Walt Disney Co. (DIS) can fire up one of Hollywood's best-oiled marketing machines to promote Hannah Montana or High School Musical. But when it comes to one of its latest profit centers, Steamboat Ventures, the media giant dials down the publicity. Located in a nondescript building two miles from Disney's Burbank headquarters, the $575million venture capital firm has quietly nurtured 25 startups in an aggressive effort to seed new ideas.
Taking cues from technology companies like Intel (INTC) and Qualcomm, Disney launched its own in-house VC fund in 2000 to find emerging entrepreneurs and products in media. It wasn't good timing. All around, dot-coms were imploding. The idea, though, was sound, and now other industry players are following Disney. Last year, NBC Universal started a similar vehicle, hiking its size from $250 million to $1 billion in April. "Media has become a hot area," says Paul Kedrosky, a senior fellow at think tank Kauffman Foundation. "Disney just got there first."
Named after Steamboat Willie, the 1928 Mickey Mouse cartoon, Steamboat operates like a traditional VC fund. John Ball, who used to head up Disney's corporate development group, and his team scour conferences and work the phones, looking for media startups in the U.S. and China with promising products, technologies, or services into which they can plow $2 million to $15million. Once they decide to invest, a team member will often join the company's board or make hiring suggestions. After buying a piece of Move Networks last year, Steamboat pushed the streaming video firm to get a new chief financial officer, which it did.
By design, Steamboat keeps an arm's-length distance from its parent, maintaining its own legal and public-relations teams. Although Disney executives have oversight through a six-person committee that includes Disney CEO Robert A. Iger and CFO Thomas O. Staggs, they have yet to overrule an investment idea. "We decided that if we were going to get into the VC business, we had to do it in a way that looked, smelled, and behaved like a disciplined venture capitalist," says Ball. Translation: The team members, who get a percentage of the fund's returns, had to be free to swing for the fences without Disney second-guessing them.
"GOOD AT OPENING DOORS"
Of course, being part of Disney has its benefits. Steamboat sometimes taps Disney executives to help scout investment opportunities. It called on folks from the theme parks' retail crew to help vet Pure Digital Technologies, which makes disposable digital cameras. Disney used its hit ABC (DIS) show Ugly Betty to promote the scrapbook site Scrapblog, a Steamboat investment. "They're really good at opening doors for you," says Michael Yavonditte, the former CEO of online ad company Quigo Technologies, another holding.
It hasn't always gone smoothly. The fund lost money on photo restoration service PhotoTLC, which shut down in March. In October the fund cut ties with Industrious Kid after a disagreement over how much merchandise its social-networking site, imbee.com, would sell; the tech firm didn't want to be too commercial.
So far, though, the hits appear to outnumber the misses. Disney says it made $37 million on an estimated $6 million investment in Quigo, which AOL bought in November. Steamboat also made money on a stake in flat-panel display maker Iridigm Display; (QCOM) the entire company was sold to Qualcomm (QCOM) for $188 million. Overall, Steamboat's first $75 million fund is expected to return at least $150 million, according to sources familiar with it. That's a middling return in the VC world but not bad for a fund started in the depths of the last bust. And as it often does with box-office hits, Disney has sequels in the works: It's pouring money into a $200 million U.S. fund and planning another focused on Europe.