Last month, Mic, a news site for millennials that had once raised $60 million and was valued on paper at more than $100 million, laid off its staff after running out of money.
It’s become a familiar story in venture-backed digital media this year. Numerous venture-capital-backed companies have faced staff reductions and missed revenue goals, including BuzzFeed, Vox Media, and Refinery29, or closed altogether, like LittleThings.
There are numerous reasons for these misses and closings.
The cheap distribution powered by portals, then Google and Facebook, lured entrepreneurs to start content companies. Publishers and investors came to believe Facebook would share revenue with publishers in exchange for sharing their content on the platform.
From 2013 to 2014, US VC funding in digital media nearly doubled, to more than $206 million, according to PitchBook. Leading VC investors in digital media since 2008 have included Lord Rothschild, Lerer Hippeau Ventures, and SoftBank Capital as well as VC arms of legacy media companies such as (Business Insider parent) Axel Springer and Comcast Ventures looking to inject some startup magic into their businesses.
Now, some are asking whether the money that helped propel the rise of digital media also stirred up unrealistic expectations for its growth — and whether pressure from these VCs contributed to decisions that did more harm than good.
To be sure, there’s plenty of blame to go around for any failure. No one forced founders to go the VC route. And not all those companies have failed. Some, including HuffPost, Bleacher Report, and Business Insider, sold for eye-popping multiples.
And lots of jobs were created by virtue of this funding. Pew Research Center in 2014 counted up the number of reporting jobs created by online news startups including BuzzFeed and HuffPost and put the number at 5,000, while pointing out that legacy newspapers had shed far more than that in the shift to digital.
Others argue that while VCs may have brought their own form of disruption, the real damage to news media was done by online platforms such as Craigslist and Google that helped wipe out legacy media’s revenue streams.
But interviews with 10 veteran operators and investors reveal how some VCs drove strategies at media companies that were based on unrealistic expectations, assumptions that didn’t reflect how the media business actually works, and a short-term horizon.
There are multiple parts of this condemnation.
First, VCs by their nature are looking to drive rapid growth. Creating a profitable, sustainable business isn’t the No. 1 priority, at least not off the bat, according to operators with VC experience.
“The digital media space wouldn’t be what it is today without a lot of VC and strategic investment,” said Jim Spanfeller, a longtime digital media executive who founded the VC-funded Spanfeller Media Group.
“The problem is, it becomes very one-dimensional. For a long time, it was scale before anyone else, because if I’m big, the revenue will come later. Ninety percent of VCs’ thought process is, ‘I’ll make 10 bets, I know at least six will fail, and if I can get one home run, my fund has done fantastically well.'”
The result is that to attract VC attention, many startups went all in on scale, hoping that revenue and a lucrative exit would follow.
“To them, investment in digital media means throwing a lot of money in to drive growth without necessarily a sustainable business in place,” a former VC-backed operator said. “It’s almost like VCs egg you on. You have this idea and you get a bunch of really successful, wealthy people saying, ‘I’ll give you money to do that.’ It’s flattering.”
To be sure, digital media executives could have eschewed a scale model and venture funding to begin with. There are success stories out there of digital publishers that have done so, including Digital Trends, which has grown steadily through search traffic, and Talking Points Memo, which now gets half its revenue from subscribers.
Chasing Facebook audience
In the case of media, the shiny toy VCs were chasing was scale on Facebook, and they encouraged media companies to invest accordingly. (To be fair, many media companies and investors were just as enamored with Facebook and readily bought what Facebook was selling, even if it meant relying almost entirely on one source for their traffic.)
“We were told by a lot of VCs, ‘You guys need to lean in as hard as you can to Facebook.’ That’s what we did,” a former VC-backed media operator said. “With a lot of these guys, it’s, ‘Do what you do really well and don’t stray from that.’ They didn’t want us to bleed into other areas.”
When the social platforms decided the future was in video, VCs, along with media companies, also joined the video frenzy.
“We need you to do more video. How many are you doing a day? Let’s increase that,” another operator recalled a board meeting going. A third VC-backed media operator recalled being told by a prospective investor: “Why isn’t it all video? We’d never invest in a place that wasn’t all video.'”
When it became clear that almost all the digital ad revenue growth was going to Facebook and Google and when Facebook started to reduce the amount of publisher content in its feed, reality hit media companies and VCs alike. “I don’t think anyone would have forecast the impact Google, Facebook, and increasingly Amazon are having on the ad market,” said Eric Franchi, a media and ad tech investor at MathCapital.
