A fast-growing media and entertainment company, BBC Worldwide’s mission is to maximise profitson behalf of the BBC, a British public service broadcaster, by investing in great brands and content, and commercialising them around the world.
Very much influenced by the BBC itself, the world’s largest broadcaster, BBC Worldwide entered the digital space early by launching websites for its commercial brands, such as Top Gear, Good Food and Lonely Planet, as well as internationalising and monetising the online news service bbc.com.
From an early age I knew computers and networking would be central to my career, which began at the iconic London publisher Time Out, where in the evenings I built my start-up – a user-generated guide to London.
After an early exit I worked at AOL on proprietary publishing platforms and entertainment channels, absorbing the technical challenges of digital streaming while learning how to monetise large online audiences better.
I then went to help build the BBC’s firston-demand audio player, catapulting BBC stations into the most listened-to radio in the world. Keen for more commercial challenges, I moved to the 4iP venture fund in London, following my passion for entrepreneurship and early-stage digital companies to Phil Wickham and my Kauffman Fellowship.
Last year, I was asked to run BBC Worldwide’s digital businesses, which was an offer I could not refuse. In my new role, BBC Worldwide has started, for the frst time, to take minority shareholdings in early-stage digital companies.
In this article, I outline the state of the market for global media companies and explore BBC Worldwide’s approach to corporate venturing. Several short case studies highlight the early success of our strategies, which should provide a kernel for BBC Worldwide’s growth strategy.
The market and the need
As with all media’s forays into the digital space, the BBC has suffered some setbacks, but today the majority of our digital businesses are maturing and reaching profitability.
For example, bbc.com advertising sales grew more than 113% in 2010/11, well ahead of plan, and this year BBC Worldwide overall is on track to deliver over 10% of our total corporate turnover from digital sources. (See Notes at bottom, point 1.)
Despite this success, price deflationin digital formats and product unbundling, combined with the global economic downturn, are placing increasing pressure on all traditional media companies that previously relied on high-margin physical formats.
As a result, total industry revenues and consumers’ per-unit spend on items of media content are at best stagnant. (Notes 2)
If consumers continue to switch from analogue to digital formats, as we believe they will, we at the BBC must seriously consider how we can afford to invest in the high-quality programmes we have become known for.
As author Robert Levine reminds us: “The fact that video can be distributed practically free on YouTube has not really changed the amount of money it takes to make a television show.” (Notes 3)
This reality means careful managing of physical to digital formats, such as DVD to download-to-own, as well as searching for additive digital revenue streams.
Like many media companies today, BBC Worldwide faces challenges to maintain the fantastic growth of recent years. But we are bullish on our prospects for success and believe the physical-digital value gap can be made up – and in fact exceeded – through the new opportunities afforded by digital platforms.
The identification and understanding of these new opportunities is the primary objective of our new digital investment fund.
Good ideas from outside the box
Good ideas are not necessarily thought of in one place. Many media companies seeking new ideas create a research and development team, a corporate development unit or a new business division.
However, such internally focused innovation strategies inevitably constrain both the breadth of ideas and, more importantly, the method for getting them implemented.
The limits to innovation in large organisations have nothing to do with a lack of creativity or technology and everything to do with a lack of the managerial skills necessary to convert ideas into impact or action.
This limit is further complicated by internal layers of bureaucracy that stifle innovation and change. If BBC Worldwide is to continue to grow its digital revenue, as the revenue from physical formats diminishes, then it needs to look beyond adjacent opportunities and seriously consider what innovations are likely to change the media value chain and the way people spend their entertainment dollars.
Rather than a single “silver bullet”, the solution to continued growth is more likely to be a series of additive strategies connected to different parts of the media value chain.
With that in mind, BBC Worldwide’s digital innovation team is not one-dimensional, but multidimensional. It is a small and highly specialised team of digital media and early-stage investment experts.
The team members are inward and outward-facing venture capitalists spanning multiple geographies – the UK, the US and Asia – looking for businesses that do something new or disrupt something BBC Worldwide is already doing.
Our strategy is not about maintaining the status quo, but about creating the future – in other words, the strategy is innovation, and we expect to be disrupting, or at least agitating, some of our more traditional revenue streams.
The innovation team: toolkits, not tools
Team members are not centralised at BBC headquarters but located in, and therefore integrated with and respected within, their local geographies.
They have longstanding relationships in the start-up technology and new media ecosystems. Their skillsets span investing, operating and business development – the optimal mix of characteristics for highly strategic investing.
