Miami Tech Rising

Over the past year the Miami tech scene has been getting a lot more national attention. I’ve had my own dabbling there working with colleague and friend Michael Hall of marketing firm  MediumFour.

So I’m looking forward to speaking at two forthcoming tech events down there.

The first is Black Tech Week in February. Black Tech Week is a week long series of events celebrating innovators of color during the last week of Black History Month. The Black Tech Week steering committee has invited top technologist, startup founders, venture capitalist, world leaders, grassroots activists and thought leaders to present at our 2 day summit, VC/Mentor mixer, Hour of Tech at Miami Dade County Schools, and a community hackathon as well as two pitch competition.

BTW is organized by the folks at Code Fever which focus on helping the next generation of young people learn to code. Find out more about Black Tech Week here – http://www.eventbrite.com/e/black-tech-week-tickets-15150416303

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I’ll also be giving at talk at Startup City: Miami in March, an event sponsored by The Atlantic and The Knight Foundation.

Join us for our annual trip down the coast to Start-Up City: Miami, where we will highlight South Florida’s high-growth (and high-profit) innovation while exploring the emerging models of entrepreneurship taking root in cities around the U.S. As a beachside business gateway to Latin America and the Caribbean, Miami is a cosmopolitan city with high ambitions in rocketing emerging markets. And those ambitions are charged by changes at home, where tech is transforming traditional industries and talent increasingly clusters in cities reinventing their brands. With Miami’s high-profile growth as our backdrop, we’ll ask: how can cities maximize their homegrown strengths and small business values, while attracting the outside resources to compete with their bigger peers?

You can find out more about Startup City here – http://www.theatlantic.com/live/events/start-up-city-miami/2015/

Congress of Future Science and Technology Leaders (June 28-30)

I’ll be speaking to a wonderful group of brilliant students at the National Academy of Future Scientists and Technologist’s Congress of Future Science and Technology Leaders this coming June. I’m humbled to be speaking alongside Foursquare CEO and Co-Founder, Dennis Crowley; writer, futurist and Director of Engineering at Google, Ray Kurzweil; prolific inventor Dean Kamen; Nobel Prize in Physics Winner John C. Mather and others.

But the biggest honor is that the event is convened by NASA Astronaut and NAFST Science Director, Buzz Aldrin.

The purpose of the event is to honor, inspire, motivate and direct the top students in our country who aspire to be scientists, engineers, and technologists to stay true to their dream and, after the event, to provide a path, plan and resources to help them reach their goal.

For more details on this event, visit scitechleaders.com

How Venture Capital Can Affect Wealth Inequality

Venture Capital, a type of business asset investing, has become one of the primary generators of wealth in our economy. Yet, most middle-class households (minority households especially) aren’t participating.

There are many reasons for this:

  1. SEC restrictions prevent non-accredited investors from investing in securities which would include hedge funds, venture and most other equity investing. Non-accredited investors account for 97.2% of American households, while accredited investors 2.8%.
  2. The investment instruments where minority households tend to over-index (like real-estate) aren’t nearly as lucrative as they once were before the 2008 financial crisis.
  3. The technology space, where much wealth for younger professionals is being created is often criticized for being insular. Diversity in the most prominent tech companies is well below 3%. Those numbers are even lower at most startups. While employment is an issue, the real problem here is that it prevents building experience investing in this space and knowing which companies to invest in. 

In short, the best growth vehicles for investors has changed but the accessibility and understanding of these areas in minority households has not. 

In this white-paper I outline potential strategies where business asset investing can be redesigned to improve these non-participating communities, both directly and indirectly. None of these strategies are about charity, philanthropy or social responsibility. Successful investment vehicles have to be successful first but they can be designed to have social benefits as a second or tertiary outcome. 

Why do so many venture capitalists ignore the single best predictor of the future: demographics?

David Teten, Forbes

Pandora is Not the Enemy

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This week Pharrell Williams sent the music industry into a frenzy by announcing that he only made $3,000 from 43 million streams of his massive hit song “Happy”. This made waves throughout the music industry as many people point out what is an apparent imbalance in the market.

However this isn’t a problem created by the streaming services. It was a problem with the way music was priced from the dawn of the digital era. The record labels lost this war a long time ago. Unfortunately a lot of people are just now figuring out what was lost. To point the finger at music sharing services like Spotify, Pandora, Beats and others is to misidentify the problem and the blame.

