Valhalla Partners
News from Valhalla September, 2009 - Volume 7

From the Partnership

In this issue of our newsletter we focus on some of our Internet and digital media investments.

We hear from Jeff Shelstad, the Founder and CEO of Flat World Knowledge, about his company's plans to disrupt the college textbook market.

General Partner Charles Curran offers his thoughts on digital media infrastructure vs. content as investment targets, and Valhalla Principal Saj Cherian asks if content in the digital media world is still king.

As always, we welcome your comments and questions. Please email to

Valhalla CEOs: Jeff Shelstad

Jeff Shelstad
Position: Founder and CEO Flat World Knowledge, Inc.

What drove you to start Flat World Knowledge?

The real trigger for me to formally launch the venture was the realization that the three main customers in the higher education publishing space - authors, professors and students – were all becoming increasingly frustrated.  When your paying customer (the student) is searching frantically to avoid the transaction, I became convinced this was the opportune time to launch a potentially new and disruptive business model.

What's been the biggest surprise to you in building out the company? What's been the biggest reward?

The biggest surprise is quite honestly the amount of PR we have generated. It's both a sign of the brokenness of the current model and the uniqueness of ours. But if you would have told me we would have been interviewed by Tucker Carlson 2.5 years after starting the business, I would not have believed you. The PR has allayed some of my parent's concerns that I was crazy to leave the job I had. The biggest reward has been the number of authors that have joined us from other houses. And then to see their passion to recruit other author teams is gratifying. Finally, of the eight authors who have invested in our company, seven of them had previously written textbooks for our competition; they are betting on a better way.

How do you see the textbook landscape in 5 years?

I would not be surprised to see one new major player. Whether that is an incumbent selling out to a new owner and/or a related entity buying their way into the content space, I think something is going to happen. Right now the industry is dominated by three major houses and that same industry structure may not exist in five years. In addition, I think the following trends are inevitable: disintermediation -- more direct sales to the end consumer are coming; disaggregation -- much more micro purchasing will emerge; formats will continue to multiply -- not just ebooks, but more handhelds and other devices; and finally communities of learners will continue to prosper and grow.

In what other ways (besides textbooks) do you see technology influencing post-secondary education over that time frame?

I am not a believer that the university will go away anytime soon. But I am a firm believer that the format of delivery will continue to be challenged and made more efficient. I also believe the walls between content availability and content use will continue to lower. Technology can enable segments of the population to have access to content that may never have had access before, and that can only be a good thing.

What advice would you give to entrepreneurs embarking on startup ventures?

My first advice would be to develop an expertise in something. If you have a family, get their support. My parents were dubious, but my wife was very supportive. Find a good partner who complements your own skill set. And finally, do it. If you know you can serve customers better, go prove it. Don't sit in your current chair and complain.

Partners' Viewpoint: Charles Curran on Digital Media

Charles Curran

Valhalla continues to build up a portfolio of investments in digital media, investing in both content and infrastructure companies.

One of the enduring debates among venture investors is the "prospectors" vs. "prospecting tools" debate: is it better to invest in one or more potential hits (with lower probability but higher upside) or to invest in tools which every "prospector" will need to buy?

In digital media, investors have achieved some success with each. Digital media properties like YouTube or Hulu have achieved substantial returns or at least built substantial audiences. Similarly, digital media infrastructure vendors like Isilon and NetApp have built robust businesses.

At Valhalla, we try to evaluate content sites by not confusing ourselves with the audience. Whether a site is appealing to us or not is irrelevant: audience growth numbers and advertising rates do not lie, and we must try to identify themas part of due diligence. Interestingly, getting reliable audience data is not always an easy task, and trying to identify the long-term trends in this data is even harder.

With digital media infrastructure, the questions are different. Does this company solve a "hair-on-fire"problem for a large and growing customer base? And, if so, when will the inflection point for growth happen in this market?

In digital media, one hair-on-fire problem has to do with the size of digital media files and the requirement that they be produced, distributed, and delivered with adequate quality of service to insure that the material remains intact. The processing, networking, and storage systems and the applications which work with smaller or non-time-based files will not necessarily work with digital media assets.