Naturally enough, we have launched our investment activities in San Francisco, as California is a digital media powerhouse and the US is home to more than two-thirds of corporate venture dealmaking. (Notes 4)
The diverse mix of skill-sets enables our team to lead any number and type of deals effectively.
While team members have experience making typical venture capital (VC) investments, they also have the operational know-how to spin out new companies from BBC Worldwide, acquire companies or partner strategically.
The real power and benefit to BBC Worldwide comes with a team that understands how these options can be used simultaneously. For example, joint ventures do not make sense when we already have the necessary skills and resources to enter, and hopefully dominate, the market ourselves.
BBC Worldwide and corporate venturing
At BBC Worldwide, we started off knowing two important things. First, traditional corporate venturing – minority equity investments by established corporations in privately held entrepreneurial ventures – is highly cyclical.
In 2000, established corporations were important players in the VC industry, participating in rounds well in excess of $16bn, approximately 15% of all VC investment in the US. (Notes 5)
However, the 2000 dot.com crisis in the public markets resulted in a dramatic contraction in VC activity, driving many corporations to fold their venturing activities. (Notes 6)
Given the high-risk nature of the VC asset class, it was surprising that the boards and shareholders of the corporate parent have habitually pulled back from corporate venturing investment when the losses start to stack up.
However, many of these programmes started late in the economic cycle, (Notes 7) in addition to reflect in the corporate desire to meet earnings per share targets and save cash during an economic downturn.
Second, many early corporate venturing groups and their employees were finance-focused– a reflection of their entering at the end of the economic cycle but trying to reap the rewards of dot.com dealmaking during the late 1990s.
Experienced programmes such as Dow Chemical subsequently moved toward a greater focus on strategic returns while still looking to be profitable, while new units often have explicit strategic goals, such as Merck Serono Ventures aiming to sell at least part of its portfolio companies to its parent.
At BBC Worldwide, we are not trying to structure a fund to beat Sand Hill Road’s finest independent VCs. Rather than mimic the VCs, we recognised our strength lay in bringing something different to the companies we funded – and something complementary to the venture community.
We therefore constructed investment criteria that ensured we:
l Concentrate on early rounds (A and B) where the potential financial writedown of the investment is money we can afford to lose. We set our treasury’s expectations low by saying we were unlikely to return the money.
l Expect to do at least one follow-on round. We do not promise the next round, or commit to it, but we are supportive to a fault. Being an entrepreneur is hard – having supportive and caring investors helps.
l Concentrate our investments in companies where the BBC can bring tangible value today or in the very near future.
l Combine, where possible, a straight cash equity purchase with capped, performance-based ratchets. If we deliver real value – traffic, advertising, sales – we are awarded additional equity.
Let the capital flow to the business responsible for delivering the primary strategic value rather than returning investment proceeds to the corporate centre.
This incentivises those sitting outside the investment unit who tend to be based on divisional performance.
In this way, we hope corporate venturing will be a vehicle for engaging and learning from one particularly innovative pool of digital opportunities – entrepreneurial ventures.
Corporate investment is an integral part of a firms innovation toolkit, but not the only tool. Traditional corporate venturing funds are often less connected to the needs of the parent company and make investments based firstly on financial rather than strategic motivations.
In contrast, we not only work closely with the operating units at BBC Worldwide but our strategy is also influenced by their needs and where we see pockets of opportunity.
As much as 50% of our time is spent interfacing with the core business – both in finding out where those pockets of opportunity may be and in socialising around possible investments or partnerships.
Early-stage investments– Viki
When BBC Worldwide’s digital team has yet to build up the internal knowledge and talent to execute fully on our ambitions, we instead take small equity stakes in existing early-stage companies.
Viki.com, a crowd-sourced video translation company based in Singapore, is one such case.
A natural fitwith our core distribution business, Viki gives us the ability to own subtitled content in hundreds of languages while receiving a licensing fee for the use of this content.
Additionally, having our content translated into dozens of languages helps us enter new territories and reach new audiences.
Clearly, this is a winning combination for us from a partnership point of view. However, at the same time we started evaluating an equity stake in the company.
The lessons we can derive from being closely involved with Viki – for example, taking a board observer seat – help justify a financial investment in the company.
Spin-outs – Wenzani and Lonely Planet
Very often, large organisations, such as BBC Worldwide, struggle to innovate at the speed of Silicon Valley, so another method we have used to drive innovative behaviour is the creation of spin-outs.
