May 7
Fred Destin

Shame on France : the Yahoo – DailyMotion debacle

 I was on the board of DailyMotion for many years, starting with the first round of financing in 2006 and ending with my resignation off the board in January 2013.

We made many mistakes along the way but we survived and finally thrived.  The company is a great success; 200 million uniques a month, a big revenue number and profitable, and a top 30-35 global slot amongst the largest websites in the world.  More importantly, it's a company that was built on product excellence and managed to make in the face of full frontal competition from the biggest internet juggernaut ever to grace our shores, YouTube.  Veoh, Metacafe and all the other better funded and better equipped competitors died, and we thrived.

So when I see the French government scuppering the best possible growth deal that the company could hope for, I just want to throw my hands up in despair.

POST DEAL MINISTERIAL MEDDLING 

After rumors first emerged in Le Monde that the government was intervening in the sale, the Wall Street Journal revealed the details.    Here is the what the Minister reportedly told the CFO of Orange: "I won't let you sell one of France's best startups," Mr. Montebourg told Mr. Pelissier, his voice raised, according to people briefed on the meeting. "You don't know what you're doing."

Now you have to understand the Mr Pelissier is the CFO of Orange / France Telecom.  He usually does not get involved in deal negotiations of this size directly - he has an extremely capable team that would have done that for him, including the CEO of DailyMotion Cedric Tournay, his M&A department and probably some of the senior talent in digital strategy such as for example the excellent Stephanie Hospital.

The late intervention of the Minister tells me the deal was agreed when they got wind of it and decided to step in.  As major shareholder in Orange they have a right to make their voice heard, though given the scale of Orange I doubt that a divestiture of a majority stake in DailyMotion required any form of shareholder approval.

Montebourg parisien magazine

Cute Montenbourg champions "Made in France" on the cover of a leading French magazine - tainted by a desire to be famous perhaps ?  I prefer boring technocrats.

HYPOCRISY AND POOR DAMAGE CONTROL

I don't know whether to laugh or cry about the pathetic attempts at damage control that are now being undertaken.  

Mr. Montenbourg says in a statement that he "regrets that talks between Yahoo and France Télécom did not lead to a satisfactory agreement for all parties involved".   It's nice to try and spin this as a business disagreement but it's clear from the reports that the deal was agreed between the parties and the state killed it on issues of control.  Indeed, the CEO of Orange, Stephane Richard, indicates that the state intervention spooked the buyer in this article.  And who indeed does that surprise ?  Yahoo probably thought they were negotiating with a private company that was privatized a long time ago in the form of Orange, not a state owned Telephone Company still sometimes called France Telecom.

Then you have Fleur Pellerin saying : "there is no need for Dailymotion to remain wholly French-owned, and all options must be studied".   Who is she kidding really ?  Do you think a $300M acquisition happens without "studying all the options ?".   Indeed, Stephane Richard indicates clearly that the search for a partner started 6 months ago, over 60 partners were contacted, and the French State was involved at every step of the way through the FSI.  

Laughable.

logo dailymotion modded

TERRIBLE SIGNALLING 

The French State has now effectively told people that it considers it OK to meddle into transactions between private companies.  It told founders that after working hard for years, they feel it is their right to come and step all over your carefully negotiated exit.  

The issue is : it can do this on a large scale.

Consider this: the State is the largest direct Venture Capital investor in France and the largest fund-of-fund operation in France (both through FSI), as well as being the largest shareholder in the leading telecom and ISP in the country.  Dan Primack pursued that line of thought in connecting all the dots of what he calls the French Connection. 

Do they now really expect that a fresh-faced investor will be happy being a minority investor alongside a shareholder who behaves in this way ?  Stephane Richard might be putting a brave face on it for political reasons, but there is no way anyone I know would accept to be locked into a minority investment where an exit can be blocked in political or ideological grounds.

They're hurting us through tax, insane regulations and now this.  It has to stop.

WHAT'S NEXT ?

The battle for DailyMotion is not in France, where growth is limited. It's all about nailing the international strategy - no amount of posturing is going to change any of that.

Now they killed the deal with best possible partner to go execute on that strategy. That is all. Take your responsibility.  As Pierre Kosciusko-Morizet, the awesome founder of PriceMinister, put it : "if DailyMotion does not find a strong international partner. in the end, it will die".

I hope this pyrrhic victory acts as a watershed moment in France when the startup community, #geonpis and others realize it's time to say STOP.  Maybe we have not yet reached rock bottom, but it cannot be far off now.

In the meantime, all I can think of is Cedric, Martin, Luc, Giuseppe, Olivier and all the others still trying to crank the wheel and put a brave face on this, all because of some ego-maniacal ministers who think it's OK to destroy shareholder value, taxpayer money and more importantly the aspirational nature of entrepreneurship in the name of some vague "national interest" that no one asked them to protect in the first place.  

Clowns.

PS - Disclosure : I was investor and board member in DailyMotion and PriceMinister

20 Comments
May 1
Fred Destin

Men on Mars : The Reinvention of Atlas Venture

 I joined Atlas Venture 9 years ago. At the time we had 5 offices, 22 partners, 7 board rooms, a team of over 60,  over two billion in assets managed. And boy, were we making life difficult for ourselves. Today: one office, 7 partners. We still have two board rooms, but our startup companies seem to like that :-)

Between 2005 and 2012, we went back to our roots.

