Q & A

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As a venture capitalist since 1981, Jonathan Funk has worked with emerging technology companies that specialize in everything from telecommunications to e-commerce.

The next major wave, he says, will deal with broadband technology.

In 1996, Funk helped form Media Technology Ventures to invest in seed and start-up companies. The firm now has offices in L.A., San Francisco and the Silicon Valley and is backed with $71 million by a consortium of large media companies.

He spoke with the Business Journal about the opportunities that lie ahead as broadband technology becomes more widespread.

Q: What will change once broadband becomes a large segment of the market?

A: It will totally change the way the consumer interacts with the world. As a consumer of both business services and entertainment, you will have seamless integration between a content experience and a commerce experience. You will watch content of some kind and then be able to engage with the content and make purchases, provide feedback, interact, answer questions, participate.

For example, you can be watching an NFL broadcast, point your mouse at a player and click on him. Then you’ll be able to get, at the same time as you’re watching the game, a bio of the player, view old clips of him, and buy a book about him. There are currently only small pockets on the Internet where you have this kind of seamless integration of commerce and content, but they are the exception and not the rule. With broadband, this integration will be much more pervasive.

Q: You seem to be focusing a lot of attention on local broadband companies.

A: We are looking at a number of deals in Southern California. Most of our work so far has been more on the Internet infrastructure side and the e-commerce side. So we haven’t actually made any investments in Southern California that you could specifically say are broadband companies. But we are looking at a couple that are very interesting and that would be classic broadband platforms. It’s an emerging category, but it is our top priority in terms of investment focus.

Q: So if it’s going to be such a huge market, are investors anxious to get involved at this point?

A: It will be a gigantic market. There are billions of dollars of capital that is ready to invest in this area. Everybody knows that this is the next wave, and we are all, especially in Southern California, very interested in spotting new opportunities.

Q: Are there other major investors, along with venture capital firms, looking for opportunities here?

A: If you look at the companies that we have as our investors MediaOne, NBC, WWP Group, Freedom Communications, Hearst New Media all of those are big media companies that are very interested in this. Every movie studio and every television network knows there will be a lot of opportunities, and they don’t want to be left behind.

Q: With billions of dollars to be invested in this industry, will a lot of it end up going to projects that might not have any viability?

A: That will definitely happen. We’ve raised so much money that needs to be invested, and as has been shown in prior cycles, some of that money is invested badly. When there is too much of it, there are simply not enough places for it all to go, and the returns are not as good. So there will be losses. But you could argue that broadband will create a whole new wave of opportunities, and that we will have another big wave of companies like Yahoo and eBay. That is something that remains to be seen.

Q: What are you looking for in a broadband company, given that it is a new industry?

A: It’s got to offer the chance to deliver content in a unique way over the higher-speed platforms that are being developed for the Internet. In other words, digital subscriber lines and cable modems. It also has to be able to bring together elements of traditional content delivery, like television and entertainment, and put those together in a way that is unique. Eventually, those two channels, Internet and television, are going to blend together. So we’re looking for the potential of convergence of the two delivery mechanisms.

Q: What is happening right now?

A: There are two things going on. One is, the infrastructure has to develop and gradually become more popular. Right now, the penetration is relatively slow, but by the end of 1999 and certainly in 2000, a large percentage of the population will have broadband access. So that has to penetrate deeply for a lot of business to be made. The second thing is that the right content models have to be developed for that particular delivery channel. It is still unclear what exactly those are going to be. You can look at entertainment, you can look at information, you can look at very niche-oriented content. But those two things have to develop together to create interesting business opportunities.

Q: How is the Los Angeles-based broadband industry different from that of Northern California?

A: L.A.’s big advantage is that there are some very skilled people here in creating original content, obviously for television and theatrical release. We are gradually building a pretty strong infrastructure for the launching of new companies. We have a big studio here in Disney that crosses into both traditional media and the Internet, plus the other traditional movie studios. So we have some unique advantages. Silicon Valley has a tremendous set of advantages, in terms of just the basic, emerging company infrastructure, and Southern California will never be able to catch up with that.

Q: Who are the people you see setting up broadband companies here?

A: It’s a mix of people out of technology and people out of the traditional studio environment. You have a lot of people coming out of a place like Disney, and a lot of people coming out of smaller companies. There are many people out of the entertainment industry, generally, but they all have a lot of entrepreneurial initiative. That is kind of the common thread.

Q: How do you evaluate management at these companies given that these people have very diverse backgrounds?

A: You look for talented management that has some relevant experience and also has identified a unique opportunity one where you can build a big business, have a competitive advantage. We’re looking for people who know or can describe how to build a big business and one that can be successful against the competition.

Q: The market for broadband is still several years away, and it will be some time before any of these businesses will be profitable. Does this put more burden on a venture capital firm that invests in them?

A: In terms of creating value, which is what we are trying to do, we see value being created for investors in the next two to three years, even though the ultimate potential of the business is four to five years away. Investors have shown an interest in funding companies that have yet to realize their full potential. So you’ll see a lot of money from our industry going into broadband-oriented businesses in the next 18 to 24 months that will be ahead of the real development of the industry.

Q: Does this make it hard to know right now which companies will turn out to have the right kind of business plan?

A: It takes a lot of experience in sorting through what is a good business opportunity and evaluating management.

Q: What is an example of a good business plan that you have come across recently?

A: One example is a company in Venice called CollegeBroadcast.com. They have a unique business proposition of working with the cable television networks of universities to develop and to deliver content to those universities, as well as to develop a complementary Web presence that they will tie over to the cable television infrastructure. It’s a brand-new business, but they have a lot of access to cable television communities within universities, and they have a pretty interesting story. That is an example of a classic broadband opportunity, where, if you can marry the cable television part with the Internet part effectively, you’ve got the potential to develop a business with a market that is big.

Q: Have you come across any companies that have already proven to be big success stories?

A: It’s too early still, so the answer is no. We have a couple of companies, not in Southern California, that are very well-positioned, and there are some other companies that are showing a lot of potential. Some local firms have spent a tremendous amount of money trying to position themselves for the broadband world, but you can’t point to any big winners yet. You could make an argument that WebTV is a successful broadband company, but they are not there yet either.

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