Shane Smith, CEO at media group Vice, whose valuation has more than doubled to $4bn after its recent Walt Disney backing, told news provider Financial Times last month: “There is a revolution going on in media. It’s scary, and it’s fast, and it’s going to be ugly.”
Germany-based Bertelsmann, one of the world’s oldest and largest media, services and education groups with more than 117,000 employees and €17.1bn ($19.1bn) in revenue last year, has been preparing for this revolution.
In the past year, Bertelsmann, which traces its book publishing back more than 180 years, laid out how it would navigate the upheaval and continue its growth with a focus on education as its third main business line alongside media and services, and making corporate venturing one of its eight divisions.
Shobhna Mohn, executive vice-president for growth regions at Bertelsmann, said: “Corporate venture activities are of significant strategic relevance for Bertelsmann – since January of this year, all our key investment platforms have therefore been grouped in a separate division, Bertelsmann Investments.
“In particular, our venture fund activities make an important contribution to the development and expansion of our businesses in Brazil, China, India and the US.
“Through our investments, we gain insights into the trends in a given market, identify strategically relevant businesses at an early stage, build partnerships with local investors and entrepreneurs and benefit financially from the successful development of young startups. In return, we bring valuable business building experience and our existing network to our portfolio companies.
“Moreover, the insights gained through our investments are one of the key drivers of the group’s digital transformation.”
By running growth regions, Shobhna Mohn has Pankaj Makkar, managing director of Bertelsmann India Investments (BII) since its foundation in 2013, and Marc Puskaric, managing director of Bertelsmann Brazil Investments (BBI), which was founded in 2012, two of Bertelsmann Investments’ four “investment platforms”, report to her.
Growth regions at Bertelsmann also covers China, but Annabelle Yu Long, managing partner of Bertelsmann Asia Investments (BAI) is also CEO of the Bertelsmann China corporate centre and on the company’s group management committee (GMC), which advises the executive board on corporate strategy and development.
Long reports directly to Thomas Rabe, chairman and CEO of the executive board, which effectively runs the company through the GMC.
The fourth investment platform, Bertelsmann Digital Media Investments (BDMI), covers the US and Europe. Urs Cete, managing partner of BDMI, is not on the GMC but reports directly to Rabe, who is also CEO of Bertelsmann Investments.
These four platforms have been increasing their activity, with 34 investments and follow-on deals, including five exits, by end-July this year, compared with 39 in all of last year, according to an internal list seen by Global Corporate Venturing. BAI, with 15 exits and investments by end-July, made nearly half these deals, with five in India and the remainder primarily focused on the US and Europe through BDMI.
At the end of August in its interim results for the first six months of the year, Rabe said: “BAI once again generated considerable earnings from sales of holdings – €55m, to be precise. Total gains from disposals at BAI since the inception of the fund now amount to nearly $200m [actually $194m] – so we are earning real money in China. The work done by Bertelsmann Investments not only facilitates knowledge transfer and innovation scouting across all our lines of business, but is also financially successful.”
Bertelsmann Investments’ results are determined mainly on the basis of earnings before interest and taxation (ebit), which increased to €42m compared with an ebit loss of €7m in the first six months of last year. With Bertelsmann’s overall profit of €482m, the company said: “Capital gains from exits of Bertelsmann Investments shareholdings – primarily at BAI – thus contributed significantly to the group’s earnings.”
Excluding the five investments struck in July – Treebo in India, FloSports in the US, and including Zaihui and DS Movie in China, plus a third by BAI which is confidential – and Bertelsmann Investments’ 24 deals in the first half would put it in touching distance of the most active venture investors, such as New Enterprise Associates (56), Sequoia (50), Accel (47), Kleiner Perkins Caufield & Byers (37) and Intel Capital (33), according to data provider PitchBook.
The increased focus by Bertelsmann Investments’ four regional platforms also ignores increased corporate venturing activity by the media group’s other business units, such as Gruner & Jahr.
Collectively, therefore, Bertelsmann has been increasing its focus on taking minority and majority stakes in entrepreneurs over the past few years under the direction of its senior officers.
Rabe moved from chief financial officer (CFO) to chairman and CEO of Bertelsmann at the start of 2012 and instigated a strategy based on growth regions and built around supporting its existing business lines, including through digitisation, and finding new “growth platforms”, such as education, services, content for television and “other sales channels”.
The company said: “These examples show why a significant portion of Bertelsmann’s investment funds will be channelled into such new businesses from now on. Activities in these lines of business will help Bertelsmann to become a faster-growing company in the next five to 10 years.”
Family imperative to grow and stay private
Bertelsmann also puts its focus on transformation, down to its private, family-owned structure giving it focus and flexibility to make changes, with its top two core values being partnership and entrepreneurship, taken as the principle of decentralisation.
Bertelsmann is controlled by the Mohn family and the Bertelsmann Foundation after it spent €4.5bn in 2006 on buying back shares traded to Groupe Brussels Lambert for control of entertainment company RTL Group.
As a family-owned company, Bertelsmann has generally avoided the type of schism that can surface in other dynastic media groups, such as that affecting US-based peer Viacom after its nonagenarian chairman and founder, Sumner Redstone, reconciled with his daughter, Shari, leading to the departure of CEO Philippe Dauman last month.
But while Rabe and the GMC were hired from outside the family, the ties between owners and managers is close.
Shobhna Mohn is married to Christoph Mohn, chairman of Bertelsmann’s supervisory board since 2012 – which oversees the executive board – Christoph’s sister, Brigitte Mohn, is chairman of the board of trustees, and their mother, Liz Mohn, is vice-chairman of the executive board.
Liz was the second wife of Reinhard Mohn, the fifth generation of the family to run the business, who built the company into a media conglomerate through the second half of the 20th century. He died in 2009.
