Jeffrey Katzenberg’s Investment Firm Takes a Risky Bet on Mobile Video

(Bloomberg Businessweek) -- One recent December evening, DreamWorks Animation co-founder Jeffrey Katzenberg weaved through a room atop a trendy Hollywood hotel. As the sun set and the sky glowed pink through the windows, he greeted his guests, an assortment of soft-spoken private equity investors mixing with music industry icons, Silicon Valley technophiles, and a Bulgari jewelry heiress. Although the small talk was awkward, they all had at least one thing in common: Katzenberg and his partners had personally persuaded them to plow a combined $769 million into their newest brainchild, representing the ultimate Valley-Hollywood mashup, WndrCo.

Pronounced “Wonder Co.,” the consumer technology holding company is part private equity shop, part incubator, and part old-fashioned venture investor. It mostly makes careful bets on unexciting but profitable tech companies while sprinkling a few hundred thousand dollars as seed investments here and there across dozens of embryonic startups that could flop—or define the next generation of entertainment. “It’s an asymmetrical risk and reward,” says Colin Lind, a Bay Area-based pilot and retired professional investor who’s putting a portion of his personal fortune into WndrCo. “The downside risk is you get a T-bill rate of return, and the upside is 20 times your money.”

Its most ambitious undertaking so far is Quibi, Katzenberg’s plan to create a library of polished, Game of Thrones-quality short-form video shows for mobile phones. Named for the “quick bites” of entertainment it intends to offer consumers daily, Quibi has raised $1 billion from WndrCo, technology companies such as Alibaba Group, and almost a dozen major movie studios including Walt Disney, 21st Century Fox, and Time Warner. The idea, as the always peppy Katzenberg pitches it to agents, stars, and studios, is for Quibi to add to viewers’ choices, not cannibalize existing content. Some influential industry names, including actor Leonardo DiCaprio and filmmakers Antoine Fuqua and Guillermo del Toro, are on board, and Katzenberg says he has buy-in from all the top studios, which are also investors or members of Quibi’s advisory board.

The early support has given Quibi momentum and generated buzz for WndrCo. But building a library of content from scratch, at a caliber that can compete with streaming giants Netflix Inc. and Amazon.com Inc., means Quibi will need to spend money. A lot of it. Driven by the boom in demand for online content, the average price to produce a drama has almost doubled from two or three years ago to more than $5 million an episode, according to Bloomberg Intelligence. Quibi pays all production costs and doesn’t retain the rights indefinitely. While that creates what Katzenberg describes as a “total no-brainer” partnership for the major studios and talent, it also means Quibi is bearing the financial risk of this unproven model. The startup ultimately plans to make money through ads and subscriptions.

Quibi won’t roll out its service until sometime in 2020, and at least one direct competitor is beating it to market: Los Angeles-based Fiction Riot LLC plans to launch its Ficto app for watching short premium mobile videos in early January. Still, if the concept catches on, the payoff could be huge. Katzenberg and Quibi Chief Executive Officer Meg Whitman, who previously led EBay Inc. and Hewlett Packard Enterprise Co., get downright giddy describing what they hope will grow into a $50 billion business. “The enthusiasm across the board from the creative side, the storytelling side, of Hollywood has been like actually nothing I have ever seen before,” Katzenberg told investors.

With Quibi chewing through money and commanding the bulk of Katzenberg’s attention (he spends four days of every week on it), WndrCo is relying for now on its other, less flashy companies to grind out a profit. One of those workhorses is mobile privacy and security company AnchorFree Inc. Founded in 2005, the Redwood City, Calif.-based startup was backed by angel investors until 2012, when Goldman Sachs Group Inc. bought a stake and joined the board. The investment bank helped impose financial discipline but did little to nurture experimentation and growth. In 2018, WndrCo led a $295 million investment in the aging but profitable company, giving AnchorFree money to develop products, pursue acquisitions, and possibly add a sales team for the first time. The infusion, with participation from Accel and other investors, also included buying Goldman’s shares for roughly the same price the bank paid for them six years earlier, according to people familiar with the transaction who weren’t authorized to speak publicly. WndrCo partner Sujay Jaswa, a former Dropbox Inc. finance chief, was named AnchorFree’s chairman in September. “Sujay is always calling with new ideas, and Jeffrey calls every week to see how he can help with team building and intros,” says AnchorFree CEO and co-founder David Gorodyansky.

WndrCo has had a healthy pipeline from the beginning, reviewing about 1,700 potential venture deals since it started investing in 2017; the partners have backed just a half-dozen so far. Investments follow a pattern: WndrCo pours in money and offers advice to boost growth and wring more profit from a company in a business where a WndrCo partner has deep expertise. Partner Anthony Saleh, former manager of rap artist Nas, advises both restaurant review site the Infatuation and mobile music platform Mixcloud. ChenLi Wang is the subscription revenue specialist among the partners, and Andrew Chang, former general counsel at DreamWorks Animation, is the legal heavyweight of the group.

WndrCo partner Ann Daly concedes that hiring seasoned, successful leaders to run their portfolio companies is expensive but says it’s part of the investment thesis. “That is the bet,” she says. Founders who come to them “are not buying into a theory. They are buying a company that has proven expertise in all of these areas, which comes with people who actually have that experience.”

To contact the editor responsible for this story: Jeff Muskus at jmuskus@bloomberg.net

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