For LA, Maker Studios' $950M exit couldn't have come at a better time

By Michael Carney , written on March 24, 2014

From The News Desk

If you’re anywhere near Los Angeles at the moment, you probably just heard a collective sigh of relief, followed by a raucous round of applause. Maker Studios, one of the region’s most highly publicized startups, was just acquired by Disney in a deal that could ultimately be valued as high as $950 million – the floor being $500 million plus performance incentives. (The deal was first reported by Re/code.)

While there’s often a sense of remorse when a high flying startup is acquired rather than staying the course and committing to building a big, independent company, this is outstanding news for LA and for the YouTube ecosystem that has placed its center of gravity here.

It’s been a tumultuous few years as venture capitalists, entrepreneurs, and creatives have turned their attention to YouTube as the platform where next generation entertainment dynasties would be built. But with this attention came the realization that for all its scale, YouTube remains immature from a business perspective. Multi-channel networks (MCNs) like Maker Studios, Machinima, Fullscreen, Tastemade, and Awesomeness TV attracted millions of eyeballs and built up impressive content creator communities, but few found sustainable business models to match.

Maker has established itself over the last 12 months as the clear leader in the space. As a result the company was able to post consecutive years of 300 percent revenue growth at large scale. But despite this apparent success, there remained doubts as to whether the MCN business was a viable one long term. If Maker didn’t end up a winner, what chance do the other companies in the space have.

In that way, today’s news is a major vindication for the ecosystem and provides a benchmark to which other companies in the space can point. Depending on where the Maker-Disney deal ends up, it will be the largest in the history of the YouTube ecosystem by a factor of five to ten, surpassing Awesomeness TV’s $117 million sale to Dreamworks last year.

Maker is also the largest M&A exit for the LA startup ecosystem in over a decade, dating back to Yahoo’s 2003 acquisition of Overture for $1.6 billion. In the time since, Intermix Media (incl. MySpace) sold to NewsCorp for $580 million, Riot Games sold a majority stake to Tencent at a $480 million valuation, Edgecast sold to Verizon for $390 million, and Gaikai sold to Sony for $380. But none came close the mythical $1 billion threshold. And because Disney is a local firm, the Maker Studios brain trust won’t be shipped out to another far-off corner of the country or world.

Unlike so many of the marquee LA deals – Snapchat, Whisper, NastyGal – the big winners from a venture perspective are local LA firms. Upfront Ventures and Greycroft led multiple early rounds before making room for strategics like Time-Warner Cable and SingTel to write late-stage checks. But as local VCs look to attract more LP capital to the region, being able to point to big local wins is a must.

Finally, it’s not just the YouTube ecosystem that has been under pressure lately. Several of LA’s most well-known startups have faltered in the face of massive valuations and even more massive hype. Viddy raised the celebrity-fueled party-round to end all party rounds before imploding on itself, returning capital to its investors, and ultimately selling in a talent-acquisition. The outcome for ShoeDazzle wasn’t much prettier as the company’s sub $50 million exit was for just a fraction of its $200 million Series C valuation. Similarly, the long-term prospects for Beachmint and Machinima remain uncertain. Put bluntly, LA really needed a win and Maker delivered in a big way.

It remains to be seen just how Disney will incorporate Maker and its digital-first content strategy into the house that Mickey built. But for the thousands of entrepreneurs and investors that make up the LA tech community, that’s a secondary concern. Today’s deal marks a major win for the ecosystem. The smiles will undoubtedly linger for a few days, but then, hopefully, the community will get back to work on building the next local giant.