In his 2012 book, Corporations and Cultural Industries: Time Warner, Bertelsmann, and News Corp, (see media titans) author Scott Fitzgerald concluded: “Bertelsmann remains the most successful European media corporation operating today. Due to the rapid period of growth during the Second World War, due to effective state sponsorship, the German conglomerate emerged as a dominant book publisher and book club operator in the federal republic, and from the early 1960s it embarked on international expansion to become the most transnational of the German publishing companies.”
The accessions of Rabe and Christoph Mohn within 12 months of each other in 2012, however, followed a period of reported analyst concern that Bertelsmann was too dependent on traditional advertising and on western Europe.
In 2011, Bertelsmann’s revenues were €15.3bn, but profits attributable to Bertelsmann shareholders were down slightly to €465m.
In its annual results for last year, the company said: “The strategic transformation of Bertelsmann is paying off. In the past fiscal year, the international media, services and education company increased its revenues, operating ebitda [earnings before interest, tax, depreciation and amortisation, to €2.5bn] and group profit to the highest results [€1.1bn] in years.”
In its June strategy presentation, Rabe said the revenue contribution of high-growth businesses had increased from 20% in 2011 to currently 28%, while revenues from structurally declining businesses were reduced from 16% to 5% in the same period.
He added: “In the medium term, we aim to increase the contribution of high-growth businesses to group revenues to over 40%.
“Here, we are focusing especially on further strengthening our growth platforms, which we will press ahead with both organically and through acquisitions. Since 2011, we have invested more than €3bn in digital and growth businesses. We intend to continue building on this as well as on our strong operational performance. In the long term, Bertelsmann is striving for annual revenues of €20bn and operating ebitda of €3bn – with a diversified portfolio capable of growing profitably on its own strength.”
Analysts supported this confidence in its strategy. Douglas McCabe, CEO at media consultancy Enders Analysis, said: “At its core, Bertelsmann has consistently been able to achieve something that is structurally very difficult for large corporates – they have an entrepreneurial mindset and spirit, and a genuinely entrepreneurial methodology for exploring ideas, innovation and managing investments. They work effectively with entrepreneurs within their system.
“Bertelsmann’s overall strategy for media, services and education focuses on digital transformation and also developing growth regions, without losing sight of its core businesses. Sounds simple on paper, but it is extraordinarily complex in practice.”
When talking about growth platforms, Bertelsmann points to “the success story of BMG Rights Management”, which it said took just four and a half years after its formation in 2008, following the sale of its Sony BMG music joint venture, to become the world’s fourth-largest music publisher, with the rights to more than a million songs.
As CFO, Rabe had used private equity firm KKR’s financial help to restructure its music business, BMG, in 2009 before acquiring the buyout firm’s 51% share in 2013.
As Bertelsmann is a family and foundation-owned company, it describes itself as having to be quite flexible to make larger investments as it has no public listing to sell shares.
BDMI’s Cete said: “Venture is just one instrument in the strategy toolkit. Bertelsmann is way more comfortable with the whole toolkit than most media peers. But all big media groups are now more open to entrepreneurs to grow faster and partner, as entrepreneurs do not want to sell too early and in those cases investing or partnering is the only way to work with them.”
Education
Bertelsmann’s spokesman added: “Bertelsmann firmly believes in the mutual benefit of partnerships – whether with founders or other companies (for example, the joint establishment of BMG with KKR).
“Venture activities help us to gain early expertise regarding interesting business models and promising markets. One example is the education division, which is to be expanded, medium-term, into the company’s third mainstay of business alongside media and services under Bertelsmann’s chairman and CEO Thomas Rabe.
“Since the beginning of 2012, we have acquired stakes in some innovative companies in the education sector through the two University Ventures funds [see fund intrigue]. The know-how obtained in this way was incorporated into the fine-tuning of our education strategy – since 2014, we have increasingly relied on direct investments.”
Bertelsmann bought Relias Learning for a reported $540m in 2014 to kickstart its education unit, although it was only formalised as a division, along with BMG and Bertelsmann Investments, this year.
Just over a year later, in November 2015, this division rather than Bertelsmann’s venturing units invested in US-based learning technology companies – $230m for HotChalk and a reinvestment as part of a $105m round for Udacity. Bertelsmann had originally invested as part of Udacity’s $35m series C round in September 2014. US-based Synergis Education previously secured $33m in September 2013 from University Ventures, Bertelsmann and University of Texas Investment Management Company.
However, its venturing units have also taken stakes in at least 15 education companies, according to a comprehensive list of its Bertelsmann Investments portfolio companies – including those already exited – to the end of July seen by Global Corporate Venturing, and excluding 19 commitments to VC funds. Although the full list from the four investment platforms, which excludes deals done directly by other business divisions, cannot be published unless the deals are already public, it includes India-based online-offline higher education services provider iNurture Education Solutions, which raised an initial $4.9m from BII in October 2014.
BAI has made seven education deals in China, including EZJ by Will Wang, a GCV Rising Star in 2016 (see profile), while BDMI has at least three, including Flat World Knowledge and Learnship.
However, Bertelsmann’s Brazilian corporate centre and venturing unit has been probably most active in developing education as its main focus.
Puskaric, managing director of BBI since January after 14 years as a senior vice-president at corporate legal at the company’s headquarters in Gütersloh, Germany, said: “Bertelsmann has been here in Brazil for more than 40 years. But when Thomas Rabe became CEO in 2012, he decided to look beyond Europe for growth and further expand in India, Brazil and China.
“The idea for BBI was born in this period, to start with corporate investments in education and digital media. We considered how to enter the market and decided to start through funds of funds, Monashees and Redpoint Eventures, to learn about key drivers of the market and understand the Brazilian ecosystem on venture capital and private equity.