Saj Cherian, Principal: Future of Digital Media: Is content still king?

At Valhalla Partners, we have been working actively on what we call the "Journalism 2.0" thesis: essentially, we believe that the end of the newspaper does not mean the end of news, and we intend to bet profitably on the transition to new kinds of businesses and new kinds of business models.

This is not a popular stand among current investors. Given the "ad recession", many venture firms have turned away from ad-supported content bets, reasoning that content, especially news, is obeying a kind of Gresham's Law by appearing everywhere with less and less editorial pedigree.

Professional journalists are well aware of this, and are increasingly asking to be treated as a charity. I heard CNN'S Christiane Amanpour say before the Council on Foreign Relations, "I would ask... all the business people and the people who advertise in the United States to stand for something and start funding us and advertising and allowing us to do our jobs..." Nicholas Lemann, Dean of Columbia's Journalism School, added, "I'd... like to... entertain the notion that pure market forces will not, in and of themselves, support the kind of overseas reporting that our society and other societies in the world needs... We have lots and lots of important public goods that we've found ways to provide through means other than the pure markets."

Valhalla believes that a business model for news content does exist, and that the road to a new news business involves three important shifts:

1. From the Newsroom to the Network. Most studies of the costs in a newspaper stop at the cost of printing and distributing "dead trees", but in fact the newsroom itself is much more expensive than it has to be. The cost per article (fully-loaded compensation of reporting and editorial staff divided across annual volume of articles) is estimated to be $6,000 for the New York Times and $3,500 for the Philadelphia Inquirer. By "networking" the newsroom, talented editors can significantly lower costs-per-article through a mix of established in-house journalists, young "farm system" talent, and "free agents" among well-known writers and opinion columnists. A pay-for-performance model for the latter, where they share in the advertising revenue their articles generate, will help line costs up with revenue.

2. From Paper to Video Rolls. Today's audience, particularly younger audience, is as likely to get its news from Jon Stewart and Stephen Colbert as from a newspaper. Audio podcasts and video clips are growing into new formats of choice as well. While most video online is user-generated, we believe that professionally produced and edited news video could be part of the solution. Publishers of such premium content are selling out 90%+ of their video ad impressions at premium CPMs (2-3x display ads). We believe that content providers who master the art of producing timely video on shoestring budgets should be able to make significant money in a Journalism 2.0 world.

3. From Audiences to Members. Newspapers once enjoyed a captive audience through effective monopolies around cities and towns, dictating pricing for print ads and classifieds. Building such an audience online requires the publisher to think of its targets less as captives and more as active members of a community. Here, multimedia features, interactive postings on stories and chats with journalists, and social media sharing tools all serve to increase user engagement metrics. More visits per month, more pages or views per visit, and more data about what content they are consuming all increase the value of the audience to advertisers.

Content, at least in the news business, may no longer be king: it may no longer have a sovereign right to the attention of an audience. But content may still be President, capable of being elected to office and re-elected in a cost-effective model based on networked newsrooms, video, and a membership-based audience.


Q & A

We want, as much as possible, to open up our newsletter to questions, opinions, and suggestions from our readers. The great magic of our newest medium for communication is its interactivity.

Please click here to submit feedback. We will undertake to respond to every submission, and to print those of general interest in this section. The partnership is happy to address topics such as hot technologies, exit strategies, or due diligence. We look forward to hearing from you.

The Valhalla Team

Investment Team:

Art Marks
General Partner
Gene Riechers
General Partner
Hooks Johnston
General Partner
Scott Frederick
General Partner
Charles Curran
General Partner
Kiran Hebbar
Saj Cherian
Kevin Greene

Finance Team:

Harry D'Andrea
General Partner
Danielle Brogan
Gregory McNiff
Financial Analyst

Research Team:

Dan Gordon
Director of Research
Leon Zilber
Research Analyst

Administrative Assistants:

Claudia Bartz
Executive Assistant,
Office Manager
Sara Endicott
Executive Assistant
Bibiana Speroni
Executive Assistant,
Finance and Research

We want, as much as we can, to open up our newsletter to questions, opinions, and suggestions from our readers. The great magic of our newest medium for communication is its interactivity.

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