There are two main reasons that the streaming services are catching unfair flack for this:

The Economics of A Music Streaming Service

The first problem is the fact that streaming music is a tough business to be in.

The fees to join these streaming services are abysmally low – free for the majority of users and only $54.98 for a one year paid subscription on Pandora that allows you to stream whatever you want. The number of paying users is really small and the usage by free users is paid for by ads that they listen to.

We know Pandora makes money off of its free users but how much? We can start to guess if we apply the Pareto Principal which states the vital few pay for the many. In business this is known as the 80/20 rule, 20% of paying customers pay for the other 80% of non-paying customers. This works on the web because of freemium business models where web services monetize the two types of users differently. 

In this case Pandora sells its audience of millions of non-paying users to advertisers. The paid users offer $54.98 per year.  Pandora only has around 3.3 million paying users which at $54.98 add up to around $181.4M in revenue. Of course, not all users pay consistently, or for a full year, but lets agree to keep it simple for the sake of projecting.

We don’t know how much Pandora pays for ads but we do know their revenue in 2013 was $427M. Since we know paying customer revenue, we can subtract that from the total revenue and assume that Pandora pulls in $246M from its advertising revenues. We also know from press statements that around 61% of Pandora’s revenue goes to paying performance royalties. Assuming that number held in subsequent years, it would mean $150M is left to be paid out to the recording artists.

Pandora reportedly had 80,000 different recording artists in its catalogue at the time of its IPO. While, its probably grown considerably, I’m not sure those numbers are public so lets use to old number to be safe. If you divide $150M by those 80,000 artists, you get $1,875 at most they have available to pay out, per artist.

So Pharrell Williams actually earned 62.5% more money than the theoretical average Pandora music artist could possibly make. From Pandora’s perspective Pharrell broke the bank!

The Value of A Stream

For the second problem, thank Steve Jobs and Apple.

In 2003, with the launch of iTunes Apple famously negotiated the ‘fair-market value’ of an MP3 to be $0.99. While, this literally didn’t force everyone to sell MP3s at that price, the fact iTunes won as the platform of choice for the music industry and consumers effectively set this price for everyone in the MP3 selling business moving forward. The other thing this deal did was to allow for the unbundling of the album.  People no longer had to buy entire albums to get single songs. They could get single songs from the album at $0.99. Anyone selling music could sell for less than $0.99 but they couldn’t go above unless they offered more value (in the form of selling WAV files, FLAC files, or other formats that were better quality than MP3s).

But a stream is not an MP3. Streaming a single song from a single source isn’t valuable. An MP3 I can actually buy directly from an artist or music outlet. An MP3 one can ‘own’. In that way (and that way only) they were similar to physical media. Physical media (CDs, Tapes, Vinyl) were different in that they had inherent scarcity and value. The costs of production, manufacturing, distribution, marketing and promotion were all added up and some margin above cost of production set the price of sale.

MP3’s changed things dramatically. The cost of distribution became nominally low while the cost of manufacturing an MP3 essentially went to nothing. This is because the cost to ‘make’ the MP3 is some infinitely small fraction of the cost of owning a computer and having electricity to power it. The rest of the costs stay the same. 

When the Record Industry negotiated with Apple for the cost of digital music, they ultimately took the stance that costs of production were not more than half the cost of sale. CDs used to sell for around $20 each, MP3 albums (on average) sell for around $10 each. The cost of a single MP3 is around $0.99.

So what is the value of something that you can’t ‘own’ like streaming music? Something that you want to have access to from anywhere in the world from any device? Streaming is like the digital equivalent of radio. The record industry negotiated price points that forced Pandora and services like it to adopt radio-like business models.  But so far digital radio ad buys haven’t accounted for the type of revenue that terrestrial radio ads do, resulting in the streaming services having the razor thin margins that they have.

Beyond that, people aren’t used to paying for radio. From their perspective, for the past 100 years its been free. They also aren’t used to paying more than $0.99 per song or more than $10 per album. If the average person used to buy at least 5 albums per or 50 MP3s per year from iTunes, $50 per year is palatable for streaming services. If that price goes to far above $50 per year, people will just go back to buying MP3s because they will feel they are getting more for their money. Buying MP3s may not be the endless supply of all music that streaming is, but owning something still provides an endless supply of enjoying SOME music versus none.