“These were more strategic drivers than only financial returns. We co-invested in JusBrasil, a legal platform in the top 10 for traffic, and Bidu, an online insurance broker, with them [in 2013 and 2014 respectively].
“But most of our interest is in education. My mission is to contribute to Brazilian society through improving education– long-term, sustainable investment in high-quality education, such as training medical specialist and consultants.
“Brazil is one of the biggest private education markets in the world and we foresee disruption in this space through education technology so wanted to get close to startups, for example in mobile learning.
“We committed to Bozano Investimentos’s smaller [R$65m ($20m)] education technology and services funds and took the largest stake in the Brazilian market leader in corporate training, Affero Lab along with the International Finance Corporation and management. Last year, we also committed to Bozano’s R$800m fund, Bozano Educacional 2, as an anchor investor – our role is to provide strategic advice.”
Puskaric said the knowledge of unique local markets in certain sectors meant expertise that could be shared more easily across other corporate venturing units and through the business groups for potential acquisitions under the new Bertelsmann Investments division.
He said: “From the corporate centre we have traction with Bertelsmann divisions on M&A for publishing, video, TV and services. Brazil is the fourth-largest internet market with 64% penetration ahead of China or India, even if it is currently not doing so well [as them] on growth and bureaucracy.
“It is a great help that Joern [Caumanns, executive vice-president of M&A and CFO of Bertelsmann Investments since January], with whom I have worked for more than 10 years, is CFO as he has so much M&A experience.
“It is good to have Bertelsmann Investments [as a division] now, as it further fosters corporate venturing at our regional investment platforms and what plays out in one vertical can do so in the other regions.”
Makkar, who has headed the corporate centre for Bertelsmann India since 2011 and been managing director for BII since it was set up in 2013, agreed.
E-commerce
Makkar said in a statement: “We work closely together [with the other digital funds in China, Brazil and the US] in evaluating potential investment targets.
“One such example includes BII’s recent [$5m] investment in Roposo, a fashion social network. It was great to leverage on the market knowledge of our colleagues at Bertelsmann Asia Investments who have invested in a similar business model, Mogujie, in China, now a multibillion-dollar-valued company.
“Growth in India and China is still significantly higher than in the developed countries. The sectors Bertelsmann invests in – digital media, services, education – show above-average growth rates. Consumer spending in India is expected to double between 2015-2020 – this demonstrates the potential of the market.
“Generally, Bertelsmann has a long-term perspective in all its growth regions, so we are not worried by short-lived market fluctuations.”
Across its four investment platforms, Bertelsmann Investments has backed at least 23 e-commerce companies, more than half of which have been in China. Seven of these BAI e-commerce deals were made last year, although Mogujie was its first and made out of BAI’s second fund.
Both BAI and BDMI use shadow equity schemes to incentivise their teams by giving a performance bonus based on the returns from a cohort of deals as if it were a traditional venture capital fund. Makkar said BII was also carving out a similar shadow equity scheme.
Mogujie acquired its competitor, Meilishuo, which had been backed by China-based media group Tencent, for $3.6bn in January to form Meili. This was a far cry from Mogujie’s $10m series B round in 2012 and its $1m A round the year before.
Zhaohui (Jeffrey) Li, Tencent’s investments managing partner and a co-head for M&A, said he regarded BAI’s returns as being “pretty decent” with a portfolio of highly selective deals, increasingly at the earlier stage, such as Keep, which Tencent led for its C round last month.
Before Tencent, Li had worked as an investment principal at BAI for two years. He led deals there for BitAuto and Phoenix New Media. Bertelsmann had reportedly invested $12m in BitAuto in 2009 – it floated on the New York Stock Exchange a year later and BAI sold its stake to unidentified buyers for $65m at the start of 2014. BAI invested $2.8m for a 2.9% stake in Phoenix as part of a $25m round and the company floated in 2015.
Wayne Shiong, another ex-BAI investor who left in September 2012 to become a partner at China Growth Capital, agreed his former colleagues retained a strong reputation. He said: “They are still considered as an active early growth investor in the market and I would certainly love to do deals with them.”
BAI’s Long said its success had in part been down its ability to hire talented people and its bottom-up approach to investing and building the group (see human resources). She said: “I enjoyed working with both Jeffrey and Wayne. I like to work with people with high IQ and EQ [intelligence and emotional quotients] and integrity.
“The skillset of analysis is not the difficult bit but rather it is culture and communication skills. I hire them young and give them responsibility rather than acquire established professionals. On the buyside you learn by small mistakes and reflecting on them. So I don’t push them in the first two or three years for results but give them $500,000 on a first deal they bring so if it is a mistake they can learn and it doesn’t cost too much money.
“Bertelsmann is very entrepreneurial driven, having been made up of 1,000 smaller companies, and it is motivated by finding innovation by entrepreneurs in different fields and geographies.
“As a Chinese national, living in US for seven years, I was asked [in 2008, a year after joining BDMI] to go between Beijing and New York so they could have some feet on the ground. Bertelsmann realised China would be one of the most important international markets in the future and innovative in the consumer internet due to having the largest single language population and a productive innovation culture with 7 million college graduates each year.
“As a bottom-up investor, BAI focuses on China. India followed after we had identified the success factors for BAI – dedicated approach and local team.”
BAI started with a handful of fund commitments, including to Morningside, which Long said she was “very proud of as it was a series A round investor in Xiaomi [phone maker that had been valued at $44bn]”.
She added: “[Making fund commitments] was a way, given I was away from China for seven years, to start to understand the market.
“Our focus is to be relevant to Bertelsmann’s core and try and find links with current business so we are bottom-up – look for opportunities to try and fill gaps. For example, in automobiles we would look for commerce or financing.
“China is at a different stage than, say, Brazil with new growth levers particularly around digital media.”
