The 5min Story in 5 Minutes, As Told By Spark Capital’s Alex Finkelstein
Got five minutes? Here’s an eye-opening example of how markets are analyzed, how VC deals are won, how startups are built—and a little bit about what might have been.
New York-based 5min Media, a video syndication company, started in 2007 as a portal for how-to videos, and became a top video-content aggregator before getting bought by AOL (NYSE: AOL) for $65 million last September. (Some people think of 5min as the “other” deal that AOL announced on the same day as its TechCrunch acquisition, even though 5min had a bigger financial value.)
Boston-based Spark Capital led 5min’s $5 million Series A financing round, which was announced in January 2008. The startup was originally based in Tel Aviv, Israel, and was led by co-founder and CEO Ran Harnevo. It ended up taking just under $13 million in total VC/angel money, and was guided in part by Alex Finkelstein, a general partner at Spark.
Finkelstein talks fast and makes deals faster. He says he usually knows within five minutes (which is appropriate) of being in a room with an entrepreneur whether he wants to make an investment or not. But that’s after doing months of market research, of course.
Here’s the 5min story, in Finkelstein’s words:
“My thesis was that how-to videos would get the highest CPMs [advertising cost per thousand impressions] on the Internet, given that someone watching a how-to video is a super-defined niche demographic, right around the purchasing decision, and has intent. So my idea was, as opposed to producing this content, could you go out and aggregate content under really, really attractive terms?
“I spent 12 months flying around and put a list together of the top 100 DVD content owners in the country for how-to videos. The top guy was in Salt Lake City, he had 200 how-to-play-every-sport-at-every-level DVDs. Each DVD had 40 individual task-level how-tos on them. I signed him up to a very attractive contract. I found two guys locally doing the same thing in the music space, and did that with those guys. At the end of that process, I cold-called 5min. It was four guys at Israel at the time. They had the exact same vision, which was not to produce content but to aggregate it under very attractive terms and then to syndicate it all over the Internet.
“They were about to sign a term sheet the next day [with another VC firm]. We convinced them not to sign the term sheet, and to fly from Israel to Boston, which they did the next day. We led the $5 million A round into that company, and it was acquired around three years later by AOL.”
Still, a VC (and startup) can always do better. In 5min’s case, Finkelstein notes that the company probably could have sold for double the amount today, given the tech environment is much frothier now than it was in September.
Which leaves the rest of us wondering what that really says about the market. But our five minutes are up.