Monday, February 22, 2010

What's happening at Netflix?

Netflix, Inc.Image via Wikipedia
You'd expect me to follow Netflix closely - and indeed they have always been a beacon of the on-line revolution. Disrupting the established methods of distributing movies to consumers in a significant way - leading to the inevitable demise of Blockbuster (once the brief on-line battle had been won) their dedication to great customer service has been a constant theme.
Our own founding of Video Island - later to become LoveFilm after a series of mergers - has meant a more intensive tracking than normal of a much admired business. Listening to Reed Hastings, Netflix, outstanding founder and CEO and comparing his metrics with our own every quarter has been an education.
The Netflix stock-price has always suffered the overhang of those who believe that the DVD's days are numbered and that digital streamed delivery would render Netflix's obsolete or at least would open up significant more competition than it has experienced hitherto.
Netflix has consistently come up with the answers - first by explaining that DVDs would be around for a lot longer than people thought - then by offering streamed movies themselves and agreeing that DVDs would indeed die at some point not too far in the future. Mostly however, Netflix has delivered results. Consistently meeting and beating the street's forecasts.
After music, then books, newspapers and magazines, movies are bound to be the next digital 'goods' to be widely distributed over the new platforms.
So, is Netflix in a very vulnerable position? Or is it perfectly placed, with a fiscal relationship with 12m subscribers who pay them each month. Its relationship with the movie studios - who will ultimately decide how and when their product is distributed is clearly another factor.
There are a handful of digital companies (outside of the main utilities) with such a close, regular and continuing  transactional relationship. Netflix is a more than a "DVD by post" business, they are an entertainment distribution platform.

Is this realisation behind the recent exceptional surge in the Netflix share price? It has trebled in the past year despite the continuing stream of news heralding new competitors. Walmart's acquisition of on-line movie service, Vudu is the latest. Hulu, Apple, YouTube, BestBuy the list is long and powerful.
The battle for movies will start soon.

Not even Reed Hastings sale of 10,000 shares last week has dented its apparent strength.

For all Facebook and Google's power, neither of them has a direct financial relationship with consumers. Though clearly they will move in that direction.


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Sunday, February 21, 2010

Beware the band of Angels

There used to be a commonly held concern of entrepreneurs that taking investment funds from an angel investor, came with it a large dose of interference - not necessarily of the constructive kind.
After all, most angels are successful people, who made their money building or running businesses - not necessarily of the type that the entrepreneur was engaged in - and their keeness to assist often verged on intervention.

Current conventional wisdom is that entrepreneurs should strive to obtain 'smart money' - cash that comes with strong, in-depth knowledge of early stage, start-ups; an extensive rolodex; loads of management and recruiting expertise.

It hard to disagree with this although I have observed that having lots of 'smart money' in the project sometimes almost equates to having dumb money!

How so? Well, if a syndicate is put together of a collection of angels - a band of angels - unless there is a lead angel ie someone who takes responsibility for pulling the syndicate together, for staying close to the entrepreneur throughout, then the company may land up with the worst of all worlds.
The investment that each angel makes is often of little consequence to them, they take no 'ownership', get involved very occassionally and peripherally and if asked to advise they are seldom close enough to the situation to give really good advice.
Everyone gets that warm, comfortable feeling that they are co-investing with the great and the good of the eco-system, whereas in fact no-one really 'owns' the investment. No-one has the necessary unwritten but clearly articulated 'contract' with the entrepreneur that they will be their 'partner' in the venture.

Looking back on some of our failed investments, a few fall into this category.

Nowadays, if I'm asked to join a syndicate - "we're raising $1m and only need $200K - would be great to have you guys involved - I've heard how much value you add ...etc..." some of the questions I ask are: "who's the lead investor? Is he or she joining the board? How much time is he/she planning to spend? Are they being properly compensated for this time/effort?"

We are firm believers that choosing your investors is a fundamentally important decision to make. That they really do make a difference. Its not just quality that counts but the committment and willingness for that quality to be applied.
In the end, its hearts and minds that matter - not just cash and share certificates.

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