VCs should invest in influencers. Seriously.
The tranquillity that comes when you stop caring what they say. Or think, or do. Only what you do. (Is this fair? Is this the right thing to do?) <… > not to be distracted by their darkness. To run straight for the finish line, unswerving.
- Marcus Aurelius
I recently came back from ‘Startup hero’ program at Draper University. It was a life-changing experience, where I’ve met a lot of new friends and watched how real deals are made in Silicon Valley. It was fun to watch investors during the Demo Day — because all of their interests can be narrowed down to 4 things: blockchain (more than 50% of the investors are crypto-oriented), VR, AR, AI. That’s it.
If you’re not one of these, you’re out. I was.
Unfortunately, that’s how it works: either you are a part of the hype, or you’re on the sidewalks. There is no ‘in-between’. And it’s interesting to speculate why that is.
My last post was about demand-driven economy and how it changes the fundamental, classical study of economics. If you don’t want to read it, here is the short version: in the demand-driven economy the real asset is demand (i.e., users or subscribers or MAU/DAU) and your goal is to aggregate it. In this new world the marginal cost of production is 0. Meaning, it costs you (as a business) nothing to have 1 more customer. And that’s game-changing.
Well, IT companies (especially in the spheres I mentioned above) are not the exception either. That’s why VCs tend to invest in IT startups.
The nature of IT companies is that they:
a) Require massive capital upfront: for product-development and initial distribution before it goes viral
b) Have 0 marginal cost of production (i.e., can scale very quickly)
And for VCs that’s very appealing in terms of ROI. No other business can scale so quickly as IT.
Well, except for one.
Tim Draper (the founder of Draper Associates and whose university I visited this summer) says: ‘a business is anything that has money flowing in and money flowing out’. Like a factory: you buy equipment (money input), produce goods, sell goods to businesses with a margin (money output).
And if you think about, influencers are a business too. They can put money in: in production (videobloggers especially), in marketing (duh), in branding, so on. And they have money coming in through various revenue streams: book deals, ads, sponsorships, keynote speeches, YouTube monetization program, other influencers paying them to ‘collaborate’, etc.
Influencers are a business (even though they don’t really realize this — or want to). And if it’s a business — you can invest in it and get your ROI for equity. And if you dig deeper, you’ll realize why I talked about IT companies in the beginning of this article.
Influencers operate similarly to IT-startups. In fact, being their younger brother (content became popular recently while IT-startups have been around for a while now) in the demand-driven economy, their nature is completely identical:
a) Influencers require massive capital upfront: video-production and initial distribution
b) They have 0 marginal cost of production (i.e., can scale very quickly and become viral)
And as we see more and more YouTube and Instagram-celebrities, it becomes harder and harder (from a financial standpoint) for influencers to become popular. It used to be that you could take your webcam and start recording (hey, GaryVee!). But now (especially in Europe) to stand out, your production has to be high-quality, content has to be interesting and bring value, and it’s better if you invest a couple of grand in distribution for your personal brand. It’s just harder.
And that’s where VCs come into play.
Why is there still no VC fund that invests solely in influencers and vloggers? I would love to create one of those someday. Since IT-startups and social media influencers operate in a similar fashion and have a similar nature (i.e., can scale quickly but need cash upfront) — VCs should take advantage of this opportunity and just go for it.
The problem is, influencers themselves don’t realize that they are a business. They view themselves as creators — free from the economic burden of capitalism. But they are — and somebody has to explain that to them.
In my country (Russia) the top-5 influencers make crazy loads of money. Some sell ads on Instagram for $15 000 per Story post. (Yup.) Others do YouTube integrations and commercials in their show for a similar sum of money. You can teach (online-school), write (book deals), do nothing (post on Instagram) and make money. Instead of market capitalization, influencers have followers. And the more followers they have, the more money they can make — the more interesting they are for advertisers. Being an influencer today is amazing — all you have to do is be you. And aggregate viewer attention. Influence is power.
But to be successful, you have to be the first one. That’s why it was easier (for some) back in the day when YouTube was still in its early phase. Today it became much harder to stand out in the constant content stream and become a successful influencer. For free at least. If you have money — you can still win.
There is nothing out there in the market that allows influencers to raise capital for a cool YouTube show idea. I had 4 requests this last month for such thing. And I don’t know where to go. I think it’s time we took this influencer thing seriously and started viewing it as a business: with investors, deal flow and market rules. This is a clear opportunity and good money to be made here.
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