She added that BAI’s focus or investment theses were:
• Online and mobile video streaming – you will not see “Made in China” on new companies, such as Music.ly, but there are app-producing factories for utilities, gaming and social. One company, Bigo, in six months has grown Southeast Asia, Brazil and Russia and in three to five years could be worth $10bn. If not them, then another.
• China has the largest middle class at 200 million people. In China the middle class is taking off in first and second-tier cities.
• China has a really big role in artificial intelligence (AI). It used to be only Silicon Valley but China’s coastal factories have an edge in future hardware with AI software. Adding in big data from China’s very big population and sensitivity to privacy could be China’s major contribution. A consumer-focused, big-data-driven AI.
• China’s further modernisation, urbanisation and industrialisation.
Media
BAI has made 66 investments, including the four commitments to VC funds, a few less than BDMI’s 79, including commitments to seven VC funds, according to company records. But, whereas the New York-based team has conducted two social media and communications deals, according to its classification, online reputation management company Traity and app studio Thirty Labs, all of BAI’s dozen investments in the broader media categories were in social media and comms, including culture blog Douban and menstruation app Dayima.
Instead, nearly a fifth of BDMI’s deals have focused on video or music streaming and online publishing.
Cete said the important issues BDMI was analysing were virtual or augmented reality (VR and AR), including June’s investment in Germany-based Splash, messengers and bots, distribution and discovery with customised content and channels, new platforms, such as Snapchat, and online video.
Sim Blaustein, a partner at BDMI who “spearheads” its seed fund with 22 deals, according to his company profile, has posted BDMI’s analyses on influencer marketing, VR and short-form video to Slideshare as part of a sharing of what the future landscape could look like.
As befits a former director of strategy at Bertelsmann, Cete said: “Part of our job is to be ahead and an ear on the street. We had 30 from Bertelsmann’s divisions at our media summit [in July in New York] with meetings around it.”
BDMI sold its stake in video distribution service VHX to Vimeo in May but has tapped a rich seam in this area, with other deals including Jukin Media, while in e-publishing its deals have included Hello Giggles, a women-focused website co-founded by actress Zooey Deschanel in 2011 and acquired by Time in October for a reported $30m, and fashion website provider Clique Media, which raised $8m in its B round in August last year.
Marrying the two areas of fashion and video, BDMI had originally invested in StyleHaul in February 2013 before RTL invested $6m three months later. In November 2014, RTL through its Fremantle production unit then took a controlling stake in StyleHaul for $107m, although milestone hurdles could have valued the business at about $200m.
Bertelsmann described StyleHaul as “the best example of how the strategic work of our funds may pay off for our divisions”.
Cete said: “BDMI is a service provider to Bertelsmann but invests as a VC with its fiduciary duty. Maybe a third to half of portfolio companies have very regular contact or contracts with business units, for example Marfeel with Gruner & Jahr (G&J) or StyleHaul with RTL.”
Business unit venturing
Bertelsmann prides itself on the level of empowerment for its main divisions or, as it describes itself, “a very decentralised working company”. As Cete summed up: “It empowers entrepreneurs.”
Given its core businesses in RTL, Arvato and G&J all have more than €1bn in revenues, this means where there is a clear interest Bertelsmann’s divisions can invest in startups directly, as well as through regional investment platforms.
Last year, Arvato, acquired an initial 40% of Intervalor, a provider of financial services in Brazil, with an option to increase this stake.
RTL has also invested in VideoAmp and Clypd last year, while its Netherlands-based RTL Ventures unit has listed seven deals, including an exit for Sizz.
G&J also runs the Greenhouse Innovation Lab as an incubator and lab for internal ideas as well as external startups, with the first projects being completed last year (see entrepreneurial seedlings).
Less than a year after Bertelsmann acquired all of G&J, having bought out the Jahr family’s remaining 25.1% stake in late 2014, the Hamburg-based publisher set up a €50m Digital Ventures fund in September 2015, led by Nicolas Kirschner and Beate Koch. The Digital Ventures fund’s first deal announced earlier this year was in vintage design marketplace Pamono, although G&J has been acquiring venture-backed or other startups, such as Employour in November and Danato in June last year, and entered into a strategic partnership with the Netherlands-based startup Blendle as part of its digitalisation push. About half the €50m is to be invested as cash with the remainder as the value of advertising offered to portfolio companies in G&J publications.
In April 2011, Random House, Bertelsmann’s English-language trade book publisher before its merger with Penguin in July 2013, became an investor in Flat World Knowledge, a publisher of college textbooks. The Random House investment closed the B round announced in January that year led by BDMI and VC firm Bessemer Venture Partners.
Venturing history
And the book publisher Penguin Random House had Random House Ventures, a book publishing-focused venture unit set up in 2000 by Richard Sarnoff, who left to join private equity firm KKR initially as an adviser in 2011 then as co-head of the technology, media and telecoms industry team in 2014.
Sarnoff had been president of BDMI after its creation in 2006. BDMI “kind of” looks after Random House Ventures after Keith Titan, a partner at BDMI, joined Cete in 2006 from Random House Ventures where, according to his profile, he managed investments in American Reading Company and Xlibris, acquired by Authorhouse.
Bertelsmann’s corporate venturing history stretches back further still. Bertelsmann had set up a private equity fund with banks Citi and Morgan Stanley in 2007.
FremantleMedia Ventures had been the relatively short-lived social gaming-focused investment unit of Bertelsmann’s entertainment and TV production company, with its Ludia portfolio company acquired by Fremantle. Tobias Schiwek, one of two people taken on in 2014 to the fast-track executive management program sponsored by the Bertelsmann executive board, describes himself as an “intrapreneur” for the company and head of ventures at UFA/Fremantle Germany.
