How would I invest $ 50 million to refound the media ecosystem in Latin America
The ecosystem of media innovation is broken in Latin America. Legacy media see their printed/paper distribution falling systematically and there is no innovation in the traditional aspect of the industry that can force change to this sector. Not in the long run. Advertising revenues, from those printed versions, are still very high in relation to online income; forcing a delay in further investment in the businesses from digital platforms. This media — focused on other parallel businesses, and linked with traditional family ownership — have not added any value or significant growth. And, there we go. Or I will say here we go!
In March of 2011 we founded the local chapter of Hacks/Hackers in Buenos Aires, Argentina. Today, it is the largest in the world with more than 7000 active members. We hoped to generate a disruption, which did not happen… as we imagined.
Seeing further need for impact and change, I founded the Media Party, the largest productive meeting in Latin America, where we gather more than 2000 people each year to work on innovation, for which I also created the first acceleration fund for data journalism and the first media acceleration program in the world. This all took place in 2012 and continues today very successfully gathering local, regional and international disruptors, entrepreneurs, mentors, sponsors and investors.
We opened the door to dozens of enthusiastic entrepreneurs, investment funds, philanthropic and large corporations looking to make a change in the media model and especially in our part of the world. It was and continues to be very exciting as we have not yet been able to see the growth of dominant digital media in Latin America. Dozens of good ideas and great entrepreneurs end up being discouraged by the current market opportunities, driven by the lack of stimulation or directly trampled by other legacy operators. Many projects, with great potential, are in stuck in “the middle of the road” because of the inability of potential investors to find them, invest and support their growth.
The funding system is also broken. The philanthropic-driven innovation system is based on spastic efforts to use funds (or their interests) from highly profitable businesses without the need for any rush. With a mandate to generate new business, these funders support projects that otherwise could not exist but, unfortunately, without them would also cease to operate and are not independently sustainable. Investors want to be first, but they do not want to be alone in building a difficult structures or change to markets in order to make things happen. This dependence of philanthropy on media innovation has made communities of innovators into beggars of opportunities. At least in Latin America, and among the available funds and the media entrepreneurs, appears a layer of intermediaries more interested in managing the cash than in accelerating innovation. The result of this system is that the great entrepreneurs end up abandoning their own economies and join projects in central countries leaving behind their own markets.
Where should funding come from to accelerate innovation and achieve native or reconverted digital media, capable of dominating the monetization market? Philanthropy is limited, slow, and insufficient. Venture Capital investment moves fast, is focused on exponential benefits and does not wait. Ideas, teams and projects that could be detected early end up putting efforts in more lucrative or disruptive markets and — as in Simpsons chapter — at the end everything returns to normal. Our region and our markets get left behind because of pacing, culture in change and the current investment/funding model.
It is important to also acknowledge that the training system is also broken. Universities are totally out of focus in terms of betting on journalistic business, training spaces have been co-opted by large Internet corporations more interested in journalists trainings to use their opaque technologies than finding new business models as a whole. The communities are a little lost, it must be said. Debating and fighting, the constant struggle between philanthropy and for-profit business exists without too much direction or impact. This creates a unique opportunity in embracing open data as a new approach, as a differentiator in media entrepreneurship and creation. We take the best examples of what has and does work and apply them both technically, regionally and culturally to the markets as well as, and most important, learn from failures and mistakes.
While for many that is disappointing, I firmly believe at this is a business opportunity. If I could create a fund to accelerate media innovation in Latin America and offer significant returns to investors, I would do so in a completely different way from what currently exists in the market. The company-by-company investment model, which is traditional in the venture capital world, does not work to impact the media ecosystem. It is slow, inefficient and companies grow in litany, investors are frightened quickly and seek other areas of comfort. After all, they end up blaming the entrepreneurs, and the entrepreneurs suggest, always without offending the investor, that they have not given them enough time to grow and continue to need and receive more capital. The traditional funding of a startup or investment with exit strategy can sometimes and often be “lost in translation”.
How would I invest 50 million dollars to make a profitable business, and transform the media ecosystem in Latin America?
Imagine for a moment, that Latin America is a roulette in which, in a first round, you can bet on all the numbers; assuming that if, at some future time, finally the roulette hits one of those numbers. Those who played from the beginning will have special rights for each number to enter to play each time.
Specifically, it would apply a 15/15/20 cascade model to be distributed over 3 to 5 years.
$ 15 million for new opportunities, $ 15 million for product validation and $ 20 million for stabilization and growth.
It is not a question of squandering the first 15 million dollars to see what happens, but to establish continuous flows of financing, training and transfer of value aggregation. Work at an early stage with dozens of entrepreneurs, journalists, programmers and designers and organizations, improving capacities, and creating permanent bridges in the development of opportunities, where the best in all results in the end. It becomes a cooperative, incubator, innovator, disruptor and mentorship model with investment focus.
