Spark backs TwistBox, a porn distributor

Spark Capital late last week led a $12.75 million Series A round for TwistBox Entertainment Inc., a Los Angeles-based wireless content distribution.

The deal looks normal from a financial perspective, but it also could raise some concerns. That’s because TwistBox earns most of its sales from the distribution of adult content. Certainly, the market opportunity is enormous, as some analysts estimate that the online adult content market is valued at roughly $50 billion.

TwistBox—via its Waat Corp. subsidiary—signs exclusive mobile distribution deals with adult entertainment purveyors, such as Vivid Entertainment Group and Girls Gone Wild producer Mantra Films. It then sends that content to cell phones and other handsets via agreements with more than 60 major mobile carriers.

TwistBox raised the Series A as it is expanding into non-adult categories, such as gaming, and into non-U.S. markets, such as Europe and Latin America.

“Most new digital content delivery technologies first prove themselves in the adult market, whether that be VCRs or online video streaming,” says Ian Aaron, CEO of TwistBox and former head of The TV Guide Channel. “We will continue to grow that part of the business, but also are going to provide all sorts of other content.”

TwistBox isn’t the only startup that deals with pornography. But the company stands out for being able to secure venture financing. Previously, PE Week reported (July 24, 2006 issue) that Silicon Valley-based Heetseek, which makes a browser technology with uses for adult content, was in the hunt for possible venture financing, but that some investors did not want their names associated with the company.

However, Aaron says that venture capitalists found TwistBox, rather than the other way around. The company received multiple term sheets, plus received verbal regret from VCs who felt their limited partners would frown on such an investment. Some of those LPs might have required that their VCs sign so-called “sin clauses,” or side letter agreements barring the GP from making certain types of investments. Shar’ia-compliant LPs, for example, often will prohibit investments in pornography or alcohol, while certain European institutions have caveats about weaponry. Some of these agreements are outright restrictions, while others are more like discouragements.

A third version is the “excuse provision,” which allows an LP to abstain from call-downs and distributions related to a particular portfolio company.

Spark’s LPs include public pension funds and university endowments, but none of them requested any sort of sin clause or objected to the TwistBox deal. Dennis Miller, a Spark managing director who led the TwistBox deal, says that avoiding TwistBox because of moral worries was “never a consideration.” He instead compared it to an investment in Comcast or Hilton Hotels, both of which make hefty profits off of adult entertainment consumption.

TwistBox does not currently have future financing plans, but Miller believes that it eventually will raise more private equity to help fund acquisitions.

He points to TwistBox rival MobiTV Inc. The Emeryville, Calif.-based company raised about $20 million in two venture rounds from Gefinor Ventures, Menlo Ventures, Redpoint Ventures and Sorrento Ventures. It then raised a $70 million Series C deal led by Oak Investment Partners. That most recent deal came with a post-money valuation in excess of $400 million, compared to a $50 million mark for its 2004 Series B round.