Tag: marvel studios

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Will AI Take Over LP Investing?

I recently watched Brandon Sanderson’s keynote on whether AI is art or not.

It’s a great talk. And I highly recommend you check it out even if you don’t work in the creative industries.

We’ve seen writer strikes in Hollywood as well as a proliferation of AI use cases in creative industries. James Cameron joined the board of Stability AI. The Russo brothers behind Marvel’s superhero sequel prowess have created their own AI studio. Pouya Shahbazian as well, using AI over the next four years to create 30 AI-generated films. The list goes on. As such, the question of “Is AI art?” is an interesting one to answer. And admittedly, harkens to a series of conversations I’ve had with allocators on leveraging AI in investing practices.

From the VC/GP side, there are folks like Yohei, Sarah, and Ben and Matt, just to name a few who’ve all been building and incorporating AI recently into their workflows and deal flow pipelines. Yes, I know I’m missing a lot more names. But you get the point. From the LP side, progress is still slower, but many younger LPs are quickly adopting AI as well. The conversations I’ve had come from senior allocators on whether it makes sense to use AI. And if so, how much?

Which begs the question: If AI can do your job, do you still have a job?

I was at a dinner last year where the CIO of a large endowment shared that the reason she knows what to look for in managers today, how to underwrite funds, and how to build a venture portfolio was due to the fact she made a plethora of mistakes on her way up the allocator ladder. Small mistakes, like mixing up a decimal on the spreadsheet which led to a venture fund needing a $10B outcome instead of a $1B outcome. Or like Jamie Rhode once said on Superclusters, that she failed to check before she made a commitment to a fund if the fund actually had the commitments that the GP advertised, leading to her check being a larger proportion of the final fund size than she anticipated.

A lot of senior leaders in the LP space seem to be quite skeptical of what AI can do for investment decisions in its current state, yet junior team members seem to widely adopt it to write memos, to inform investment decisions, to create portfolio construction models, and so on. And so far, there’s been a general consensus that AI, at least with respect to investment decision-making, has yet to reach its desired state. In one comment at the same dinner, a senior allocator remarked that one of her direct reports submitted a fund construction model that was built via AI and suggested that in order to return the fund, they needed almost a quarter of the companies to become unicorns. And when questioned, the junior allocator saw nothing wrong with the model. Only to further defend their choice. Or as Brandon Sanderson says in the talk, the problem with AI “is because they steal the opportunity for growth from us.”

“The process of creating art makes art of you. My friends, let me repeat that. The book, the painting, the film script is not the only art. It’s important, but in a way, it’s a receipt. It’s a diploma. The book you write, the painting you create, the music you compose is important and artistic, but it’s also a mark of proof you’ve done the work to learn because in the end of it all, you are the art. The most important change made by an artistic endeavor is the change it makes in you. The most important emotions are the ones you feel when writing that story and holding the completed work.

“I don’t care if the AI can create something that is better than what we can create because it cannot be changed by that creation. Writing a prompt for an LLM, even refining what it spits out, will not make an artist of you because if you haven’t done the hard part—if you haven’t watched a book spiral completely out of control, if you haven’t written something you thought was wonderful and then had readers get completely lost because your narrative chops aren’t strong enough, if you haven’t beat your head against the wall of dead ends on a story day after day until you break it down and find the unexpected path—you’re not going to have the skill to refine that prompt. The machine will have done the hard part for you and it doesn’t care.”

Growth comes from making mistakes. It comes from the struggle. The “distance travelled,” to borrow a term Aram Verdiyan used before. This is why investors often prefer partnerships and co-founderships. It’s why many firms have “red teams.”

There is probably a day when AI can do our job. But for now, the art of investing is in the friction it takes to make a decision. The character-building moments. The moments where you question your own priors. So if AI enables you to have more nuanced dialogues with yourself, if it challenges the way you think in ways you hadn’t considered before so that you look for evidence that either proves or disproves the null hypothesis, then there will still be room for the use of AI in investing. Otherwise, if you’re regurgitating scripts based on singular uninspired prompts, then you likely won’t have a job for long.

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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The Anatomy of the Future

pinky promise, trust, future

There was a fascinating episode on the Tim Ferriss Show recently, where we get the inside baseball on how David Maisel, founder of Marvel Studios, raised half a billion on a promise for a company who’s public market cap at the time was only a fifth of a billion. Naturally, not only was he against a lot of headwind externally, but internally as well. According to the board at the time, they would only greenlight the idea of producing their own films (as opposed to licensing their IP out) if “Marvel had no risk. Not little risk, but no risk.”

On the cusp of Captain America and Thor being licensed away, David asked the board to give him six months. The “zero risk” pitch then came in the form of external funding, huge financial upside (if things worked out), market timing, and a promise.

Financial upside for Marvel

As David puts it:

“First to my board, the argument, was if we own our own studio, it means we get the full financial upside that they understood very well.” As opposed to licensing, their traditional business model. Where Marvel only got five cents on every dollar of profit. As was the case with SONY and Spiderman.

“Number two, we decide on greenlight when the movies get made that they also understood because they only sold toys really at the time, and the toys were contingent on a movie, which they then control the timing. Now when you’re doing a public company and you’re giving guidance every year, how can you give guidance if you don’t even know what movies are going to get made? And so controlling greenlight was important, full creative control.”

Moreover, the team was able to take 5% of revenues as the producer fee AND keep all non-film revenues (i.e. toys, video games, etc.). And even if four out of the five films lost capital, they’d still make $25M in revenue each. In other words, $100M in sum. Half of Marvel’s public market cap at the time. Whose cap was only based on toy sales.