The fact that Pandora raised its prices today is a slippery slope.  If the other streaming services follow suit and raise prices too high, it just sends public demand back to wanting to own their music and the streaming services will screw themselves out of business.

You can blame The Record Industry or you can blame Apple but don’t blame Pandora for a business model that was forced on them.

What I Learned about Tech and Business from Tyler Perry

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When I tell people I used to work for Tyler Perry there are overwhelmingly two reactions. The first is the number of people around the world who haven’t ever heard of him or his work. The second reaction is laughter or condescension:

“The guy who dresses like a woman?”

“The guy who makes those black films?”

“The guy who puts his name in the title of all his films?”

Yes. That guy.

Regardless of whether or not you think he’s a creative genius, he is a genius of a different type and a lot smarter than people seem to give him credit for, especially when it comes to business.

First, some background. I only worked for Tyler Perry Studios briefly  from 2006 to 2007. It was just after he had closed a deal for $200 million dollars to build his studio in Atlanta and produce his first set of TV Shows, HOUSE OF PAYNE and MEET THE BROWNS, for TBS. I was a Sound Designer and Audio Engineer at the time and not involved in any business dealings so nothing I’m saying here is confidential. In fact, much of what I write here can be discovered through a few searches on Google, Wikipedia or Variety.com.

In any case, through following Perry over the years and reflecting on my own observations at his studio, I learned a lot that I later used to find success in the tech industry.  What are some of these lessons?

1- He Knows the Business He’s In

The secret to Tyler Perry’s success is really in that second group of people I mentioned. The smug people who underestimate him.

The first lesson I learned is, rarely are successful people in the business of the things their critics think they are.

People think Tyler Perry is in the business of pleasing the public or critics. He’s not. He’s not even in the business of speaking to his ‘niche’ audience. No, Tyler Perry is in the business of making movies that earn returns for his financiers. Yes, he speaks to an audience he understands but he’s always been smart enough to focus on what matters most which is the bottom-line.

But what makes him stand out, is that people at every level are always underestimating his ability to do one thing because of their opinion about how poorly they feel he does another. In this case, because they don’t get or simply don’t like his films, they often assume they will flop. When they don’t, not only has he succeeded, but he’s surpassed expectations that were probably unfairly low to begin with.  He knows this and uses it to his advantage. 

2 – He’s Bankable

At Goldman Sachs 10,000 Small Businesses they use the term ‘bankable’ to describe people and companies who are attractive to investors. In other words, people who prove they will use money wisely and therefore attract more money.

There is a saying that goes, “A good engineer is someone who can do for $1 what any idiot can do for $2”. In this regard, Tyler Perry is a good engineer.

His first film DIARY OF MAD BLACK WOMAN woman only cost $5.5 million dollars to make. It went on to gross over $50 million.

Many of the methodologies Steve Blank described in ‘The Lean Startup”, I watched Perry apply to his work in TV and Film. Prior to having the money to actually produce feature films, he just set up a camera and FILMED THE PLAYS ON STAGE!! Frugal innovation that would make even Navi Radjou proud. It was the sale of those homegrown DVDs and related merchandise and tickets that originally gave him his first big financial successes. This also proved he had an audience that was hungry and unspoken to.

It was these numbers that convinced Lionsgate to back him for his first few films. It was the success of those films that lead TBS to back him for TV syndication deal for his first two TV Shows, which lead his deal with Oprah’s OWN network and so on.

He essentially sold his first TV Show, HOUSE OF PAYNE, into syndication before he produced a single episode. This was smart for many reasons. First, it gave him the money up front to produce the show, which would go on to build his brand over the next five years. Second, because his deal with Lionsgate also underwrote his studio, this asset dramatically cut costs on producing the TV show (and all his subsequent TV shows and movies). Third, because TBS put the money up for a syndicated show, we ended up shooting and editing the entire series (which ended up being 7 seasons long) in just over a year. One year!

Why? Because the longer you shot a show, the more costs you have.  Staff, insurance, on screen talent, if it took 7 years to produce the show, you’d have to pay for all of those for 7 years. By doing it all in barely over one year, that’s essentially 1/7th the cost for the same amount of money.  That money he reinvested into producing other content which at that point could be sold for all profit.

