dave liu dot com

Below is a transcript of an interview I gave to the folks at The Dealmaker.  Enjoy!

Taxicab Interview with David Liu

Everyone is saying that it’s all about digital media, the valley is hot again, etc. What’s your take on the resurgence of the valley and the state of affairs in the digital media sector?

From my vantage point as an investment banker, it certainly appears that the Bulls are running wild and the Bears are in hibernation in the Valley! In 2004 and 2005, VC fundings were happening but it certainly feels like the pace of investment is accelerating. Since the beginning of this year, we’ve tracked and noticed at least 1 VC funding occurring daily in the digital media sector and most of those deals are occurring in Silicon Valley. So, the obvious question is why is this happening? I believe its due to a confluence of several key trends:

“Capital Anyone?”

Despite a whittling of the VC community since 2001, there has been a substantial amount of capital raising particularly among the veteran firms. Improvements in the economy have also led to the reemergence of the angel investor. Thus, its become relatively easy for companies to get start-up capital - particularly in digital media which is generally a low-capital intensity sector. Once a company has been created, there is also plenty of mid/late stage capital available from growth, private equity and hedge funds - all of whom have shown a strong penchant for tech investing. Why? Because globally, we’re experiencing a glut of capital and Silicon Valley is a key recipient of this mega trend.

“Exits Are Coming!”

There is also light at the end of the tunnel. Although the digital media IPO market has been relatively stagnant (fewer than a dozen since 2005), robust M&A activity due in part to the resurgence of interest from traditional media companies like News Corp and Viacom has created an optimism I haven’t seen since 2000. In addition, we’re all acutely aware of the Battle Royale occurring among the “5 Horsemen of the Internet” (Google, Yahoo, Microsoft, AOL, eBay). In their apocalyptic battle for Internet supremacy, there will be a lot of companies that will shift the balance of power and its ever entrepreneurs hope to be the pebble that helped David slay Goliath. Silicon Valley-types are naturally optimistic and the environment gives us hope that sweat and cash equity will be monetized one day. If investors know they can get out, they’re more likely to invest.

“Build It and They Will Come”

I think one of the most favorable trends has been the rapid build-out of customer touch points for digital media companies. With near ubiquitous PC usage, accelerating broadband penetration, and proliferation of wireless phones and slim devices, digital media companies with good applications or content can reach customers much more cost effectively than before. Technologies such as search, RSS, and social networking applications now permit many companies to build strong organic customer bases which they can then monetize through paid search or Web service business models. The bottom line? Companies can get to cash flow sustainability relatively quickly if they were meant to be.

“So What’s the Catch?”

I think its always important to remember that with the brief exception of the dotcom Y2K era, most technology companies need at least 6-7 years from founding to reach IPO or M&A “escape velocity”. As such, I’m optimistic about those digital media companies that were founded 4-5 years ago, reached cash flow break-even due to the paucity of VC funding, and are now solid businesses with a bright future. However, for those being companies started today, I counsel them to have a 7-Year Plan. The economy is already showing signs of slowing down and digital media companies tend to be higher beta because of their ease of duplication and the inherently low switching costs of the Web customer. Overall, I’m cautiously optimistic but speed is even more critical now than ever before. This may truly be the era where Fast Follower beats the First Mover every time.

You have just been given $7 million in seed to start a digital media company ? What type of company do you start and why?Before I answer that, let me explain a couple of my own observations. I’ve often noticed that small differences in the user experience of a digital media offering can literally determine success or failure. Offerings could be almost identical on paper but little differences allow one business to accelerate while another stagnates. I wish I could tell you I’m smart enough to know the secret formula but I don’t. As such, I’m loathe to put all of my eggs in one basket.

In addition, I cover Chinese Digital Media companies so I also have first hand knowledge of the current state of software expertise in emerging countries such as China. Certainly for very advanced infrastructure software projects, the talent does not yet exist. However, with the proliferation of open source, object oriented languages, and SOA, the knowledge does exist in China and India to build Web service based business models - particularly those targeted to a consumer audience. The engineering cost is much lower than in the US and thus any business I start would utilize programmers over there.

Finally, as I mentioned before, I’m a big believer in being a Fast Follower rather than First Mover. Google, MySpace, FaceBook, etc. were not the first to create the category in which they currently dominate.

So, if you gave me $7MM I would actually start 5 companies each funded with $1 million. That would buy a lot of programming capability in China and India. The areas I’d choose would be those where I’ve already seen some well publicized traction such as video ad networks, advergaming, online games, etc. I may even fund vertical search companies but I’d be wise to stay away from natural language text-based search.

If all else fails, I’d use the remaining $2MM and fund one of my successful entrepreneur friends and let them start anything they want. Business school taught us its always better to banks an A+ team with a B+ idea than the other way round. Given the low barriers to entry, I believe this is even more pronounced in digital media.

Before I answer that, let me explain a couple of my own observations. I’ve often noticed that small differences in the user experience of a digital media offering can literally determine success or failure. Offerings could be almost identical on paper but little differences allow one business to accelerate while another stagnates. I wish I could tell you I’m smart enough to know the secret formula but I don’t. As such, I’m loathe to put all of my eggs in one basket.In addition, I cover Chinese Digital Media companies so I also have first hand knowledge of the current state of software expertise in emerging countries such as China. Certainly for very advanced infrastructure software projects, the talent does not yet exist. However, with the proliferation of open source, object oriented languages, and SOA, the knowledge does exist in China and India to build Web service based business models - particularly those targeted to a consumer audience. The engineering cost is much lower than in the US and thus any business I start would utilize programmers over there.

Finally, as I mentioned before, I’m a big believer in being a Fast Follower rather than First Mover. Google, MySpace, FaceBook, etc. were not the first to create the category in which they currently dominate.So, if you gave me $7MM I would actually start 5 companies each funded with $1 million. That would buy a lot of programming capability in China and India. The areas I’d choose would be those where I’ve already seen some well publicized traction such as video ad networks, advergaming, online games, etc. I may even fund vertical search companies but I’d be wise to stay away from natural language text-based search.If all else fails, I’d use the remaining $2MM and fund one of my successful entrepreneur friends and let them start anything they want. Business school taught us its always better to banks an A+ team with a B+ idea than the other way round. Given the low barriers to entry, I believe this is even more pronounced in digital media.