Bertelsmann, through RTL, had also backed GMPVC, an ad-for-equity fund. RTL has kept this idea alive with its German children’s TV station Super RTL in January 2014 reportedly offering a media budget and, depending on the deal, cash to potential startups.
Further back into the 1990s and Bertelsmann had provided Jan Buettner with $75m, initially $25m, for Bertelsmann Ventures (BV) to invest in 12 companies. BV Capital, subsequently renamed e.Ventures, then raised a $250m fund in 2000 with Bertelsmann having less than or equal to 10% of the pool.
Also that year, the height of the dot.com bubble, Bertelsmann had proposed a $1bn eBertelsmann fund.
Top five media company fund launches in 1999
Corporation Size ($m)
Time Warner 500
News Corp 300
Comcast 250
Reader’s Digest Association 100
Freedom Communications 10
Source: The Corporate Venturing Directory & Yearbook
Bertelsmann said it had a history of working with venture capital, “either by using our own funds, like Bertelsmann Ventures, or by funds set up in cooperation with partners, like BV Capital”.
“Bertelsmann Ventures was founded in 1998. In November 1999, Shobhna Mohn founded Bertelsmann Valley, a unit specialised in early-stage financing of startups. This was later merged into Bertelsmann Capital Ventures under Jan Kantowsky [who subsequently left to join Alix Partners]. Since 2006, we have BDMI and in the following years we founded BAI, BII and BBI.”
Shobhna Mohn was also one of four co-founders of BDMI, along with Sarnoff, Cete and Titan, with Long joining a year later, according to Cete.
Looking ahead
With a platform in place, Bertelsmann said there were no immediate plans for further expansion: “We are keeping an eye on other countries and markets. Often, we have local subsidiaries on the ground – Bertelsmann has operations in about 50 countries. However, the focus of our VC activities is clearly on the BIC [Brazil, India and China] countries, the US and – with a few exceptions – Europe.”
Its next Growth Regions Conference, held about every 18 months, will be in Beijing in November. The last such conference took place in Delhi in 2015, where managers of various Bertelsmann growth regions businesses – divisions and funds – were brought together for three days to share experiences and knowledge, according to BII’s Makkar.
Long said BAI was already considering selecting Silicon Valley VCs with a China angle as part of its development.
Puskaric said his current focus was building success in Brazil but he had an eye on the broader Latin American market for potential expansion.
For BDMI, Cete said it was considering larger, later-stage deals, such as last month’s FloSports, a subscription-based direct-to-consumer sports media company that raised $21.2m from a consortium co-led by VC firm DCM and BDMI.
After closing BDMI’s Berlin office in 2014 and seeing the departure of his European colleagues, Jan Borgstädt and Tobias Schirmer, at the end of 2014 to set up VC firm Join Capital, Cete said he was also looking at whether to add new partners to the NYC office.
Conclusion
The power of Bertelsmann’s venturing approach comes from the combination of top-town strategic decision-making about where and what will be important – large population centres of China, India and Brazil alongside existing markets and supporting the core, digitisation and finding new business lines – along with the bottom-up focus from talented, motivated investment managers on finding entrepreneurs with a global edge.
After almost 20 years of trying different options around these themes, the creation of Bertelsmann Investments and continued flexibility to try other forms of partnerships and acquisitions and business division investing, the company seems to have found a powerful combination to maintain its position as a large, global, diversified media and services conglomerate.
And, in this case, the revolution might be televised.
Profile: Urs Cete, BDMI
From the Powerlist published by GCV in May 2016
Urs Cete rose through the ranks of Germany-based media conglomerate Bertelsmann and its corporate venturing unit after he joined his “first real employer” more than a decade ago having dropped out of his PhD program in Leipzig in Saxony after four years.
Cete, head of Bertelsmann Digital Media Investments (BDMI), the US and Europe-focused corporate venturing unit of the Germany-based media company, manages more than $180m in seed and traditional early stage funds. BDMI has closed more than 120 portfolio transactions in both the main and seed funds in the past 6 years alone, as well as seven VC fund commitments, and exited 21 portfolio companies, including online video StyleHaul, according to its website and deal information shared with GCV Analytics.
Cete said its activity slowed in 2015 compared with 25 new and follow-on deals in 2014, despite “getting a new fund generation in 2015 out of which we are investing now. He said: “The reason for this is we were quite focused on exits and overall have exited over 10 portfolio positions in the last 24 months.”
Its most recent deals this year are still unannounced, with only two – Inverse’s A round and Unmute’s seed round – being public. Among last year’s 12 deals, two were unannounced. Public ones included Marfeel, a Spain-based mobile advertising technology provider, and Visionary VR, a US-based virtual reality company.
Thomas Rabe, CEO of Bertelsmann, said: “BDMI plays a critical role in Bertelsmann’s innovation and growth efforts. Thanks to very close collaboration with our operating businesses ranging from TV broadcasting, magazine and book publishing to business services, BDMI is successfully connecting our businesses with innovative young startups.
“In the case of BDMI’s StyleHaul, it led to the acquisition by our TV division RTL Group. Besides BDMI’s focus on North America and Europe, Bertelsmann has separate venture activities around the globe in China, Brazil and India. This gives us a unique global network of expertise.”
These other venture activities are Bertelsmann’s Asia-focused investment team, run by Annabelle Long, Bertelsmann India Investments and Bertelsmann Brazil Investments, as well as education-focused investments by the corporate parent. However, BDMI is the oldest and most active venture team, followed directly by Bertelsmann Asia Investments, which also is very active. Brazil and India have been established more recently with smaller venture teams and hence have amassed smaller portfolios.
Cete added: “2015 has been a very busy year for us where our portfolio of early-stage startups was able to raise $119m in funding. Given the expected slowdown in the economy and funding markets this is particularly exciting. Many of those funding rounds had corporate investors besides us participate in or lead those investments.
