Media’s complicated relationship with VC funding

Venture-capital funding can be a double-edged sword for startups. On the one hand, the access to money allows young companies to grow quickly without having to worry about profitability, but in many cases it also encourages them to take irrational risks in an attempt to produce the kind of returns VCs rely upon. The dilemma this creates for media companies in particular was thrown into sharp relief last week when bad news broke on a trifecta of high-profile digital-media ventures:

• BuzzFeed will reportedly miss its revenue targets for this year by as much as 20 percent. The company had been talking about a public share offering next year, but analysts say an IPO is likely on hold due to its lackluster financial performance. After its most recent financing round in 2016—an investment of $200 million from NBCUniversal that doubled the Comcast subsidiary’s holdings in the company—BuzzFeed had a valuation of $1.7 billion. As analysts noted at the time, this number wasn’t much larger than what the company was theoretically worth in 2015, which suggested it isn’t growing quickly enough to justify a higher value.
• Mashable has agreed to sell itself to Ziff Davis for about $50 million. That’s less than one quarter of what the company was worth as recently as last year, when it closed a $15 million round of funding from Time Warner’s Turner unit. Not long afterward, Mashable laid off about 30 employees, including its entire political reporting team*, and “pivoted” to focus on video, a change driven in part by Facebook’s insatiable demand for video content.
• Vice is also likely to miss revenue targets for 2017. It had a theoretical market value of $5.7 billion earlier this year, after private equity firm TPG invested $450 million in the company. Disney also has a significant stake, having invested $400 million in 2015 (a funding round that gave Vice a market value of about $4 billion at the time), in addition to a $250 million investment made in 2014 through A&E Networks, a partnership between Disney and Hearst. Vice has talked about possibly floating an initial public share offering, but it has also named Disney as a potential acquirer.

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Obviously, BuzzFeed and Vice aren’t failures by any normal definition. They have hundreds of millions of dollars in revenue and are theoretically worth billions. Skeptics, however, will note that those billions are private-market valuations—notional values that can disappear in an instant, as in Mashable’s case—and that neither appears close to turning a profit.

So is any of this venture capital’s fault? Although CUNY journalism professor Jeff Jarvis celebrated Axios taking venture funding, others were not so quick to herald VC as always good for media startups.

I'm not sure VC money is good news. Why are you?

— Jay Rosen (@jayrosen_nyu) November 17, 2017

Talking Points Memo founder Josh Marshall argues that much of the investment in media companies was driven by false expectations, but now “investors are realizing that scale cannot replicate the kind of business model lock-in, price premiums, and revenue stability people thought it would.” The bottom line, Marshall writes, is that “the future that VCs and other investors were investing hundreds of millions of dollars in probably doesn’t exist.”

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BuzzFeed, for example, built a business dedicated at least in part to producing content, including video, that would work well on Facebook. But the returns on that content appear to be much lower than expected. Is that because the expectations of BuzzFeed and its investors were too high, or did Facebook make changes that undermined those expectations? Or did the landscape change in other ways?

One of the bets VCs made was that digital-media companies like BuzzFeed could grow at rates similar to tech startups, and could therefore justify the same kinds of valuations, but that doesn’t appear to be the case.

At one point, the company was said to be projecting revenues of as much as $500 million for last year, but it was forced to scale back those forecasts, and it likely pulled in about half that amount. For this year, BuzzFeed executives were reportedly looking for growth of 35 percent, but the company appears to have achieved dramatically less than that.

BuzzFeed missing revenue targets by 20% doesn't make it a bad business. It's just not a big business. Hard for me to see/believe in path for huge $$$. I wouldn't invest at its valuation. I still like the company and it'll be successful – just a more moderate $$$ success.

— Ted Williams (@ted_williams) November 17, 2017

If the reports are correct, BuzzFeed increased its revenue by less than 10 percent, to about $280 million. That’s not a great performance for a company that’s seen as a fast-growing digital superstar, and it makes its alleged $1.7 billion value look awfully rich. One of the bets VCs made was that digital-media companies like BuzzFeed could grow at rates similar to tech startups, and could therefore justify the same kinds of valuations, but that doesn’t appear to be the case.

As for Vice, co-founder and CEO Shane Smith has said multiple times over the past year that the company had a $1 billion “run rate,” meaning it was on track to generate that much in annual revenue. But it is expected to bring in only $800 million this year.

As a number of observers noted after the BuzzFeed and Mashable news broke, the reality could be that these businesses are not failures at all, but simply aren’t worth as much as either their founders or investors hoped. The blame might lie with Facebook, or the dominance that the social media giant and Google exert over the advertising industry. But part of the blame could also belong to over-inflated expectations of a pot of gold at the end of the digital-media rainbow.

*An earlier version of this article said Mashable laid off its entire news team. In fact, the site laid off about 30 members of its staff, including its entire political news team.

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