The fourth amazing thing about that deal was the fact that he completely de-risked the entire process of launching a successful TV show in the first place.

Syndication means that a TV show will go on to air and ideally generate profit for the TV Network that purchased it for years. Usually syndication deals only work with popular, proven shows that have amassed huge followings when they originally aired. Shows like BIG BANG THEORY, SEINFELD, and CHEERS. Rather than run the risk of HOUSE OF PAYNE airing and not being that successful, by selling it directly into syndication he ensured that, regardless, his product was sold. It’s a bit like starting a business with a guaranteed exit.

There are a lot of people who try to argue away Tyler Perry’s success because of they don’t like his creative choices.  But they fail to realize that there are plenty of people who have talent who don’t survive in business. Talent isn’t always bankable, generating profit is.

3 – He’s Consistent

More than the fact that he knows how to operate leanly and still generate profit, the reason why investors continue to back his projects is the fact that he’s so amazingly consistent. He has NEVER lost money on a film.  Not a single one.  In fact, almost all of his films made all their money back on the first weekend, Which is crazy given that in Hollywood’s eyes he’s still relatively ‘new’ (he’s only been directing for around 12 years).  This is in comparison to an industry full of big name directors who have lost tons of money on various projects.

Here is a list of the movies Tyler Perry has made throughout his career and their box respective office earnings (and cost where I could find it):

Title / Budget / Opening Weekend / Total Earnings (in millions)

  • MADEA GOES TO JAIL Unknown/$41M/$90.4M
  • MADEA’S WITNESS PROTECTION $20M/$25.3M/$65.6M
  • MADEA’S FAMILY REUNION $6M/$30M/$63.3M
  • WHY DID I GET MARRIED TOO?  $20M/$29.2M/$60M
  • WHY DID I GET MARRIED?  $15M/$21.3M/$55.1M
  • MADEA’S BIG HAPPY FAMILY $25M/$25M/$53.3M
  • A MADEA CHRISTMAS Unknown/$16M/$52M
  • TEMPTATION Unknown/$21.6M/$51.9M
  • I CAN DO BAD ALL BY MYSELF $13M/$23.4M/$51.6M
  • DIARY OF A MAD BLACK WOMAN  $5.5M/$21.9M/$50.3M
  • MEET THE BROWNS Unknown/$20M/$41.9M
  • FOR COLORED GIRLS Unknown/$19.4M/$37.7M
  • THE FAMILY THAT PREYS Unknown/$17.3M/$37M
  • GOOD DEEDS Unknown/$15.5M/$35M
  • DADDY’S LITTLE GIRLS $10M/$13M/$31.3M
  • THE SINGLE MOM’S CLUB Unknown/$8M/$15.9M

This data is gathered from the IMDB page on Perry.

My initial reaction is holy cow, MADEA GOES TO JAIL made $90 million dollars! Combined his movies have made $792.3 million dollars. That’s just theatrical releases and doesn’t include merchandise, DVDs and Blueray, his TV and licensing deals etc. No wonder he keeps making Madea movies!

Beyond that, if he were an entrepreneur or a venture capitalist Perry’s track record would be the equivalent of a like 9.3 of 10. (This assumes THE SINGLE MOM’S CLUB may have lost money since it was a theatrical release with big talent but relatively low earnings. The rest almost certainly did not lose money based on what they ultimately earned.)

It’s actually stupid to bet against a guy who performs this consistently.

4 – He Bets on Himself

I’ve talked a lot about how much money Tyler’s work generates in this post. While the arts aren’t always about profit, being able to finance your own work means you don’t need anyone’s approval to get stuff done.

From what I understand, Tyler Perry is still 100% in control of all his own work. This is similar to how Mark Zuckerberg has built Facebook into a public company valued at over $50 billion dollars without ever giving up more than 51% ownership. It means that nothing happens at Facebook without Mark’s say. He controls the show.

Likewise, with Tyler Perry, he’s the world’s most successful independent film-maker. He never gave up control. Lionsgate is an independent film distribution company and it largely backs independent film projects.  By working with them instead of anyone else, Tyler insured that he never really gives up creative control of his work.  

This means he doesn’t have to go to the Weinstein Company or Sony or anyone else to ask for money to produce anything. He has enough personal wealth, and enough credibility and success to convince people to back his projects himself.