“This clearly highlights the importance of corporate venturing in the media space. Having exited a significant number of portfolio companies in 2014 and 2015, I am really looking forward to 2016 and beyond as new developments like virtual reality or changing user behaviour particularly of younger audiences will offer exciting investment opportunities.”
However, the transatlantic dealmaking requires Cete to be travelling between the US and Europe regularly – his quote above was provided just as he was boarding his next flight – following the closure of BDMI’s European office in 2014. The former team in Berlin, Jan Borgstädt and Tobias Schirmer, has in the meantime set up a VC firm, Join Capital.
Cete overall sits on nine startup boards, such as the affiliate marketing company Skimlinks and digital content recommendation provider ZergNet. But perhaps the final word about Urs Cete and BDMI comes from its portfolio companies.
Alicia Navarro, CEO of Skimlinks, said: “BDMI exceeded all my expectations as an investor, since you get the best of both worlds with them. You get the benefit of BDMI as a strategic investor, where they deliver exceptional strategic value in the form of insights and introductions both within Bertelsmann and across other international media companies. And you get the benefit of BDMI as a traditional VC, looking out for the team and the company’s best interests.”
Greenhouse heats entrepreneurial seedlings
‘Innovation is a big challenge for everyone and not many corporations solve it.” Just as many startups set themselves big, audacious goals. This challenge was one Jens Uehlecke said he had set for himself to tackle as one of a handful of “intrapreneurs” – internal entrepreneurs – working under Bertelsmann’s entrepreneurship programme, another being Tobias Schiwek.
Uehlecke’s work led to the creation of the Greenhouse Innovation Lab at Gruner & Jahr (G&J), a Germany-based publishing house and Bertelsmann division.
He said: “At Greenhouse, we try to tackle two typical problems of corporate innovation. First, at many corporates, it takes forever until in-house innovation projects take off because of slow processes and politics. Second, investments in make-cases are made based on spreadsheets filled with assumptions. However, we know from the startup world that a successful early-stage startup usually evolves and pivots.
“We address these two problems by shortcutting the corporate innovation process. Before new business ideas get management attention and are up for discussion, we test them thoroughly. This involves checking for potential market size and synergies with G&J then testing.
“During a three-month validation program, we apply startup methodologies such as the lean startup approach and design thinking to generate insights, we build MVPs [minimum viable products] and we live-test them. The goal is to allow the ideas to evolve in a safe space and to generate strong evidence for or against an investment case. Eventually, we present the findings to the leadership team and make a recommendation.
“The goal is that about 20% of all projects get further investment. Success is defined by coming up with a clear case. If we make a good case against an investment, great – we save a lot of money, time and other resources. Failure, however, would be not having tested an idea well enough.
“How do we compare to other innovation initiatives? Greenhouse is designed so that it is as effective as possible in the G&J cosmos. We combine internal and external staff in the cross-functional teams. We try to leverage in-house expertise as well as get skills on board that we don’t have in-house yet, we work closely with stakeholders to ensure implementation, and we work in an external space that, again, is close enough to our HQ that people can go back and forth if necessary. We budget up to €50,000 per project, but whereas we had initially planned for ideas to be tested in cohorts, we chose not to go this way as we did not want a delay to wait for the slowest champion to emerge for all projects.
“We have worked on almost a dozen projects so far, including content, commerce, social media tools and media sales projects. We have recommended three projects for further investments – one is up and running – Club of Cooks. In a second case we are looking into a buy option through our startup fund [G&J Digital Ventures] and number three will be announced at Dmexco [digital marketing conference in Cologne] in September.
“Our default is to pull the plug on projects, whereas most corporations three months into a project have an impulse to move forward. Some projects have also helped others, for example we had a tool to help content be posted on Facebook in other markets which can then be a benchmark for their conversion rates. Another developed a content management system framework for one project that we used again.
“For the successful projects, everything is possible, from being part of an in-house unit, such as Club of Cooks, to spin-out or taking a stake in a third-party company rather than set up a new company.”
With three successes out of its first year, however, Uehlecke’s own startup initiative could be regarded as something of a success even if it takes the hit rate to about a third.
Human resources
The recent establishment of the central human resources (HR) department reporting to the executive board, with a focus on education and talent management, advanced last year according to Bertelsmann’s annual report, points to how decentralised the conglomerate has been.
That it is being created now also points to the central importance hiring and managing people is to Rabe’s strategy as an entrepreneurial company.
Bertelsmann said it “expressly aspires to be a home point for creative talent and entrepreneurs”. Rabe said: “We have to position Bertelsmann such that our company becomes the first choice for entrepreneurs who want to grow their own businesses and let them expand internationally. As a privately managed company with a long-view approach, we have every opportunity and at the same time the necessary flexibility and freedom to do this.”
Bertelsmann pointed to the founders of businesses taken over by Bertelsmann that were still on board, including Stephanie Horbaczewski (StyleHaul), Sharzad Rafati (Broadband TV) and Jim Triandiflou (Relias Learning).
And it added: “We recruit talent in various ways. For one, there are a number of Bertelsmann HR initiatives aimed specifically at entrepreneurially-minded potential employees – Talent Meets Bertelsmann, which is how Will Wang joined [BAI, see profile], or the Bertelsmann Entrepreneurs Program, where BAI boss Annabelle Long was “discovered”, to name just two. Also, group employees who previously worked in other departments feel drawn to venture capital. Urs Cete, head of BDMI, for example, previously worked in the strategy and controlling department at the Bertelsmann headquarters in Germany.”
And the company encourages what it called “close interaction between Bertelsmann’s investment platforms and our divisions”.
