This isn’t the post I intended to write. I’d planned a detailed interview on capital and porn which would explain why business’s which deal with explicit sexuality are more likely to get funding from the Taliban than banks, financiers and other traditional lending institutions. I wanted to find out what the barriers are to adult business, how they might be overcome and which things are guaranteed to make an adult business seem untouchable.
My interest was born of experience. I know adult companies which have eight-figure sums of cash in the bank and aren’t allowed to provide their executives with corporate VISA cards as they’re considered to be ‘high risk’. Porn companies invariably have to grow without the benefit of external investment. Given most of them operate entirely legally, and that venture capitalists aren’t known for operating within a nuanced ethical framework, logic suggests the reason porn is so bad and getting funding is due to a misunderstanding of the rules which govern finance. I wanted to talk to an expert about those rules and see if we could provide some advice for people interested in doing it right.
It would have been great.
Looking for an expert opinion I contacted Fred Wilson, a venture capitalist who’s better known in blogging circles than he is in the world of finance (which is not an insult, but is the sign of a successful blog). Over the course of a few emails it became clear I wasn’t going to have the conversation I’d been hoping to and I gave up on getting detailed responses. Looking back on those emails today though, I see they provide a perfect example of the difficulty faced by the adult industry when attempting to mix in polite society. If you run an open-cast mine, sell advertising into school textbooks or design land-mines you can hold your head high at any table in America. Show people boobies? I think I’m feeling a little sick. I mean how can you live with the harm you cause?
Our conversation says more about ‘mainstream’ attitudes to porn than anything I could extrapolate. The mixture of revulsion and aggression in his answers to my, really pretty damn polite, questions mirrors many conversations I’ve had with people and companies who only have a problem with the commercial exploitation of sexuality if it’s done honestly. I offer our exchange here as an object lesson.
Sam to Fred:
Fred,
I’m a reader of yours with a blog about 10% as popular as yours on a good day. I’d like to ask you a few questions for a VC related post on mine.
My blog concerns the adult industry and you don’t need to be a fan, or even approve, to provide great answers. I’d like to get a sense for why VC firms avoid legitimate adult content, how that may change and what your own advice is regarding adult business’ seeking investment.
Is this doable?
Cheers,
Sam.
Fred to Sam:
It just has a taint that they’d rather not deal with
fred
Sam to Fred:
Thanks Fred - pretty pithy. Care to talk about why that is? I’m sure many VC’s have dealt with Playboy stock, why then would someone trying to emulate that company not be treated the same way?
It seems that there’s a degree of confusion. What would you say the limits are? How sexy do you have to be before VC’s close the door?
American Apparel have very sexy ads (featuring porn stars) and MTV specializes in teenage girls behaving sexually. I don’t mean to sound accusing, I’m simply trying to get a grasp of where the lines lie.
Sam.
Fred to Sam:
You know the old saying “I can’t define pornography, but I know it when I see it”
That’s how the VCs behave
fred
Sam to Fred:
I’m very familiar. Regarding legality though, I’m surprised that no VC’s have seen the potential and thought “This is perfectly legal, ethically sound in my book and a huge opportunity”. Do you think that if a single VC firm was bold enough to back a defendable adult business they’d start a flood? Could the hesitancy be due to fears regarding the difficulty of selling an adult company - however successful?
Many of the big online companies make a fortune from porn and receive funding but are careful about not being “only” porn. GUBA’s just done a deal with Time Warner and they make a fortune selling access to porn newsgroups. Would you say the smart way to pitch an adult company is as general interest with adult entertainment potential (like Yahoo! Groups for instance) and stealthily sneak in the back door?
Sam.
Fred to Sam:
You may be right but I wont do it.
Just isn’t my thing
fred
Sam to Fred:
Got it. Do you have any thoughts on why other VC’s aren’t doing it? Universal conservative morality? Fear of reprisal?
Sam.
Fred to Sam:
Its the taint I mentioned
I could give a fuck about morality
But I don’t want to be associated with porn
Fred
Sam to Fred:
I appreciate the honesty.
I’m sorry if you feel ‘tainted’ by this exchange. If you knew about the other work I did I’m sure you’d be surprised. I’m not a bad guy and I love your blog. Exploitation disgusts me too.
Cheers,
Sam.
Fred to Sam:
I don’t feel tainted by the exchange.
I was just trying to explain the situation to you in the most colorful way I could.
fred
Sam to Fred:
Glad to hear it. It’s really useful feedback too.