2013 03 13 10 48 54
2013 03 13 10 48 54

Complexity kills
What is true for startups is true for VC firms. When I joined Atlas in 2003 we had way too much geographic and sector complexity. Picture this: London, Boston, Paris and Munich get on a video conference call to approve new tech and biotech investments (we sometimes referred to it as the "intergalactic meeting"). We had legal, PR and recruitment services at our main locations. We had three layers of partners and three layers of investment professionals below the partner layer !

How Atlas got there, I don't really know. Atlas was a very successful firm built on a strict regimen of small funds and a maniacal focus on very early stage investing. Because of the quality of its results, it became one of the pre-eminent firms in the late nineties, and started ballooning out of control. Fundraising became more important than investing, and Atlas began to think of itself as an "institution".

It matters little at this stage. What is more important is what happens next.

Losing Sonali
These shortcomings were obvious to me when I joined.   I thought that with time we could fix this and there weren't many ways to get into venture through the front door.  So we had started a patient process of reducing team, concentrating our locations and so forth.   It was a very consensual process that followed the usual pattern of young guns pushing and established guns moving more slowly.   Anyone who's done generational transition in venture knows what I'm talking about, though this one was constructive and pretty smooth.

Then suddenly the nonchalance got thrown out of the window.   We were in the process of raising our Fund VIII in 2008 when my partner Sonali left to join Accel Partners in London.   Sonali was my sister-in-arms and our most talented person in Europe.  It was no surprise to me, but it changed the game overnight.   It's one thing to be evolving slowly, it's quite another to lose one of your best people.

The time for reactivity was over.

Staying at Atlas
Over 2007-2008, there were periods of doubt.   I considered leaving; it's tough to find a new partner in European VC and I had a lot of inbound interest.  I stayed for two reasons.  First, I decided to make Atlas my battle of Thermopyles.   I set down my shield and planted my lance and thought : I will make this work no matter what.    I will take failure when it comes but I will fight for this one, make it mine. The second reason was my partner Jeff Fagnan.   We're brothers in arms in this; I was not going anywhere.

So I stayed.  Goodbye Europe, hello Boston.

Proactive, not reactive: designing a fund we'd invest in
Once you stop caring about the consequences, you can do things right.   Sonali's departure provided that opportunity.   In our case, this meant evolving the fund so it was one we would want to invest in and not one that was shaped by legacy.  

The cadence of change increased dramatically and we really got to work.

The first step was a phone call between Jeff and I that went something like this:
- "How far do we push this ?"
- "All the way"
- "You moving to Boston ?"
- "Provided we move out of Waltham :-) ... yes"

I can't remember who said what line, as Jeff and I tend to finish each other's sentences, but that was the gist of our conversation on the eve of Sonali's departure.

We promised ourselves that we would continue to embrace our own demise, not ever be reactive again but proactive.  The market would continue to change, and we would not just embrace change, we'd spearhead it.

The reinvention of Atlas Venture
In the end we've done nothing more than apply common sense.   Here are the foundations of Atlas today and why we think we're going to rock:

Equal Everything.  For a partner at Atlas, there is only one comp package. Same salary, same carry, same ownership in the management company (not that management company ownership matters, mind you, since we're not trying to accrete any value there).  We all float up or down with the vagaries of fund size and management fees.   The benefit ? We spend zero time discussing compensation issues.  Imagine that.  All our energy is focused on winning in the market.

Team first.  Individual track records be damned.  What matters is that as a team we generate 3X over the life of a fund. We will have each other's back and be relentlessly intellectually honest about driving reserves to the best companies, not the ones we (personally) happened to invest in.

Primus inter Pari. No one runs Atlas.   Jeff Fagnan deserves a special nod for being a relentless force in particular around fundraising, but he considers this service to the firm.   We don't have, want or need a boss.

If you suck, you go.  I will leave Atlas before I am asked to if I either lose the hunger or realize I start to suck.  We all feel the same way.   We're not there to maximize our net worth by raising funds forever, we're there to be the best at what we do and build awesome companies with top entrepreneurs.   The world does not need another average venture capitalist.

Single office. On the tech side, all five of us are around the table every Monday making decisions and meeting teams.   Same for our three partners in biotech. Decisions are fast; debates are engaged.   There is zero loss of energy between getting to know an entrepreneur and getting to term-sheet.   With entrepreneurs, speed wins.

Small funds. Given our maniacal focus on starting at seed and all the improvements in capital intensity vs. value creation in recent years, we can run our investment strategy successfully with small fund sizes.   Besides, being slightly capital constrained has done wonders for us.  We're sticking with small funds.

Alignment with LP's. By raising smaller funds we take care of the issue of inflated salaries.   We also upped our commitment to the fund and I think will up it again over time.  Some of the partners bought a secondary position in the last fund. We want to be in alongside our investors.  That is all.