“Various dialog formats serve to promote this interaction. For instance, BDMI organises an annual Digital Media Summit, at which startups present their businesses to our colleagues from the Bertelsmann Group. Beyond this, exchange of know-how with the divisions often happens directly through people. For example, Dora Yi, investment principal at BAI, was previously chief investment officer at Bertelsmann’s music subsidiary BMG in China.”
Cete said that while there had been stability among his New York-based partners over the past few years, there was turnover of junior team every two to three years. He added that while HR was a Bertelsmann unit that helped him hire and manage staff, BDMI hired directly for its recent junior through an advert on LinkedIn and Twitter.
But retaining top talent is helped by its structure. He added: “Sure, incentives [Bertelsmann’s shadow equity scheme] makes a difference to attract and get good deals as founders and co-investors look to aligned incentives.”
Profile: Will Wang, BAI
Published in GCV’s Rising Star 2016 in January
It is perhaps no surprise that a media and education group would have a strong career development scheme. The training scheme at Bertelsmann Asia Investments (BAI) is proof that when talent meets opportunity, impressive results can occur.
Within only three years of his investment career, which only really started in September 2014 when he was given direct investment dealmaking authority, Will Wang had already led investments in 10 companies out of a total of about 40 at BAI.
Annabelle Yu Long, managing partner of BAI and CEO of the Germany-based publisher’s China corporate centre and member of the main group management committee, was full of praise for Wang.
She said Wang joined BAI in August 2012 “as a fresh graduate” from the London Business School and BAI’s talent programme. Wang said his break came after he “was the leader of the winning team of Bertelsmann’s Talent Meet Bertelsmann business plan competition”. Wang’s edge in the competition was in part due to having created or co-created three startups before the event.
Long added: “Wang’s investment career was accelerated by working directly with the BAI management team to take in a steep learning curve.
“Recently, Wang has also participated in Bertelsmann’s Preparing for Future Opportunity study programme for mid-level management at the Insead business school in France.”
Wang himself recognised the challenge of being on such a fast track. He said: “The biggest challenge for me is that I am so young. With only three years’ working experience, I find myself facing the challenge of providing strategic advice for the 10 CEOs I am now working with.
“In terms of getting the cash back at exit, I am fresh and I have lots to learn from Annabelle. I am grateful for the steep learning curve I have been on that arises from considering all the business challenges the CEOs are confronted with every day.”
Such reinvestment in staff training is usually reserved for the brightest stars. Of Wang’s 10 angel to series-B-round deals, half have already achieved up-valuation within a year. The five up-valuation deals were XiaoZhan, which had an up-round series C by Sequoia; EZJ, which had an up-round series A by SIG; Career Dream, which had an up-round by ChangAn Capital; Keep, which had an up-round by GGV; and MONO which had an up-round by BAI and CRK2.
Wang’s five other proprietary deals were Mioji, a series B with Morningside and DCM; See, a series A with IDG and Morningside; Tocar, as an angel with CRK2; Open, as an angel with CRK2; Penguin Guide, as an angel with GGV and Trustbridge.
The strong strike rate came about after more than 1,000 visits to technology, media and telecom startups in China and his frequent blogging. Wang has also participated in most of the other successful deals devised by BAI, such as Dayima, from series A to series C, and Lagou, from series A to series C. Wang actively takes management responsibility in five portfolio companies.
His hope over the next five years is to have delivered a “home run return for BAI – be the VC investor of a $1bn company”.
Unsurprisingly, therefore, Wang said: “Corporate venture capital units should leverage the stable source of capital from the corporate as a strong value proposition to aid long-term, visionary entrepreneurs.”
He should have enough time to see his goals realised.
University Ventures’ fund intrigue
One of the attractions of most venture capital funds to its managers is that the money is committed and then legally required to be delivered when the fund-controlling general partner (GP) strikes a deal. This limited partnership (LP) agreement forms the basis for how much GPs get paid and under what conditions the money can be invested.
It is rare indeed for LP commitments to shrink rather than rise unless a key-man or other clause is affected, causing the LPs to change their mind.
So the regulatory filings for University Ventures’ second fund last year were intriguing. The one filed in August 2015 put the fund at $136m, compared with the $105m University Ventures Fund I, launched in 2011. A nice increase, but a total less than the $188m it disclosed in an April 2014 US Securities and Exchange Commission filing. And back in March 2013, the fund had raised $175m, half its planned total of $350m, according to its filing at the time.
The fund’s main managers were then and are now Ryan Craig, the founding director of Bridgepoint Education, and Daniel Pianko, the first outside director of Altius Education, with Gregg Rosenthal, an education expert from Bertelsmann also on the filing as an executive officer, with Troy Williams joining in July this year from MacMillan’s New Ventures unit. David Figuli, former general counsel to two state university systems, was then still acting as a principal to the fund, judging by his LinkedIn profile, although he is no longer an executive officer in the latest filing as he was in 2014.
Bertelsmann revealed in March 2014, when the target was still $350m, that it had agreed to provide half of the second fund’s total cash. However, a source close to the fund’s limited partners said Bertelsmann effectively changed its mind as it regarded the strategic mission from setting up University Ventures as “fulfilled” hence “not that important any more now”.
Instead Bertelsmann set its strategy around early 2014 as a focus on e-learning and online services in the health and education sectors and so started to do larger investments, such as Realis Learning, its biggest acquisition in the US since 1998, Udacity and HotChalk. Now, Bertelsmann’s focus appears to be on expanding the education businesses in which it is invested rather than pursuing new startup investments in the US, although this does not hold true for its growth regions, such as Brazil.
University Ventures has not responded to various emails on this and other topics but the source added: “It was set up to invest smaller amounts in different areas and companies to learn about the education market. That is why within University Ventures, we cooperate with partners who know a lot about the education industry.”