In fact, the way Tyler’s films are backed tend to resemble venture capital deals more than typical film deals. He proposes a project, investors put up money, he does the project and returns their capital at some multiple of what they originally gave him. That’s the whole bankability thing at play. But because he reinvested his early money to build his own studio, there are far fewer middle men to pay. This means the costs of making a film or show are far lower for him than they would be for anyone else not in his position which allows him to take greater risks on projects.

If he was working within the studio system, he’d have a much harder time convincing “The Studio” that his projects were the right movies to make in the first place. Studios tend to want to make a lot of changes to scripts and they inflate costs because to them, putting more money into fewer projects is more efficient.  But what that does is greatly diminish their tolerance for risk. This is why they spend even more money developing and retaining A-List stars who they then cast.  The assumption is that A-List talent leading well financed film projects is far more likely to succeed than a bunch of unknowns in smaller budget films. This, as a rule, is usually true. Unfortunately for writers and directors, this ultimately means they have less control over projects that are backed by big Studios.  When you hear some directors talking about how hard it is to get controversial films made, it’s because they are asking permission from people at major film studios who are inherently risk-adverse. The Studios want to finance money makers, and they will do everything in their power to ensure everything they produce is such. For them ‘controversial’ means alienating, and alienating audiences isn’t helpful if you’re trying to get the most people possible to go see a film.

The equivalent in the startup world would be the entrepreneur who successfully bootstraps a series of companies, versus entrepreneurs who only rely on venture capital.  Neither way is wrong and both can lead to great success but the boot-strapper can take greater risks because he or she has less people to answer to.

5- He’s Obsessive and Detail Oriented

Now you might ask yourself how on earth I could learn anything from a film director if I was working in the audio department. At most film studios, you’d be right. The sound designers usually don’t work too closely with the director.

I’m not sure what it’s like at his studio now but back then, initially I probably saw Tyler Perry once a week (which is a lot). He wanted to change the music, he hated the laugh tracks I added, he wanted some dialogue to be louder, he made suggestions on sound effects. It wasn’t just the audio department, he’d go into the writers room and rewrite portions of the script himself. He’d be on stage with the actors helping them with their performance. He’d supervise video edits. He was in accounting. He was in props. He was the lunchroom with the interns.

The point is, he wanted to know what was going on at every level of his business. While it sometimes it felt like micromanagement, it was ultimately because he cared.

On top of that, he was used to doing a lot with a little. When you build something from nothing, you aren’t used to the people around you chipping in to make things happen. This is because people tend to assume you’re going to fail, and therefore you aren’t worth going out on a limb for. As the founder you know differently, you bet on yourself and you double-down on yourself. This means you’re going to make sure everything gets done.

At Tyler Perry’s studio I saw both sides. Initially he was always there making sure everyone was doing everything. This is completely unsustainable for any business. You have to delegate to scale. As he got more comfortable with the people around him, and saw that we were all actually doing good work (and better work if he left us alone 😉 he backed off. He was able to delegate and ultimately start doing multiple things at the same time.

While that ‘founder anxiety’ probably still rears its head every now and then, to be successful at his level you have to learn to let go. Regardless of the business you’re in, this is a good management skill to develop.

6 – When the Rules Aren’t in Your Favor, Make New Rules

While Hollywood has about 100 years on Silicon Valley, the film and tech industries have a lot in common. Both have very insular communities at “the top” which make it hard for newcomers to break in, both require access to capital or financing that not everyone has access to, both require more than just creative talent to be successful, and whether it’s intentional or not, a lot of people feel like many forces conspire to keep them out of the industry at all.

When faced with a tough environment like this, there are two options: fight the system or work outside of it.  As far as I’m concerned, Tyler Perry provides one of this generations best examples of a businessman who worked completely outside of the system until the system couldn’t ignore his potential for profit. At that point he had the leverage to basically do whatever he wanted.

From what I can see of his career, Tyler Perry rewrote all the rules that lead to his success because the old rules would have completely prevented it. While that isn’t always easy, it’s necessary for anyone who wants to succeed when the odds are stacked against them.

Sometimes fighting the system in place is a futile effort because you as a lone individual usually can’t change an establishment fast enough to also benefit from the change. If your goal is to make it easier for the next generation that’s one thing, but if your goal is to change it and play in it at the same time, that’s almost sisyphean.