Eric Hippeau, a longtime VC whose media investments have included HuffPost (where he was previously CEO), BuzzFeed, and Group Nine, said the faith in Facebook was a mistake in retrospect but was reasonable at the time.
“We all trusted Facebook with our data, all of our friends’ interactions,” Hippeau said. “So it’s only fair to think as media companies, that given there were tests and some money changed hands, that Facebook was trustworthy. You would expect to get compensated. It just didn’t happen. Investors are reflective of the times.”
Not only did the so-called pivot to video fail for most digital media companies, but these moves had an opportunity cost as the money and focus that went into video could have gone into building other revenue streams that would have set them up for a more sustainable future.
VC evaluates media companies like tech
Another common criticism of VCs is that their growth expectations are based on tech companies with recurring revenue models, not necessarily ad-based content companies.
“A lot of VCs don’t really understand the media business,” said a veteran media operator who’s raised venture capital. “They get it from a global perspective or due-diligence perspective, but when it comes to running the business day to day, there’s not a lot of former operators in VC.”
For digital media companies that are advertising-based — as many of these VC-funded ones are — it’s hard to reach VCs’ growth expectations because advertising is susceptible to market forces and publishers have to constantly pitch to win every ad dollar.
The lost-cost editorial model that might serve a startup early on also will change as the company grows and it hires bigger-name journalists to differentiate and build its reputation, for example.
“I remember a conversation with an analyst and he was telling me, even in digital media they look at other Silicon Valley enterprises,” one sales veteran of multiple VC-backed media startups said. “You’re doing an analysis of an industry, you tend to expand that comp set to look at other things that might be comparable. You can’t just have the Bustle model of paying $75 for beauty tips.”
To be fair, some sources said the lack of direct knowledge of media could actually be an asset for VC-backed media companies. VCs often have seen a variety of types of business and bring a lot of ideas. Some may be bad, but some are ones that media companies wouldn’t have thought of or had the confidence to try on their own.
Moreover, several also agreed that strategic investors — traditional media companies with VC funds that were investing in their own future — often were just as if not more unrealistic than nonstrategic VCs about the growth potential of digital media companies they backed. The sales veteran recalled a strategic investor thinking it was possible to vastly expand a media company’s branded content revenue with only a small increase in headcount — seemingly ignoring the reality that branded content is highly resource-intensive to produce.
“These were guys who understood the business, and they really bought into the hype,” they said.
A knock on VCs generally is that they lack diversity in their ranks and that they repeatedly fund the same kind of companies, which in turn contributes to a lack of diversity in company types and founders. That’s also true of media, where VCs are attracted to young founders who also are new to media but are armed with grandiose ideas, sources said.
“Cool, older rich guys see younger dudes and they remind them of themselves,” a media startup operator said. “If they perceive you to be cool, it gives you extra points.”
“They go by pattern recognition and they say, ‘We want that.’ They’re still attracted to finding a young person with piss and vinegar and [who can] figure out a new way to slice bread and make a billion dollar business,” the media vet said.
The end of an era
The era of big VC dollars going into ad-driven digital media startups may be over for a while. In 2018 (through December 5), US VC funding was down about one-third from the 2014 peak, according to PitchBook.
“The venture capitalists that I speak with are reluctant to make any further investments in digital media — and I can’t blame them,” said Gretchen Tibbits, who was president and chief operating officer of LittleThings, a women’s lifestyle media company that closed in February after a change in Facebook’s algorithm caused most of its traffic to plummet.
“Almost all of the digital media companies that have raised significant funding are — at best — valued dramatically lower than they were just a year ago and at worst no longer in business.”
Media companies are pivoting to subscriptions, events, and e-commerce to diversify away from advertising. Investors, if they’re looking at media companies, are looking at ones with multiple revenue streams.
That shift is part of why Hippeau says he’s still bullish on media.
“There’s an anomaly with Google and Facebook,” he said. “In a sense, you’ve got a duopoly that is capturing about 90% of the growth in advertising dollars, which is creating pain for everybody else. But over time we’re convinced quality content will get compensated.
“Second, it has forced digital media to look for other revenue streams. So this generation of media companies is way more diversified. Today, we want to build a media brand that is responsible and also knows how to make money.”