struggling_CEO

Los Angeles-based video commerce company Kingmaker has been acquired by Joyus, a San Francisco-based competitor. Before now, both Kingmaker and Joyus had an aim to monetize video content through product placement and ecommerce, but approached the problem from different directions – Kingmaker had focused on YouTube and Joyus on creating its own online destination.

The companies declined to specify the terms of the transaction, but Kingmaker CEO Guy Gal (yes, that’s his real name) did reveal that it was an all stock deal. Kingmaker had raised $1.7 million in a convertible note in 2012 from investors, including Greycroft Partners, New World Ventures, Machinima CEO Allen DeBevoise, former YouTube COO Dean Gilbert, and other angels. The company was an early graduate of the Venice-based Amplify accelerator.

The twist comes in the fact that Gal claims to have held a Series A term sheet in his hand at the time of accepting the acquisition offer. The terms of that investment, however, required that he let a number of employees go and dilute existing seed stage investors “down to nothing,” in the CEO’s words.

“I chose the path which I felt would create more value for more people,” Gal says. “As a founder and CEO, there’s an obligation to show commitment to stakeholders, and maximize value for all.”

Gal further explains that he was able to negotiate the acquisition such that his investors received a liquidation seniority over Joyus’ existing investors – presumably through a preferred stock, although he declined to specify – and the option to either cash out or reinvest at Joyus’ next financing. The entire six-person Kingmaker team was retained under the the acquisition and has since moved to the Bay Area.

Although both Kingmaker and Joyus were founded in 2011, the San Francisco-based acquirer is the far larger business today. Joyus, which raised $19.4 million from InterWest Partners, Time Warner Investments, Accel Partners, Harrison Metal Capital, and others, has more than 34 employees to Kingmaker’s 6. Joyus also has extensive ecommerce and retail marketing pedigree, according to Gal. As a result, the company publishes 60 new videos each month across a variety of topics.

Kingmaker, on the other hand, focused too heavily on creating technology for scale and on generating top line revenue through ill-advised partnerships, but not enough on generating original content, building audience loyalty, and establishing vendor relationships, according to its CEO. The young company spent more than half of its seed capital before realizing these mistakes and at that point was in a weak position when looking to raise additional capital – hence the unfriendly Series A term sheet.

“If I could go back, I would have built more and generated more traction before raising money, and then I would have spent it more surgically,” Gal says. “Accepting institutional capital kept us from being patient and focused – we had to be too opportunistic.”

Despite the missteps at Kingmaker, the biggest win for Joyus in this transaction is likely the addition of Gal, who will assume the role of Head of Business development. The Kingmaker founder has significant experience on YouTube, having previously built and sold a 20-person digital video agency in Canada. It was in this prior role that Gal discovered the power of YouTube as a marketing channel and developed the business plan that would become Kingmaker.

“The goal with Kingmaker was always to build an online QVC,” Gal says.

Gal and his agency team helped build two early YouTube channels to a combined 350 million views and $9 million – from product sales, not advertising. The key lesson during this time, he says, was savvy merchandising of high-margin product like cosmetics, cookware, and apparel and the use of instructional rather than entertainment-focused content.

The opportunity for the newly expanded Joyus team is a big one – the offline analog is the $15 billion TV shopping category dominated by QVC and HSN. But as a consequence of this massive opportunity, there’s no shortage of competition in the space. Joyus is joined by HaulerDeals, StyleHaul, Subblime, and numerous other companies looking to drive commerce through YouTube – many of which are based in Los Angeles. Each business must walk that fine line between adding value to the consumer and putting them off through overt product marketing.

The founder is noticeably conflicted about the outcome for Kingmaker. He says:

Philosophically, acquisition is always a failure. Like most entrepreneurs, I seek independence and freedom to express my point of view / strategy. But I’m enjoying my new role and finding it valuable. This is actually my first job ever. I’ve started 3 companies, but I’ve never worked for anyone. It’s a learning experience for me to learn how to support another founder. That said, there are certainly days that I long to be the founder and CEO again.

The focus now is simply to make Joyus a success and maximizing the return that his early investors are able to achieve.

Reflecting on the past two years, Gal says,

Championship boxers are not champions because they’re really good at dodging punches. They’re really good at taking them and rolling with them and staying calm and cool under tremendous amounts of pressure. I think that also makes for a good founder and a good business. We definitely took some punches, but we got right back up and kept fighting.