So the lesson here is that when you feel the rules of a system are working against you, one option is to stop working in the system altogether.  There is more than one way to do anything.

If you can’t raise venture capital as an entrepreneur perhaps because you feel decimated against or any other reason, then double-down on what you do have.  Changing the entire venture capital industry is hard, it’s not impossible but it’s likely not going to be a battle worth fighting if you need capital tomorrow.

If you have an idea for a product or company, bootstrap as far as you can. Do what you can to prove that customers are ready for that product.  If you still can’t convince investors to back you, then use that demand to partner with other businesses who can help you get your own to the next level. You never know, you might build a massive business without backing, in which case you’re in the best place to be.

But most importantly, don’t let the fact that the system wasn’t designed in your favor prevent you from trying at all. Not trying is not challenging and not being challenged is exactly what any establishment requires to preserve its status quo.

Your phone is no longer a part of you. It’s a weapon, pointed at you.

Michael Arrington

A Conversation with Peter Thiel and Local Philly Tech Leaders 9/22

On 9/22 myself and four other panelists will support investor Peter Thiel in support of his new book Zero to One. This will mark the first time I have the opportunity to introduce the local Philadelphia community to my new angel fund Third Cohort Capital.  

Peter Thiel is the Co-Founder of PayPal and the first outside investor in Facebook. His keynote will be followed by a panel discussion led by Technical.ly Editor-in-Chief Zack Seward featuring myself as a panelist alongside local investors Ellen Weber (RobinHood Ventures), Richard Vague (Gabriel Systems), and Mark Samuels (SEI). We’ll be discussing the advantages and challenges of the Philadelphia startup ecosystem.

Learn more about Thiel, his new book and his contrarian strategy in this month’s Fortune cover story: http://bit.ly/abcThielFortune

You can read more about Third Cohort in this recent article from the folks at Technical.ly

Monday, September 22, 2014 | 8AM to 10AM

Franklin Institute | 222 North 20th Street, Philadelphia, PA 19103

Ticket: $45

VIP Ticket: $150

Register Now: http://bit.ly/ZeroToOnePHL

All attendees will receive a complimentary copy of Thiel’s new book. VIP guests will have preferred seating and access to a post-event meet + greet with the author, Mr. Thiel.

Launching Third Cohort Capital, an Early-Stage Investment Fund

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I’m excited to announce the launch of my new angel investment fund, Third Cohort Capital. Third Cohort came together when myself and eight other alumni of Goldman Sachs 10,000 Small Business program decided to pool our resources together and invest in technology startups. 

Some of you may know of my work over the years via The Appfrica Fund, a fund which exclusively targets early-stage tech ventures and social enterprises in Africa. After cutting my teeth there and learning how to help startups as a funder, mentor, and by sharing my experience, I learned I have a desire to do this regardless of location of the company. With Third Cohort I can do just that. We’ll be focusing on the broader tech space, entrepreneurs with great ideas and great backgrounds who need support from early-backers. 

In fact, we’ve already made our first investment into a company called Shadow that we’re super excited about. Shadow is tackling one of the biggest undertapped markets in the world: people who dream. For me they represent a unique opportunity to democratize sleep science while capturing data at scale about one of the biggest mysteries of human consciousness.

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Shadow began their journey by raising nearly $100,000 from over 3,500 people on Kickstarter. Building on that momentum they’ve accomplished a great deal since then that they’ll be announcing soon. I encourage you to follow their progress at discovershadow.com

A portion of the fund is dedicated to what I feel is one of the most inspiring alumni networks in the country, the Goldman Sachs 10,000 Small Business graduates. The types of businesses that go through the GS10KSB program are more traditional brick and mortar, mom and pop type companies. While these small business account for a growing number of jobs in the United States’ sluggish economy, they are traditionally under-capitalized. This is a problem we’ll help to solve.

I’m excited to expand the profile of entrepreneurs that I’m able to work with through Third Cohort! Follow us on Twitter at @thirdcohortfund.

TaskRabbit presents a clear, elegantly designed future in which work is done at the absolute convenience of the haves by a legion of smartphone-toting relative-have-nots. It’s an entire industry of doing shit people with more money than you don’t feel like doing.

Sam Biddle, ValleyWag