Cheers,
Sam.
NB: Fred’s blog is well worth reading if you’re interested in the business of money (or AOR - as the above suggests he’s not very ‘Rock-n-Roll’)
This is just so typical of the predatory capitalist viewpoint. Anybody care to speculate along with me as to exactly what we could find on his hard drive or in his IE history?
Why not open a venture capital firm using some of those funds you mention as being in the bank accounts of some adult publishers? Establish small grants or loans for people attempting to break into the field? Think of the bragging rights to be won if you discover the next Buttman?
Keep your originals Sam. The line “I could give a fuck about morality” could come in handy if this one ever goes into politics.
Actually, there’s a much simpler explanation for why VCs avoid porn, but it just raises another question.
VCs avoid porn because VCs depend on acquisitions and IPOs to drive their return on investment. For whatever reason, the public markets don’t like porn companies. It’s rare that porn companies can go public, and non-porn companies that acquire porn companies risk being tarred with the same brush.
The deeper question is, why do the public markets dislike porn companies? I would speculate that this is because few of the players in the industry operate with financial transparency. When is the last time you ever saw someone in the industry release their numbers?
This also speaks to the nature of VC. VCs live and die by the investments they make and their ability to inspire other big money guys to follow their lead. As such they tend to invest in what they know, and — within that — what they can cash out big in.
So a number of VCs are going to look at adult business and not have enough knowlege about them to make the risk (and lets face it, for as conservative as they are, they take big risk with every investment) worth it. Then they are going to worry (as Fred points out) that being associated with the adult industy will taint them. If other investors loose confidence in a VC, then it is going to be a hard row to sow.
In truth this is the opportunity for the industy to do for themselves. There is nothing stopping people within the industy creating a Porn VC fund. Quite frankly I am supprised they haven’t already. I mean where else are people going to go?
Quinn - That’s a good point (and one I aluded to myself in the exchange above). That said, mainstream companies are only transparent because they’re forced to be. Privately held companies never release numbers. The markets seem wary of porn I think mainly due to missunderstanding and fear. My friends who run hedge funds and work for finance banks often ask me about the market and invest heavily in other vices (have you checked the valuation of the online poker guys?). I suspect the right company, with the right potential and pitch, could break the impasse. In the US it’s less likely as interest groups would have a field day blaming investors for sex crimes.
I really like Quinn’s idea of a porn VC–there used to be a mutual fund, Morgan FunShares, which specifically invested in “sinful” companies as a contrarian strategy. It’s holdings included tobacco, alcohol, gambling, condoms, and the like.
I think there is also the issue of the cash out to consider. The VCs I have delt with are looking for investments they can cash out of in 2-5 years, and with each one they are looking for investments that can bring them 10x on their money. If a VC invests in 10 companies they more or less expect 6 of them to fail, 2 of them to break even, and 2 of them to give them a 10x cash out.
The two primary ways VCs look to get their money back are though aquisition or IPO. These are options that are currently hard for adult companies for exactly the reasons outlined in your main article. In fact of recent companies profiting off of porn, only Guba (nee SkinVideo) come to mind as a really good candidate for VC. I am sure there are many others, but that is the one that occurs to me.
But there is a flipside to all of this. There are real downsides to taking VC as well. I suspect that many of the companies in porn are profitable exactly because they had to start small, and grow their business.
All that being said, there is clearly a need for capital and financial institutions that are sympatico with the adult industy. I do think this is the opportunity for the adult industry to scratch their own itch. I could easily see a consotium of the big players combining resources to create a Porn Credit Union (and lord would I like that ATM card), and a Adult Angel Fund. I suspect the industry would get far more out of angel level investing, than of a full fledged VC fund.
Angel investers should be easier to attract as well. Traditionally these are people who have made their nut (Doctors, Laywers, etc), and are then looking for something fun to invest some very high risk money in. They will be less concerned with the “taint” that Fred discussed, and more excited that their money gives them the opportuninity to hang out with porn stars.
The comments with regard to exits are right on the mark.
Speaking as someone with some time on the “buy side” of the table, I see one factor no one has mentioned: the LPs.
People looking for VC money are often unaware that a major part of being a VC is raising the fund. The LPs are often universities, pension funds and other entities than high-net-worth individuals.
These LPs often have much more explicit limits than the VC, but a good VC would keep them in mind when evaluating deals.