Porn should learn from Rupert Murdoch. His bid to acquire Dow Jones was delayed by laborious discussions of editorial control, with Dow Jones' controlling family struggling to limit the acquirer's authority over the newsroom. Murdoch replied that a purchase without control is virtually meaningless. Why own a company if you can't do what you want with it?
This is the fundamental problem with the adult-entertainment business. Especially in the Internet space, the market is made up of entrepreneurs who built their businesses from scratch with specific visions of growth. The journey, to them, may be worth more than the payout. As a result, it often is more important to a business founder to achieve his or her strategic goal - in traffic metrics, fame or functionality - than financial success. Money does matter, and everyone wants a payout. But money isn't everything. Often, porn entrepreneurs want to sell in part but keep the seat at the wheel.
The issue of control probably will be a larger barrier to porn-industry consolidation than access to capital, particularly among Internet companies, which are most likely to have smaller staffs and higher degrees of involvement by the owners and founders. With closer ties to the businesses they have created, online entrepreneurs are most likely to have trouble letting go.
A brick-and-mortar company, with a physical product, supply chain and relationship-intensive clients, will have to grow its staff more rapidly than an online business. Even though the Web can be more profitable, off-line businesses will mature more quickly out of necessity. Rent payments, physical goods and "stuff you can touch" force business discipline, especially if outside financing is involved. This accelerated maturity can facilitate the eventual sale of the business.
Small businesses, on the other hand, tend to remain "cults of personality" of the owners for longer periods of time. In many cases, the business cannot function without the founder, who is involved in most decisions. Consequently, many potential buyers will worry that the loss of the founder implies the loss of the business as a whole.
This is a shame because there is plenty of cash sitting on the sidelines. Private equity funds and individual investors are awash in capital, and private equity firms are desperate for viable investment opportunities. Private equity investment reached a whopping $260 billion in the first half of 2007, putting the industry on track for yet another record year, according to research company Private Equity Intelligence Ltd. Private Equity Intelligence expects private equity investment to pass the $500 billion mark by the end of the year. A market with skittish buyers who have money to spend indicates that the capital will be put into the market; it simply will go elsewhere.
The ready availability of capital would bode well for the porn business, an environment that is dominated by small, private companies and therefore faces inherent growth constraints. Complicating matters further is the fact that the industry is fragmented, with the top 10 players owning no more than 10 percent of the market. Big chances for one company - even the largest company in the market - would be little more than a ripple across the $12.9 billion global adult-entertainment industry. The industry needs something big by the standards of the industry as a whole. This makes the case for thinking consolidation is evident and the use of outside capital to fuel rapid and large acquisitions is probable. The financial conditions seem to show that change is on the horizon, but the problem of control lingers.
Control and entrepreneurs are intertwined, and porn largely is an entrepreneurial endeavor, with owner-operators dominating the companies across the different sectors of the adult-entertainment industry. Founders stay in the corner offices, often for decades, nurturing their creations through modest year-over-year growth. "Dynasties" - or family businesses, depending on your perspective - are not uncommon. There is no shortage of larger porn companies in which the children have played at least a significant role or have taken over the business entirely (Sin City, Vivid and Playboy come to mind).
Given the nature of the business and the people in it, control is paramount. No amount of money can replicate the feeling that comes with being the boss and looking at a company now in comparison to where it started. This, more than any other factor, can make a good offer easy to refuse.
At a certain point, though, a small business loses the entrepreneurial veneer. It grows and matures. Out of necessity, the business changes with each major decision. After a few of these major decisions, the entrepreneur hits a wall. The business that an enterprising webmaster cobbled together over many nights and weekends has substantial operations and maybe a few staff members. Success has made the business different, but the entrepreneur has no regrets ... yet.
The savvy entrepreneur will realize that, at some point, he should get out of the way. A mainstream media personality once told me (unrelated to this article) that "when my company hit $60 million, I couldn't get the hell out of my own way. I should've just left, but I didn't. Now, I'm starting over from scratch." What he did not realize was that the skills vital to starting a business do not translate to running a mature organization.
In a startup environment, the founder throws quarters like they are manhole covers. He picks paperclips up from the floor; they can be used again. Every dollar spent is preceded by careful consideration. When you don't have a lot of cash, you have to think this way.
As the startup matures, the thought process has to change. Marketing becomes more formal and measured, as do the decisions in other areas of the business. As it grows, more happens, and as a result, there are too many people making decisions - and too many decisions to be made - for the founder to contribute to each. Delegation becomes necessary, and the owner-operator is a step removed from where he was. Without taking that step back, the company will not be able to function effectively.
And the expenses get larger.
A mature business requires large investments to accelerate growth. Costs that would seem obscene to a startup become business as usual. The risks required have higher stakes. For a small business, risk is pervasive but different. Every decision could lead to company failure, but the entire company is still an experiment. Everything is a risk! As the business grows, though, the owner-operator has something he can count on. Does he jeopardize it to grow at 30 percent per year instead of 5 percent?
The entrepreneur shifts from starting something new to protecting what he has, while using the same entrepreneurial skill set that made the business successful. But the skills no longer apply. Running a $100,000-a-year business is fundamentally different from running a $10 million or $100 million company.
It seems that the entrepreneur would see the writing on the wall and take the opportunity to cash out. Unfortunately, one entrepreneurial trait trumps all others: control. The lure of the corner office and the roles of founder and boss keep the entrepreneur engaged for too long. In the adult-entertainment business, especially, ceding control is much more difficult than giving up the company's assets, people and earnings.
Only by getting past the issue of control can an entrepreneur maximize his or her income, as a sale may produce more than continued operations and offer a substantial cash position to use in a new entrepreneurial endeavor. It eventually becomes necessary to snip the umbilical cord and move on.
The current business climate favors the "cut and run" strategy. With record amounts of private equity flooding the market and buyers eagerly hunting for business opportunities, the cash is out there. The continued mainstreaming of porn has made it easier for outsiders to consider acquisition in this space, particularly among boutique private equity funds and individual private investors.
The convergence of porn acceptance and private equity investment are likely to create a unique economic environment for adult-entertainment business owners. As the fastest-growing, lowest-cost venue with the greatest likelihood for long-term growth, the online market, in particular, will begin to attract more attention from individual investors and private equity funds. There is money to be made in selling your business; the only problem is control. If you decide to sell your business, commit to it. Look at what you have created, and accept that it is time to try something new.
Sell your business, and you will have a stockpile of cash to fuel your next adventure. But the sale requires that you cede some control to the buyer. If your goal is to raise additional funds, you will not have to surrender complete control. As the amount of money you want increases, so does the authority you will be expected to cede. A financial transaction is a control transaction, so if you expect the former, you must accept the latter.
This story first appeared in the February 2008 issue of AVN Online magazine. To subscribe to AVN Online, go to https://www.avnmedianetwork.com/subscriptions/
