Betaworks: Inside the Much-Buzzed-About New Media Incubator

If real-time Web startups prove to be the Next Big Thing, then Betaworks could become one of the hottest new media companies in a generation. If not, it’s bye-bye, Betaworks.

Such is the gamble Betaworks founders John Borthwick and Andy Weissman decided to take in the summer of 2007. At the time, Weissman was working as a VC at Dawntreader Ventures. Borthwick was the CEO of the photo-sharing site Fotolog. As Fotolog entered talks to be acquired by a French media company for $90 million, the old college friends –and, in the mid ‘90s, colleagues at AOL — started fleshing out ideas.

Borthwick and Weissman knew that Twitter was no passing fad, yet they were among the first to see that any number of new business possibilities could emerge from real-time social media. Enter Betaworks, a New York-based company that develops its own ideas, acquires companies and invests in nascent startups that it views as strategic to its ambitious vision of creating an empire of companies — all of which are rooted in live social activities online.

Indeed, since its official launch in late 2007, Betaworks has developed several companies internally, including the URL shortening and analytics service Bit.ly. It has acquired three companies, including Twitterfeed. And it has sprinkled seed-funding across roughly 20 startups, including the microblogging site for traders, Stocktwits, the online multiplayer game OMGPOP, and the hyperlocal news site Outside.in.

Borthwick and Weissman have plenty of believers. Among those investors who gave Betaworks $10 million to launch are AOL president Tim Armstrong; Huffington Post co-founder Ken Lerer; investors Ron Conway and Bob Pittman; and RRE Ventures. Judging by the rate at which it’s been committing capital, Betaworks will be raising a second round soon, too.

I asked Weissman about that late last week. I also asked him to better explain how the hybrid that is Betaworks works.

Betaworks is typically called an incubator. Are you and John paid management fees by your investors?

No, we’re not a fund, we’re structurally a company. The difference is that we sold stock, not partnerships, in Betaworks, so it’s an LLC for tax purposes. We have an annual budget; there are no management fees. We’re investing off our balance sheets.

Why set it up that way, and what company, if any, did you model the company after?

A company was the best structure through which to build our own companies, acquire others, and act as a seed-stage investor — an aspect of our business that’s really more strategic than financial.

The closest analogy — and I say this with all humility — is probably the earliest days of Liberty media. They built out cable networks to leverage the distribution platforms. Then they invested in vertical content areas like ESPN. The way we look at the world is through online social distribution platforms like Twitter that are characterized by streams of information and real-time interactions. Under that construct, platforms are things that either we own all of, or we own majority pieces of, or we aspire to own the majority of them. Then around them are content verticals: gaming, travel, finance, user voices, commerce.

And content verticals is where you’re making seed-stage investments. Tell me about your criteria.

Yes, minority, strategic investments. We’ve done 18 or 19 seed deals so far. Our criteria is that it has to be a seed deal and it has to center on social distribution and more specifically, real-time streams. Otherwise, it’s not relevant to us. There’ no geographic focus; 50 percent of our investments are New York, 25 percent are in San Francisco, and the other 25 percent are in London. And we’ll invest as little as $25,000, though our average is in the hundreds of thousands of dollars. We mostly join rounds that are a million dollars or less altogether, and we typically participate with early-stage investors that we work with again and again and again.

Would you paint a picture of what’s happening in your offices? Are there startups scattered throughout your floor? How many people does Betaworks employ at this point?

Betaworks at its core has less than 10 employees, but we have platform companies — bit.ly, Chartbeat, Twitterfeed, and a couple of others here.

No companies reside here that we don’t own, control or operate. We don’t incubate that way. We have people who bring ideas to life, or sometimes we buy a startup and bring it in-house. What we don’t do is: someone pitches us and we say, great, here are lawyers and other back-end support.

Who is “we”?

For each of the businesses here, there’s a GM. Then there’s John and myself and one other businessperson, Josh Auerbach [a former VP at AOL/Time Warner]. Then there’s a user experience person, a designer, a front- end developer, we’re hiring a quantitative analystics person — all product-oriented people.

How many startups have you acquired outright?

We’ve done it a few times. We acquired a majority stake in Twitterfeed [an application that turns any RSS feed into a Twitter stream] with [The Accelerator Group]. The other two aren’t public.

And how do you bring ideas to life internally?

Once we have an idea, one of our developers builds it. He comes up with a prototype in 100 days and doesn’t spend more than $100,000 on it. At that point, we look at it and decide whether maybe we don’t like it, or if we like it more than we thought, or we like it but think it should shift to the right or left a bit.

After that, we might put in more time and resources, for another 100 to 200 days, at which point it goes from being a hack to a product or business and we create a separate company around that. We did that with Bit.ly, then we raised outside capital from a great group of venture investors [including Conway, Mitch Kapor, and Jeff Clavier], though we own the majority of it.

Judging by the last two years, on an annual basis, it looks like we can take four to six of our ideas and build services out of them, and one to two become businesses.

So the idea is to grow, then sell these companies, as if you were a fund?

It depends. We sold [social search engine] Summize to Twitter [for a reported $15 million in stock], but [an acquisition] is not a goal in and of itself.

We have Chartbeat, an analytic product, that’s generating lots of revenues right now. Will we raise outside capital? Who knows. We’re opportunistic. But the plan isn’t that we sell all these things. Because we’re not diversified, we don’t call what we have a portfolio; it’s a heavily concentrated network. They share data or a thematic focus, so the parts can fit really well together.

Do you really not think about returns?

Because of our structure, it allows us not to look at targeted returns but rather where there are gaps in the market that we can address. We look at returns for all of Betaworks.

So how does everyone get rich here? Are you talking about selling the company?

It’s early days, but through our focus and process we’re trying to create value that’s greater than the sum of its parts. If we achieve that, [yes], the goal is to go public someday.

Is it safe to say that you have an annual budget of around $3 million, between the companies you develop, the companies you fund, and your employees?

We don’t disclose financials.

Because if you did have an annual budget of around $3 million, you’d probably be raising more money right around now.

We don’t disclose financials.

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