Startup media companies can only win when this happens
A couple of weeks ago Jessica Lessin over at The Information declared that news is not a venture backed business. I think very highly of her and she has clearly build a very good business based on that premise (that features great reporting I might add- I read their posts every day), so it took me a while to think through why I disagree with her so much. Eventually I reconciled the two perspectives.
Jessica’s primary argument is that venture is best suited for companies that generate heavy losses initially but get very rapid growth in return, and that news doesn’t fit this model:
You can hire the best in the business, pay them better than the competition and not burn millions in cash. You can broadcast state-of-the-art live video with a nominal investment in equipment. And the growth for most news companies is more linear than exponential.
This argument can be equally applied to any media company, not just news. And she provides some counter examples for media companies that bootstrapped instead, at a more moderate growth rate, including her own company, O’Reilly publishing and Gawker in the early days.
In a steady state, I think that Jessica is right. But when there is a new content distribution channel, startup media companies can get very big, very fast. The best historical example is the explosion of media companies when cable became mainstream, with ESPN and Viacom being examplars. More recently, we have seen four such changes since the internet was born and are on the cusp of a fifth right now.
The last few years provide some really good examples of media companies that have created a lot of value. The two most notable exits are Bleacher Report and The Huffington Post, both of which exited in the hundred of millions. Both arguably sold too early, as they continued to grow to be several times bigger today than at exit, and could conceivably be valued at over $1bn today. Vice and Buzzfeed are two more examples of companies valued privately at over $1bn, with Vox close by at around $850M. And in its heyday, Demand Media was a public company valued at over $600M.
So how can we reconcile these two points of view?
As I noted above, in a stead state situation, Jessica is right. Trying to build a media company in a crowded market is a slow grind. Doable if you build an editorial point of view that resonates with a certain audience, and can build a brand around that. But it is slow, hard work.
I believe that startup media companies can only succeed when there is a dramatic change in distribution. In those instances you have a confluence of factors that creates the opportunity for both dramatic value creation, and the need for venture capital:
- There is some change that creates a new, scalable distribution channel for content that offers the opportunity to reach at least 100m people.
- Incumbent media companies underestimate the potential of the new channel for distribution and move slowly, if at all, into the new channel. Because there is typically no revenue model for the new channel (see #4 below), incumbents suffer from the innovator’s dilemma and don’t want to cannibalize their existing profitable businesses by driving their users to a new, unprofitable channel.
- Nimble startups jump in to the new distribution channel and build a sustainable knowledge advantage that keep them growing fast for some time. If the new distribution channel is big enough, they can reach web scale in the course of a few years and become part of popular culture.
- Advertisers don’t know how to advertise in this new channel, and embrace it slowly, long after usage has grown to be meaningful. New forms of advertising take time to develop and become standardized before they can be scalably bought. It takes a while before a new line item appears in a media buyers allocation spreadsheet.
- Growth comes from two factors; more traffic per piece of content or more pieces of content. Typically the new distribution channel affects traffic per piece of content more than a startup can. But a startup can control how much content it makes, and so it starts making a lot more content to grow faster.
- As a result, growth drives increased costs for the startups, but doesn’t yield revenue for at least a couple of years. This creates a need for investment to cover operating losses, which is where venture capitalists come in.
- After a few years pass, the incumbent media companies catch up, but by then new brands have been formed and new content habits have been created by users, and some of the startups become scale players in their own right.
The days of the explosion of cable channels predates me, but is one good example of how this has happened in the past. But this has happened at least four times in my career.
The first big new distribution channel was the rise of the internet itself. Print and TV media companies were slow to move online. As a result, companies like iVillage, Women.com, CNet, Wired and others were built. Their growth rate was limited to the growth of the web itself, so their markets were limited through the 90s but picked up through the turn of the millenium for those that survived the dotcom crash. In those early days users navigated directly to websites home pages or through AOL keywords, so traffic came in through the front door home pages for these first generation media companies.
The second big new distribution channel was Google. Search traffic coming in through the side door became an ever more important driver of pageviews. aGoogle gradually supplanted the URL bar as the primary navigation method for web users. Demand Media and Bleacher Report were both built on this change in distribution
The third big new distribution channel was when Facebook started to allow external links in its feed. Social started to become a bigger driver of side door traffic than search was. Companies like Buzzfeed and Huffington Post rode this trend to get to real scale.
We are in the middle of the fourth distribution change, which is being driven by Facebook’s increased focus on video. Buzzfeed has pivoted much of its programming towards video in reaction to this change, with Tasty being an example of just how seriously the company has embraced a Facebook video focus. Other companies at an earlier stage in taking advantage of this trend include LittleThings*, Mic* and Cheddar*.
We may be right on the cusp of a fifth change, focused around video. More and more TV viewers are cutting the cord (or never had a cable subscription to being with). They are relying instead on the new TVOS players like Netflix, Hulu, Amazon and Sling for their video programming. Twitter has just jumped into the fray as well. The great unbundling is leading to a great rebundling, and these “new MSOs” will not confine themselves to the old media incumbents for content. Fast moving new content startups that can provide relevant programming for their younger-skewing audiences will get distribution through these new MSOs and, therefore, be able to grow extremely quickly.
As venture investors, we pay attention when we see a disruption that will potentially destroy the value of incumbents. Wherever value is getting destroyed, it is getting created somewhere else by startups. We’re watching the opportunities in new video content closely and putting our money where our mouth is.
* Lightspeed portfolio companies
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