Publicly-Funded Art?

The following column contains a number of synonyms and euphemisms, for the purpose of getting through your “canned ham” filters. Apologies for the inconvenience… 

Earlier this week, the producer of “Women Gone Wacky” pled guilty to violating federal laws related to the exploitation of children (he didn’t keep proper records of his booze-impaired actresses). He and his company agreed to pay $2.1 million in total fines, plus pinky swear to never ever do it again. 

What you probably haven’t heard, however, is that several public pension funds and university endowments are now indirect shareholders in a company that exclusively distributes the aforementioned wackiness to mobile devices. Certainly gives a brand new meaning to public funding for the arts. 

How did this happen? Boston-based Spark Capital recently invested $12.75 million into a Los Angeles-based company called TwistBox Entertainment. TwistBox is a new umbrella platform for a subsidiary called Waat Corp., which is considered the leading distributor of “late-night” programming to mobile devices (plus age verification and other related services). Spark limited partners, meanwhile, include such groups as the Massachusetts Pension Reserves Investment Management Board (MassPRIM) and the Los Angeles City Employees’ Retirement System (LACERS). 

Certain limited partner agreements contain so-called “sin clauses,” in which the general partner either: (A) Is not allowed to investment in certain types of companies (typically things like late-night, weaponry, etc.); (B) Is strongly discouraged from making such deals or (C) Can offer certain LPs an escape clause whereby an LP needn’t commit to an objectionable deal. 

What I learned yesterday, however, is that these clauses are far rarer than I believed them to be; maybe 5% or less of institutional LPs. The exceptions are Shar’ia-compliant LPs (of which there is a growing number) and certain public European LPs (mostly concerned with the defense industry), but that’s about it. Almost none of the U.S. public pensions or universities have them, and even major Christian organizations don’t request such language when making fund commitments. Doing a deal like Twistbox certainly might lessen the change of participation in a follow-on fund, but nothing preemptive. 

Spark Capital has no such sin clauses with its limited partners, and no LP objected when apprised of this deal. Dennis Miller, a Spark managing director, said that the possibility of LP dissatisfaction was “never a consideration,” because TwistBox is leveraging a basic truth: Most new content distribution technologies are initially perfected in the late-night category. This was true for VCRs in the 1980s, and was equally true for online video streaming in the 1990s. 

Moreover, TwistBox is not some basement shop run by boys in trench coats. Its management team is led by former TV Guide Channel chief Ian Aaron, has over 90 direct carrier agreements and is expected to generate in excess of $40 million in 2006 revenue. It also is significantly expanding its content offerings to include sectors like gaming, even though late-night remains its largest current holding. 

When I first heard about this deal yesterday, I thought “How could public LPs allow this deal to go through? What will happen when certain segments of their constituencies find out?” I still feel that way from a political point-of-view, but the pragmatic realities support Spark’s position. 

First, any lingering Puritanism over “late-night” investments is belied by institutions whose public equity portfolios include companies like Comcast or Hilton Hotels. Moreover, Spark’s primary job is to create value for shareholders. And this deal should do just that. Rival MobiTV recently raised $70 million in a Series C round at a valuation in excess of $400 million. For context, MobiTV was valued at just around $50 million following a $15 million Series B deal in 2004. 

Expect a similar valuation ramp-up when Twistbox goes back for more capital to support acquisitions. Sure Spark will be diluted – as were Redpoint and Gefinor with MobiTV – but the new value will be worth it. The majority of limited partners have sided with absolute returns over non-universal moralities. It is a defensible position, no matter how offensive some people might find it.