The cascading method in the selection of innovators works for both venture capital investments and as, to use an example, the selection process that the Cuban music school makes to choose its best pianists. In the schools of music of Cuba everyone has a right of access to the conservatories but only those that stand out by merit finish in the philharmonic orchestras and higher education. So does Y Combinator.
In many cases, investors hate paying expenses, training and programs. They see it as an unnecessary cost. Especially those who manage capital that is not their own, and must be extremely conservative in ensuring return. But, let me be clear, investment in short “brushstrokes” has not paid off in our region. The ecosystem of investments and acquisitions is almost non-existent in Latin America for the world of media. The traditional mainstream media have been rather skeptical when it comes to acquisitions and purchase of services. Most do not define themselves as technology companies, but as content companies that need technology and end up delegating the development of the heart of their business to large outsourcing players that “make” their platforms.
Someone will ask, why invest in opportunities and in people when what an investor wants is to maximize the returns of companies that are currently billing? The final payoff would be secured from the beginning, and give investors the opportunity to get in touch early with entrepreneurs before they decide to move to other latitudes. And even if they did, we would be betting on their future. In Hacks/Hackers Buenos Aires we have seen dozens of the most ambitious entrepreneurs and innovators that we detected, and who ended up moving to New York in order to grow their projects. The region as in most markets then suffers from tech and disruption diaspora.
In the scenario presented, the fund may take convertible notes in the early financing obtaining special rights in the detection of talent. With that initial investment, it will not be difficult to stimulate the birth/launch/creation of about 500 new companies. Something of that we learned from the first call of Media Factory, as part of my ICFJ Knight Fellowship, where we received more than 300 applications: marking the path with opportunities allows the doubting entrepreneurs to focus on new steps. More than a dozen new media went out of the first Media Factory, even without being directly funded. Innovation, inspiration and support works!
The second phase would include $ 15 million to work on prototypes or small and medium-sized projects, but also some large ones with a first right to future investments. Using the example of Urban.us, a very interesting model to follow that establishes a permanent flow of knowledge: the investment fund focused on the solution for the future of cities has a fluid internal process of talent detection and transfer of knowledge. It does not matter if it is incubated, accelerated or invested, if the teams are in the same city or in several at the same time. The important thing is that they are connected.
A percentage of conversion to a second growth stage is expected to be 5%. That is to say that in this second phase, it could be expected that — from the initial 500 companies — 25 to 30 new media companies, media technology, open data enterprises, and so on will be born.
The term born is actually very important here, because through this workflow of knowledge and solutions they will be launched with new and stronger basis that will be the foundation for long-term growth and success.
It is a reasonable amount for a market of 700 million people. We would stop discussing who pays for services and start thinking about what is the most efficient way of transferring value to improve quality and access to information and news.
The third phase is the one that closes the circle. At this stage, it is as if those small bets on all the numbers of a supposed initial roulette come with an option to purchase: $20 million dollars to invest in half a dozen companies. As mentioned earlier, growth in a truly developed and supportive environment and with different actors at stake, would improve the ecosystem of exits, mergers and acquisitions.
We have learned that in order to really support that all important “leap in growth and quality” once the execution of the team is validated, it takes a large injection of capital and commercial backing to bring media and or startups to the next level. After initial efforts and investment of seed capital and, by having a mature teams in recruitment and procurement, this crucial next level of business operations and growth towards sustainability would operate by capitalizing on the initial investment in the ecosystem, and acquiring or contracting resources from other companies developed during the innovation process. As you can imagine, it is a constant evolution of growth, support, learned lessons, innovation, best practices and examples of positive return on investment.
The highest part of the investment structure would achieve some levels of sustainable and impactful ventures, with knowledge, capital and a network of contacts to continue growth, market development as they become dominant. At the end of the process, in addition to the cultural, social and economic impact, as well as improving the quality of information and achieving stronger market-place democracies, venture capital investors could participate in 10x capital growth and at a projected internal rate of return of 30 %. On the other hand, those strategic partners could consolidate the growth of their businesses and take priority in making acquisitions that allow them to make their businesses sustainable.
For this to make it happen, it is necessary to coordinate forces with all philanthropic organizations, technology corporations and venture capital funds. Develop the fundraising efforts for regional capitals to balance the investments coming from central countries. Let’s not focus, for a while, the conversation about only the fine print and venture capital ego. Instead, let us focus on the central discussion on how to be disruptive. In the last five years,
I’ve been putting together a global network of media innovators that include Trei Brundrett and Melissa Bell from Vox Media, the founders digital native players like Mic, Umbel, Graham Holdings, Quora, Facebook, Twitter, Buzzfeed, Google News Labs and I had the chance to work with Knight Foundation, MDIF, Omidyar Network, North Base Media, NXTPLabs, among others partners. They have supported this vision and efforts in the past, and I think that is time to take all this to the next level. Who knows, maybe, at the end of the road the double zero shows up and we take, as a result, the profits of all our bets.