Team, results
You cannot declare victory in a vacuum.   To make this happen, we were fortunate that some great talent joined our team, in the form of the best free agent in Boston (Ryan Moore, who backed Where.com and Enpocket), the commercial half of the Wu-Lynch clan in the shape of operator extraordinaire Chris Lynch as well as our homegrown talent Dustin Dolginow.

We're also looking at a number of juggernauts in we are generally the largest VC shareholder, including bit9, Veracode, Zoopla, Dataxu, Globoforce and others as well as good momentum in returning cash to our LP's in recent years.

The flywheel is accelerating.

Friday hoops
The bottom line of all this is simple.   We started playing hoops again every Friday.   Our passing game is getting pretty good, our drives are forceful, and we're scoring points.  When I got home with scratches and a bruised rib, I felt like the luckiest guy in the world.   I know the boys will kick my ass, but I also know they've got my back.

Now if only we could add a female Indian venture capitalist of the quality of Sonali, we'd even have diversity in the group :-)

26 Comments
Apr 7
Fred Destin

Zombie VCs Take II – How to Spot an Active Firm

An entrepreneur called Danielle Morrill just kicked up a bit of a shitstorm with a nicely titled "Zombie VC" post.   It's a nice pendant to her recent Zombie Startups post in which she deals with her own fears of becoming a living dead company after pivoting her startup, Referly.

In it she tries to define rules for entrepreneurs for spotting Zombie firms.  

Rise of the Zombie Firm

Entrepreneurs should be aware the we are, indeed, surrounded by Zombie Firms.  The largest shakeup ever  in the venture industry in resulting in:

  • firms whose numbers will never allow them to raise again but who will continue to live on fees until the last man standing turns the lights off (a Zombie Firm)
  • firms who bravely try but may take two years on the road to raise and be short of fresh cash to invest in the interim (a Trying Hard To Make It Firm).

In a newsletter from one of the most respected venture fund investors out there, the following statement was made: "in our estimation, there are only 100 truly active institutional venture firms out there".   Whilst that number feels conservative and does not seem to include the Super Angel funds, compare that to an estimated 1,000 firms active in the early 2000.  

To give you a sense of the shift, only 55 new funds were raised last year (per Thomson Reuters).

Both Zombie firms and Trying Hard To Make It Firms are going to give the outward signs of market activity.  In fact they may have more time than their funded brethren to be a mentor at TechStars or a judge at MIT Entrepreneurship Contest.

All this leaves entrepreneurs with the difficult task of weaving their way through a morass of people who can't actually give them, you know, actual money.

Zombie House hugh laurie 31936830 1920 1200
 
Have Suit, Won't Invest

Finding the Active Ones

First of all let me say that I applaud Danielle's initiative, accusations of sensationalism aside.  We are all know that countless entrepreneurs waste countless hours with folks who cannot invest.

Directionally her analysis is correct; a quickscan of your zombie VC list and one nods head in recognition.  There a few fundamental flaws with the current method though, though I am still very happy someone is getting the ball rolling in driving transparency.

She tries to use normative rules for what defines activity. Like any binary method it’s prone to fail, either because of inaccurate data or discrete / unannounced deals.  Ideally one would recognize that the data is inaccurate and instead of making an A and a B list would compute an index of activity and determine who’s “most likely a zombie” or "most likely active" instead of including teams Shasta Ventures in the "bad" list (given their new over-target fund was raised in late 2011, not a credibility builder).

Funds could be ranked according to their activity score or even better a holistic score that would take into account their own announced fundraising data combined with assumptions about investment period (few funds have more than a 5 year investment period).

Any zombie firm can make a few seed investments late in its life to maintain the semblance of activity. Conversely many highly respected firms like Benchmark indicate their strategy does not include doing seeds.   A bunch of firms will simply not do series A. How can Emergence Capital Partners appear in a blog post called Zombie Firms ?

How To Spot An Active Early Stage Firm

The bottom line : I love the initiative but the “Rules for spotting a Zombie Firm” should more accurately be turned around to say “Likely Indicators that you are talking to an active Seed or Series A investor”.  Less dramatic but probably more useful.

So how do you spot an active venture firm in the early stage world:

  • Has raised a fund in the preceding 5 years at most (most firms have a 5 year investment period)
  • Displays a regular pattern of activity in seed (if such is their strategy) and an active presence on AngelList
  • Acted as lead investor or named new investor on a number of investment in the last [12] months
  • Displays a regular pattern of thought leadership and ecosystem development activity not geared towards limited partners but towards entrepreneurs, indicating the desire to build mindshare and dealflow for the future

No hard and fast rule will tell you whether an investor is out of the market, but you're getting the clues.  Keep an open mind and remember that people without money may be ready to help in other ways.

Last piece of advice I would not use / waste VC meetings to try and "turn the table on them" and due diligence the crap out of investors.  Do desktop research and ask market players.  

However any venture capitalist should be able to tell you exactly how much they've raised and how much they're looking to invest in the coming year.

For us at Atlas Venture Tech, we're looking at approximately 12 seeds (average check $400K) and 4 or 5 Series A investments (average check $4M) ... if we can find the entrepreneurs to partner with !

11 Comments