Venture Capital Becomes Sexfriendly
SAN FRANCISCO, July 26 — Except for the sexual twist, Friendfinder Inc. sounds like the quintessential investment prospect for venture capitalists. The company, based in Palo Alto, Calif., operates social networking sites that boast 140,000 new registrants a day, and $200 million in annual revenue.
But the company’s main site, Adult Friendfinder, helps people meet for purposes of having sexual liaisons. The content, including explicit photographs and language, has put off mainstream investors.
“Over the last 10 years, we’ve met with a dozen venture capitalists,” said the company’s founder, Andrew Conru, who holds a Ph.D. in engineering from Stanford. “The conversations end fairly quickly.”
Times and investment tastes may be changing. Mr. Conru said that in recent months he had received more sustained interest, and follow-up calls, from potential investors. More generally, mainstream venture capitalists and private equity funds are starting to show interest in companies that make and distribute pornographic entertainment and sexually related products and services.
Several former Wall Street investors are now specializing in marrying mainstream money with companies that offer such content or products. Separately, a handful of venture capitalists have already financed start-ups that receive a big chunk of revenue from making or distributing sexual content or products, and others are considering such investments.
Jimmyjane, a San Francisco company that sells sex-related consumer products including high-end vibrators (a gold-plated one sells for $250), has six venture capitalists among its investors. The company’s chief executive said he was close to completing a $3 million to $5 million round of financing with one or more funds — not merely individual venture capitalists but marquee funds.
“It will be a watershed,” said Jimmyjane’s chief executive, Ethan Imboden, formerly a design consultant to Nike, Motorola and other mainstream brands. He said the deal could be among the first major venture fund investments in an overtly sexually themed business.
The involvement of mainstream investors in such companies is still very much in its infancy, and even those with a vested interest in developing it say it may not evolve further. There are considerable hurdles, chiefly and simply the discomfort of many in being affiliated with products and services they consider immoral or that they think could tarnish their reputations.
In addition, investors are dubious that these companies can turn a sufficient profit to justify the risk. Pointedly, investors may find it tough to take sex-related companies public, or find big companies to acquire them, limiting their profit-making exit strategies. And the universities and endowments that invest in private equity funds and venture capitalists are not likely to approve deals they see as pornographic, investment bankers said.
But there are also some forces compelling greater interest, according to venture investors and investment bankers, like P. Holt Gardiner, a partner at Ackrell Capital, a boutique investment bank that focuses largely on the high-technology industries but has a growing practice in matching investors with makers and distributors of sex-themed content.
Mr. Gardiner said that investors were intrigued that the digital era is permitting a range of new distribution models — from the Internet to digital television — that are creating many opportunities to profit from making and delivering pornographic content. Those may include technical or payment infrastructure start-ups, like those that allow micropayments.
More broadly, Mr. Gardiner noted that there was an enormous flow of dollars into the venture and private equity business and that investors were looking for creative ways to put that money to work. He said sex entertainment companies could be purchased at a discount, because there was less competition from prospective investors driving up the price.
Investor reticence about the sex industry is changing notably, Mr. Gardiner said.
But he conceded that for the most part, the interest had yet to translate into many deals. He said that he had been involved in several discussions with venture capital firms that showed interest in a sex-themed company, did the due diligence, signed off on the deal, and then showed it to their limited partners (the foundations or wealthy individuals that invest through venture capitalists).
“Invariably, one of the limited partners balks,” Mr. Gardiner said. “It has happened four or five times.”
Mr. Gardiner said a key selling point in getting these deals done was to give the mainstream investors some public relations cover by repackaging the company in a more conventional way. For instance, he said, a company can still get a big chunk of revenue from the pornography industry but also branch out into mainstream business.
He cited as an example a company called Waat Media, which aggregates and distributes content to cellphones and has deals with several makers of explicit pornography, like Penthouse and the Vivid Entertainment Group. In September, Spark Capital, a mainstream venture capital firm, led a $12.5 million round of financing for Waat, but changed the company’s name to Twistbox Entertainment and packaged the company as a mobile content distributor.
Spark Capital declined to comment for this column, as did Twistbox, which remains the parent company of Waat Media.
Philip S. Schlein, a partner at US Venture Partners and among the venture capitalists who invested in Jimmyjane, has said that he believes investment in such enterprises will increase because society is becoming more open. Among Jimmyjane’s other venture investors is Timothy C. Draper, a partner at Draper Fisher Jurvetson. He did not return calls for comment.
Mr. Imboden, the chief executive of Jimmyjane, said what attracted venture capitalists was not anything unusual: the opportunity to finance innovative products that can change or take over markets. Their expertise can be valuable, Mr. Imboden said.
“They understand innovation in consumer products and branding,” he said.
Francis Koenig, a former hedge fund manager and now the chief executive of AdultVest, a small investment banking company in Beverly Hills focusing on the pornography industry, agrees that more investment dollars will appear thanks to the widespread availability of explicit content on the Internet.
“Accessibility breeds acceptance,” Mr. Koenig said. He has started two funds to invest in the industry, named the Bacchus and Priapus funds, but he declined to specify any deals his company had participated in.
Meanwhile, not everyone is convinced the interest among mainstream investors will make a long-term impact.
Paul Fishbein, president of AVN Media Network, a company that publishes information about the pornography trade, said the time was ripe for mainstream investment. But, he noted, the industry has historically attracted talk of mainstream investment that in the end has been mostly that — talk.
“For five years we’ve been talking mainstream, mainstream, mainstream,” Mr. Fishbein said of the pornography trade. “But it still sits on the periphery.”
[Via - NYTimes.com]