. Meanwhile Amazon was sharing the investment risk with some clever sector expert investors during a time when the market was in flux as the drive towards digital downloads started to speed up.

Roll forward to 2011 and LOVEFiLM was reviewing its longer term strategic options. With turnover knocking about £100m the opportunity to IPO in London had become realistic. The VCs were beginning to get itchy feet as their funds started to mature and the need to deliver an exit intensified. Meanwhile the market was changing with the ambitions being displayed by Netflix, LOVEFiLM’s principal global competitor.

The LOVEFiLM board were made an offer by Amazon to buy out the other shareholders for cash. It was accepted and the deal was closed relatively easily, not least because Amazon already had an intimate understanding of the business. It was a casebook story of a successful corporate venturing project. And today, whilst its early days, Buckle tells me that it’s a logical place for LOVEFiLM to be housed.

Amazon understands media, especially hand-held devices — it owns Kindle after all! But it also understands consumer service and video is a key part of its offering. It’s far better for the LOVEFiLM management team to have one shareholder with this expertise, than to be dependent on the whims of the stock market. Of course, there are other benefits too — Amazon’s global customer base and its ability to invest seriously if necessary to name, but two.