There is no official update on the LPs in the second fund and information requests last summer to the main investors in the first fund, Germany-based media group Bertelsmann and University of Texas Investment Management Company (Utimco), were unanswered, along with a request to University Ventures itself.
Utimco’s investment returns filing for 2014 showed it had just more than $24m in value from University Ventures’ first fund – through two vehicles – up from nearly $5.7m in mid-2012.
A version of this article was first published by GCV last year
Media’s new titans
Digital giants increasingly dominate the global advertising market. In 2015, Google, Facebook, Baidu, Yahoo, and Microsoft accounted for 19% of all the global ad spend flowing through all media, according to media agency ZenithOptimedia’s 2016 Top 30 Global Media Owners report.
Their rise helped account for ZenithOptimedia’s conclusion that nearly half its top 30 media owners lost media revenues in 2014 compared with the previous year, although in two cases, Time Warner and CBS, this was because media owners disposed of some of their media activities.
This backdrop also helps account for Bertelsmann’s feeling of satisfaction about its increasing revenues and profits last year and increased proportion of business coming from faster-growing segments.
Jonathan Barnard, Zenith’s head of forecasting, said: “The traditional media owners in our top 30 ranking have been scrambling to scale up their own digital businesses, to various degrees of success. As digital ad technology – such as programmatic buying – spreads to traditional media, it will further shake up the businesses of traditional media owners, but also provide them with new opportunities for growth.”
When asked about Bertelsmann before its interim results, Barnard said: “Much of Bertelsmann’s recent growth has come from Penguin Random House, which we don’t follow as it doesn’t sell advertising. Its media businesses by our definition – businesses that sell advertising – are RTL Group and Gruner & Jahr, and RTL’s growth has not been sufficient to compensate for G&J’s decline in recent years.”
This points to part of the strategy media groups have found for offsetting the industry’s shake-up – diversification. Bertelsmann has targeted education as its third main business line, alongside media and services, while Barnard said it had considered Tencent and Naspers, “but their media revenues were not large enough to get into the top 30, as opposed to their huge e-commerce revenues”.
Tencent through its WeChat platform is one of the most significant and interesting media and communications companies, while Naspers has been transformed from a traditional publisher, in part due to its Tencent corporate venturing investment and other similar deals around the world.
But just looked at in terms of advertising-driven media, Barnard said: “The big five digital media owners control most of the world’s internet advertising market, and its rapid growth is propelling them up the ranking of the biggest global media owners.”
Top 10 media groups
Name Revenues (media, 2014)
Alphabet 59.6
Walt Disney 22.5
Comcast 19.7
21st Century Fox 18.7
Facebook 11.5
Bertelsmann 10
Viacom 9.6
CBS 9.6
News Corp 8.9
Baidu 7.9
Source: ZenithOptimedia
These five – Google (Alphabet), Facebook, Baidu, Yahoo (acquired by Verizon for $4.8bn in July this year) and Microsoft – between them had $88bn in media revenue in 2014. This was 34% of all the revenues generated by the top 30 companies and represents 65% of the entire global internet advertising market, which has grown at an average of 18% a year for the past five years, driven by the spread of mobile technology, the rise of social media and online video, and improved advertising technology, such as programmatic buying and local real-time search. Ad spend across all other media has grown by just 0.6% a year, Zenith added.
Facebook was the fastest-growing media owner in ZenithOptimedia’s top 30, with media revenues up 65% on last year. Baidu was second-fastest (up by 52%) and Alphabet was third (up by 17%).
These sorts of growth rates and scale have helped make tech companies the five largest companies on US stock exchanges by market capitalisation.
A look at similar rankings five years before and during the inflation of the dot.com bubble, albeit for their conglomerate revenues rather than using Zenith’s allocation, shows the rise of the digital tech companies has eclipsed even the good growth seen by the incumbent media conglomerates.
Largest media companies 2009 ($bn)
Name Revenues Net income Market cap
Walt Disney 36.15 3.3 34.5
Comcast 35.8 3.6 46.5
News Corp 30.4 -3.4 20.8
Viacom/CBS* 26.6 1.8 10.6/3.1
Time Warner 25.8 2.5 30.3
Bertelsmann 21.5 -0.1 N/A
Largest media companies 1997 ($bn)
Name Revenues
Time Warner 24
Walt Disney 22
Bertelsmann 15
Viacom 13
News Corp 11
*separate share listings but under common majority ownership of Sumner Redstone’s National Amusements
It will be interesting to see how the trends in media and telecoms affects future growth. Blogger Alex Danco in a series of posts said the next successes would go to those who figured out how to take advantage of a “here and now” type of scarce resource.
Danco said: “Traditionally in media, there were two points of industry friction – content and distribution. From the age of newspapers through radio and TV, although technology has evolved, the grand bargain has been the same – those who created content negotiated with those who distributed content, who in turn negotiated with advertisers.
“Then came the web, and everything changed. On the internet, there are an infinite number of channels and no limit to the amount of content created or discovered. The formerly scarce resources, content and distribution, were no longer so.
“It took several years before we figured out what the real new scarce resources were. They were “pull” and “push” – the ability to own someone’s active searching intent or destination, with Google the biggest winner, and passive consumption interest, with Facebook the biggest winner. Many new, successful media companies have emerged that all own interesting combinations of pull and push – Netflix, YouTube, HBO, Soundcloud, and Buzzfeed all come to mind. Ultimately, they are organised around the correct scarce resources – they get the paradigm right, and have the wind at their backs accordingly.”
Danco identified virtual and augmented reality as having “potential to truly own a ‘here and now’ type of scarce resource in some way”. But he said the most underappreciated and important piece of the future paradigm, which already exists today, might be Twitch, acquired by Amazon in 2014 for $970m, for its “content that is one-third active gameplay, one third passive media consumption, one-third audience participation and interaction”.