For many good reasons, being the incumbent in a sector results in an organisation being less likely successfully to invest in and launch disruptive ideas that might cannibalise existing revenues.
However, avoiding disruptive ideas is undesirable for any company wanting to deliver sustainable long-term value and retain high-performing and visionary staff, as it leaves openings for others to find ways to take your revenues.
In the case of Lonely Planet, one of the longest established and trusted travel brands in the world, we were faced with a barrage of competitive threats from the social, local, mobile space.
New companies like FourSquare and Gowalla, and products like Google Latitude and Facebook Places were changing the very meaning of “guidebook” and delivering content to consumers on a multitude of different platforms and in real time.
Based in Melbourne, Lonely Planet has been one of the most successful retailers of premium digital guidebooks across all the major app stores, but by offering a new version of the traditional guide rather than a wholesale rethinking of the guide for a mobile and smartphone age.
Sitting at arm’s length allowed the BBC Worldwide team to see that inside the Lonely Planet organisation there were ambitious, skilled and visionary developers and designers with a revolutionary idea keen to launch a social, local, mobile product of their own.
They were clearly frustrated that their idea was proving hard to realise within the organisation, probably due to fears that the proposed product would cannibalise existing sales or damage the brand.
Rather than have those visionaries leave, we allowed them to “spin-out” their idea into a separate company jointly owned by the founders and Lonely Planet and based among their competitors in San Francisco.
Lonely Planet provided the seed capital for Wenzani and an unrestricted license to use their content and brand.
With a limited amount of funding, a team incentivised by equity, and the use of lean start-up principles, Wenzani placed a product on the market in six months – virtually unheard-of speed within a large media company.
Today, Lonely Planet retains a majority ownership but we have provided the founders with certain controls allowing them to dictate the nature of future financingrounds.
This assures Wenzani’s founders and the staff they hire that the path to liquidity lies within their control. Making a decision to invest, in spin-outs or external projects, is a collaborative effort – we closely involve the operating units and align ourselves as such.
In the case of Wenzani, the chief executive of Lonely Planet was a catalyst for the initiative, looking for ways to diversify the business while limiting the capital output.
In this space, which is crowded and ultra-competitive, we would rather own a minority stake in something huge than a full share of an internal venture that lacks the freedom and structure to succeed.
Conclusion: small steps drive investment
The survival of any media company through the digital revolution is far from certain and levers for future growth are not yet fully established or understood.
While digital technologies are in part a threat to longstanding and profitable businesses, they bring with them enormous possibility that deserves investigation.
The mission is clear – BBC Worldwide must find multiple new revenue streams in existing or adjacent sectors and geographies.
In short, we must innovate, and as any entrepreneur or VC will confirm, there is no single recipe for successful innovation.
At BBC Worldwide we have built a flexible investment fund able to use any number of financing structures to complete this mission.
We have borrowed heavily from the VC model but recognise the differences and have thought carefully about how we might bring something new and complementary to the skills required to build early-stage companies.
As we put our capital to work, through traditional avenues as well as early-stage investments and spin-outs, we will be analysing our investments carefully.
The results will help us decide which sectors or geographies need far larger investments, and those larger investments – made through first-hand knowledge of a sector – will in five to 10 years’ time provide material value to BBC Worldwide and its shareholders.
This article originally appeared in Volume 3 of the Kauffman Fellows Report, Spring/Summer 2012, www.kauffmanfellows.org/vision-journal.aspx. Reprinted with permission from the Society of Kauffman Fellows.
Notes
1 BBC Worldwide, “Our Strategic Objectives 1: Drive digital growth,” in Annual Review 2010/11, para. 3, http://www.bbcworldwide.com/annual-review/annual-review-2011/ceo-review/1-drive-digital-growth.aspx.
2 Robert Levine, Free Ride: How Digital Parasites are Destroying the Culture Business, and How the Culture Business Can Fight Back (New York: Doubleday, 2011).
3 Ibid., 8.
4 Global Corporate Venturing, “12 Months to End-September 2011,” private data supplied for this article. http://www.globalcorporateventuring.com/.
5 Venture Economics data supplied by the National Venture Capital Association (NVCA), http://www.nvca.org/index.php?option=com_docman&task=cat_view&gid=99&Itemid=317.
6 Gary Dushnitsky, Exploring the Performance Implications of Different Corporate Venturing Objectives, a working paper (New York: New York University, 2002), 5, http://www.altassets.info/pdfs/NYU_1.pdf. Used with permission.
7 NVCA data, as above.