Market timing

“The bond bubble of 2004 was happening,” as David shared, “so it was a time where there was loans being made that shouldn’t have been made. And a lot of people were enamored with Hollywood as they get enamored every few years.”

Zero downside

Instead of funding the studio off balance sheet, David would go out to fundraise from others. So what was the external pitch?

“Give me four at bats, and if one of them hits, then every movie’s a sequel after that.”

On top of all the above, to me, there were some interesting terms for the investment that helped sweeten the deal:

  • Merrill Lynch got a 3% success fee upon the $525M closing.
  • David got a low interest rate loan from Merrill by getting it insured by MPAC, therefore the debt became AAA debt, which “was easy to sell to pensions and easy to sell to individual investors” in case things went awry.

Now I’m not sure if this is standard Hollywood practice. But I imagine it’s not, at least back in ’03 and ’04. I’m a venture guy after all. And as one, the above is news to me.

That said, the banks David went to fundraise from were not taking equity. It was “pure debt. So very low interest rate. And the only collateral were the film rights to ten Marvel characters of which we could make for the movies.” Which, to me, ten characters sounds like a lot for a company whose business is characters. I also imagine these were characters that had some level of historical fanbase, so they weren’t random ones from the archives.

But David clarifies. “A lot of people misunderstand that they think we pledged ten of our characters as collateral. It wasn’t that at all because in the worst case scenario, it only got collected if we lost money on those first four movies. And then those six characters, we owned all the rights besides film. And if a film was ever made by the bank, whoever collected this collateral, we got the same license fee that we get if we just license it that day to a party. So there was no opportunity cost.”

And the promise

This is history now, but at the time, was a bold claim. The idea was borne out of frustration as an entertainment investor. That:

  1. Marvel couldn’t capture a large part of enterprise value through productions with just licensing
  2. The first movie business was horrible. Sequels, on the other hand, were a lot more predictable. So, the focus after the first movie would not be on predicting profit, but maximizing profit margins.

So David had a thought. “What if after the first movie, every movie after that was a sequel or a quasi-sequel, which required all the characters, or a lot of the characters, to show up in multiple movies?”

The idea of sequel snowballed into what we now know as the MCU — the Marvel Cinematic Universe.

Bringing it back to venture

It’s a nice corollary to raising a Fund I, where you’re also selling a promise. A world vision. A painting of the future. Nothing’s proven yet. You’re sure as hell not selling a repeatable strategy yet, and definitely not any returns. Since there’s a good chance you haven’t returned capital to LPs before.

And this is true for not just funders, but also founders. In the words of Mike Maples, “Breakthrough builders are visitors from the future, telling us what’s coming. They seem crazy in the present but they are right about the future.

“Legendary builders, therefore, must stand in the future and pull the present from the current reality to the future of their design. People living in the present usually dislike breakthrough ideas when they first hear about them. They have no context for what will be radically different in the future. So an important additional job of the builder is to persuade early like-minded people to join a new movement.”

Dissent is a luxury

The truth is loads of people will disagree with you. You’re not looking for consensus. In fact, it’s better to be wrong and alone than right and with the crowd if you’re in the venture world. Either as a founder or an emerging GP. It’s something I recently learned from the one and only Chris Douvos. If you imagine a 2×2 matrix… On one axis, you have right and wrong. On the other, you have with the crowd and alone. You want to be in the right and alone quadrant for sure. That’s where “fortune and glory” exists. It’s where alpha exists. It is how you become an outlier and achieved outsized returns.

But the prerequisite to be there is to have the guts to start in the wrong and alone quadrant. If you start from being right and in the crowd, you’re one among many. And that doesn’t give you the liberty to have independent thinking. You’re constantly trapped in noise.

It’s as Abhiraj Bhal says. “If you are a category-defining company, you will always have a TAM question, if the category is defined by somebody else, you will not have a TAM question.” You want people to question you. And as humans, we like to fit in. But to create something transcendent, external doubt is your best friend.

As such, your promise of the future must seem bizarre.

Don’t start with the product, start with your customers

When you have a promise, admittedly, the easiest way is to start engineering it right away. Without market validation. Without stress testing. Which pigeonholes a number of founders. I forgot the origination, but there’s a great line that says, “The only difference between a hallucination and a vision is that other people can see the latter.”

And in order to test that, you need to get in front of potential users and customers first. Max, someone I had the joy of working with, once wrote the below timeless tweet:

And I won’t go too deep into why I like it since I’ve written about it before. One way, like Max illustrated, is to write in public. Another is to sell without a product. It’s what Elizabeth Yin did back at LaunchBit.

As Elizabeth once shared: “We decided that we’d start with no product. We would not build anything. And, we just started selling ads. We manually brokered deals with publishers and advertisers and took a cut in between. We got our customers by emailing people and setting up the copy and links ourselves. People would pay me through my personal PayPal account. It was only when we realized we were onto something that we started building technology to remove bottlenecks.”

On the investor side, it’s building a thesis where great investments fall into. It’s a way of looking at the world in a perspective that may seem foreign to others, but almost obvious in retrospect. The thesis should elicit the response, “Why didn’t I think of that first?” But no matter how obvious, you are the best positioned to bring the thesis to life. That doesn’t mean you need returns yet. Although good graduation rates certainly help as a leading indicator.

In that regard, it’s quite similar to how David Maisel foretold of the Universe to come. Obvious once explained, yet still met with resistance from legacy players.

Photo by alise storsul on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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