Pongalo (October 2018)

Deal

https://www.seedinvest.com/pongalo/bridge

Decision

Yes.

Calacanis

CheckPass/Fail
1. A syndicate lead who has been investing for at least five years and has at least one notable, unicorn investmentFail: Not sure who the syndicate lead is, this question may be defunct for all SeedInvest deals
2. A startup that is based in Silicon ValleyFail: No, this startup is based in Los Angeles, CA.
3. A start that has at least two founders (with two, you have a backup in case one quits)Fail: No. One founder. Two previous co-founders both left the business and returned equity with non-competes. 
4. A startup that has a product or service that is already in the market (you’re not qualified to invest in startups that haven’t released their products—and frankly you don’t need to take this risk.)Pass: Had 1.8MM in revenue for 2016, $836k revenue in 2017. (Decrease in revenue?!)
5. A startup that has either (a) six months of continuous user growth or (b) six months of revenue.Pass: Has six months of revenue, and has grown 400% from May to July (upon releasing new ad-sponsored product)
6. A startup that has notable investors.Pass: 500 Startups, and several big wigs in media.
7. A startup that, post-funding, will have eighteen months of cash remaining, commonly referred to as runway (ask the founder and syndicate lead how many months of runway they will have post-funding)Pass: Yes, $20k in burn a month, $480k raised, so 24 months of funding at current burn (though burn will increase for growth.)

Why Investing

  1. As someone who is bilingual, I personally know the draw of content and media in an ethnic/non-English language. Although I am not a customer of these services (yet,) I personally know Chinese language community members that pay for services like iTalkBB, and the presence of “niche” platforms like Walter Presents demonstrates a novel market for specialized media. 
  2. The pricing and timing is right: at a valuation of $8MM it’s a little higher than ideal (if the company achieves $100MM in valuation that’s a 12.5x return rather than a 20x return if the valuation was $5MM,) but still squarely under $10MM. Crowd note at 5% for 24 months offers a good base line with upside possibility to equity.
  3. There is a strong demographic play (we know the United States is expected to have huge growth in the Spanish-speaking populations,) and though this isn’t a tech play, the network effects from an industry insider makes this a strong contender for this particular market.
  4. In my previous job, I worked for an international Latin American company, Open English. The existence of brands such as Batanga, iMujer, Inova, and the way that market was able to arbitrage and play to the strength of the Americas (leveraging currency arbitrage, similar time zones for doing business, learning and exchanging from U.S. Spanish speakers to Spanish speaking internationals) gives me strong confidence in the viability of businesses who compete on regional and linguistic differences.
  5. In addition, as bandwidth in the Latin American countries continues to improve, it’s very likely that the business capitalizes on pent up demand, which is frequently observed in developing countries. 
    • Bonus: all investors receive a free lifetime subscription to the Pongalo on-demand film and TV subscription service.

What the Risks Are

  1. Ad revenues from targeting the U.S. Spanish speaking market is weak or tepid. Although this market is large and growing, the speed of its growth and also of its base purchasing power and purchasing habits are uncertain.
  2. What’s to stop a Univision, Telefonica, Telemundo, or other Spanish media company to buy a streaming company and steamrolling Pongalo? In a similar way to how Disney acquiring Netflix would be a dangerous duo mechanic, the more real dollars and eyeballs rolled, the more attention competitors will give. 
  3. The CEO is fundamentally a media entrepreneur and not a tech entrepreneur. Whose the gal/guy on the team who understands AWS? The economics of media historically pale in comparison to a solid SaaS. Is this a venture business? 

What has to go right for the startup to return money on investment

  1. The U.S. Spanish speaking market continues to grow and become increasingly attractive to US advertisers
  2. The Pongalo team effectively parlances their media background into a defensible moat of content acquisition. 
  3. As bandwidth gets better (fiberoptic, 5G, etc.) consumers watch more content and spend more eyeballs on mobile away from television. 

Thiel

  1. The Engineering question
    • So far the technology is not 10x better. But the content may be 10x better. 
  2. The Timing question
    • With the appearance of Black Panther, Crazy Rich Asians, it’s not inconceivable that specialized Spanish language media/”Que Pasa, USA” content can appeal not only to Spanish speakers, but also culturally open Americans. 
  3. The monopoly question
    • “Bilingual (Spanish/English) women and men 18-54. Virtually all our customers access our content through mobile devices.”I am not the market, so I have no sense of market penetrationI have asked 3 Spanish-speaking friends who are part of the market. One of them says her mother watches Telemundo and the TV channels. In addition, Pongalo has apparently gone to Miami and presented at Wyncode. 
  4. The people question: 
    • Reasonably talented media team. Advisors and all seem good. As mentioned previously, if the team wants to get to Hulu level, senior tech leadership will need to be acquired.
  5. The distribution question: Do you have a way to deliver your product?
    • Mobile distribution, along with “Amazon (which agreed to advance various content-related costs on behalf of the Company), along with Roku, Vewd, YouTube, Xumo, RB Digital, Daily Motion, and others” seems like this question has been sufficiently thought through. 
  6. The durability question: Will your market position be defensible 10 and 20 years into the future?
    • Telemundo, Univision, and other media services. That being said, Hulu, Netflix, Amazon Video, iTalkBB, WalterPresents, all demonstrates that maybe the media streaming service is actually a multihoming market (no strong winner take all effects.) 
  7. The secret question: Have you identified an unique opportunity that others don’t see?
    • The company is betting that U.S. Spanish speaking consumers are vastly undervalued and can be directly accessed via mobile. 
https://mobile.twitter.com/wyncode/status/803663251733102592

The Only Rule

This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.

At a valuation of $8MM, Pongalo would have to grow to $400MM to return the fund. Though this seems fantastical, Hulu is worth $8.7 Billion. Could I see Pongalo getting to 1/10th of that in a decade? Sure. 

  1. Proprietary technology: aim for 10x better any substitute in some key aspects
    • As noted before, technology is so far indistinguishable from other e-commerce plugins and website platforms. But content could potentially be 10x better.
  2. Network effects: 
    • Yes.
  3. Economies of scale: 
    • Yes.
  4. Branding: creating a strong and powerful brand is the best way to grow a monopoly (e.g. Apple)
    • Uncertain, I’m not the customer.

To achieve growth and create a monopoly:

  • Start small and monopolize:
    • Although it’s hard to say that Spanish-speaking U.S. residents is a niche market, it definitely can be in the media world, and this market seems poised for rapid growth. 
  • Scale up: once you dominate a niche market expand to adjacent markets (e.g. Amazon and eBay)
    • Just like Open English expanded into Brazil, Pongalo could definitely expand into Portuguese content. 
  • Don’t disrupt: 
    • I personally don’t know of any media company doing what Pongalo is doing, but I am also not the target demographic. 

Updates

Review these deal memos every time the startup raises a new round

Test if original thesis still applies

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