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What Venture Capital Got Wrong About Media

Tech titans chased growth at all costs, forgetting about content until it was too late

Mike Mallazzo
Mar 22, 2019 · 11 min read
Credit: serazetdinov/iStock/Getty Images Plus

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For a zero-growth business, media sure gets a lot of love from an industry that is obsessed with growth at all costs. To this point, the results haven’t been great.

Venture capital is getting lumped in with private equity as a two-headed corporate boogeyman that is destroying the fourth estate. This is fundamentally unfair. Private equity firms, such as Alden Global Capital, follow a methodically bloodthirsty pattern: They pounce on wounded media companies, rip out vital organs while the animal is still alive, and then try to sell the carcass at a tidy profit. For more ethically dubious private equity firms, neutering publishers serves a dual purpose: They can turn a profit while simultaneously cutting down pesky gatekeepers who might expose that they’re in the business of, say, eviscerating Toys R Us.

Venture capital has no such incentive structure. While its growth-at-all-costs mentality may not align neatly with the reality of media, it needs to back winners to make money. But this hypergrowth mindset has proven dangerous; the profile of the media company that VC firms have chosen to fund is pretty homogenous and follows more in the likeness of Facebook than Financial Times. From Mic to Mashable, these publishers were general interest, digitally native, able to reach a massive audience, largely distribution agnostic, and dependent on advertising for the vast majority of revenue. Essentially, investors looked for platforms they thought happened to be masquerading as publishers. Unfortunately, this stands in stark contrast with what actually makes media companies sustainable.

Ad-supported journalism means we get journalism targeted at people who will click on ads.

Thus, the net impact of VC to this point has been prolonging the suffering of the ad-based model by creating perverse incentives that reward bad content. Silicon Valley (and some old-guard media companies) simply fell in love with the ability to reach large audiences. What was actually being presented to those audiences was effectively an afterthought.

However, none of this inherently makes VC a bad model for media. At its core, VC exists to expedite the future, and the future for publishers lies in building products funded primarily by readers and not advertisers. This is a fundamental shift that, without a kickstart of well-deployed outside capital, will happen too slowly to prevent the media industry’s continued plight. As investors learn from their mistakes, VC can be a key player in re-architecting the media business model, enabling a transformation that usually would take decades to instead be possible in several years.

“It was not a dumb idea. It may have even been the right idea at the time.” So begins Ev Williams in arguing why ads were picked as the de facto model for monetizing digital media.

While it may have been digital media’s original sin, it was a sin that made a lot of sense in context. Ads as a print business model had worked astonishingly well. At the height of newspaper supremacy, subscriptions made only enough money to cover the cost of delivery. Media companies were empires that derived 80 percent of their tributes from advertising.

What failed in digital was a thing of beauty in analog. Advertisements for Mel’s Pizza subsidized news that covered the doldrums of city council meetings and other tedious business at the guts of a functioning democracy. One of the underappreciated assets of print as a medium is that, without granular data on individual ad performance, there was minimal tradeoff between what was good for readers and what was good for advertisers. In digital, to quote the pithy VC Paul Graham, ad-supported journalism means we get journalism targeted at people who will click on ads.

However, by the time giant checks were being written, any naïve dream that this model would copy into digital should have been long gone. When NBC was dumping its second $200 million into BuzzFeed in late 2016, the New York Times had already been behind a paywall for six years.

The most strategic investments have been made not in publishers but in the technology companies that advance the ecosystem.

In retrospect, the paradoxes that doomed Mic, Inverse, Vice, and the like feel obvious, especially to those whose core competence is internet technology. The media and technology intelligentsia gave keynotes about how 40 percent of internet traffic was fake but drooled over the total number of eyeballs for digitally native publications. Pretty much everyone found videos in their social feeds annoying as hell but somehow accepted Facebook’s claim that video was the future. Investors cooled on ad tech thanks to fraud and ad fatigue among high-value audiences but hoped publications targeting high-value millennials were going to make a bunch of money bombarding them with ads. Compounding this, investors in new media were shown overinflated statistics around audience and engagement. Shed no tear: They fell for an obvious ruse.

On the basis of total addressable market, it is easy to see why investors can still be smitten by advertising-based businesses. While media languishes, digital advertising overall continues to grow at an astonishing 20 percent per year.

But for publishers, beyond the obvious Facebook, Google, and Amazon mountains, there are more mountains. As the bull market subsides and investor patience with massive losses wears thin, even more big tech companies will turn to ads for a junkie’s high. For all of its flaws, advertising remains the best way to bring in a quick influx of high-margin revenue, especially for companies besieged by the banality of short-term thinking.

By the end of 2019, publishers will be actively competing with Uber, Lyft, and Netflix (sigh). Fancying themselves media companies now, retailers such as Walmart are also joining the fun. Add it all up and what you have is a zero-growth business with an increasing number of massive market participants who want a piece of the pie, most of whom have a fundamentally better advertising product than publishers.

More broadly, ad-based media competes for your peripheral attention, which in many ways is actually harder than directly competing for your dollars. That means ad-based media doesn’t just compete with Facebook and Google but also with Candy Crush, 2048, texts from last night, and any other way a person uses their screen time. Over time, as brilliantly posited by Derek Thompson, the whole attention economy is a Malthusian trap.

Digital media has to re-enter a period of rediscovering product-market fit. Unfortunately, the first round of VC investments has helped delay the inevitable by infusing artificially cheap capital meant to scale ad-based publications, costing the media industry precious years to rethink the fundamental revenue model. This capital flowed to undifferentiated publications with little justification other than accumulating eyeballs as if that should be the end in and of itself. Rather than helping rebuild the car, we took rocket fuel and mainlined it into a jalopy. Too many publishers were allowed to temporarily grow without producing a product that anyone was willing to pay for.

This has become a double whammy in the mergers and acquisitions blitz that is engulfing the industry. From a valuation perspective, the main problem with advertising is that it represents ephemeral revenue and is valued by the market as such. While early media acquisitions profited from the same naïveté that propelled Vice to a $5 billion valuation, the market changed its tune quickly. Mashable, once valued at $250 million, was bought by Ziff Davis for $50 million, almost an exact match of its annual revenue.

Digital media has to re-enter a period of rediscovering product-market fit.

Companies that have bucked the trends and succeeded in mergers and acquisitions are those with recurring revenue and access to unique data, a similar framework that allows software-as-a-service (SaaS) companies to often be bought at 10 or more times their annual revenue. Subscriptions represent the most obvious recurring revenue stream, but revenue derived from commerce operations is also valuable at the negotiating table.

With the unique combination of expert analysis of products and millions of monthly clicks, sites like Digital Trends and Best Reviews are arguably the best single snapshot into what people actually want to buy on the internet. That information is potentially worth good money to a lot of constituents in the retail ecosystem; brands and retailers alike pay consultancy companies like Kantar into seven figures for similar data. Quality commerce publishers with diversified merchant partners see the most data aligned to the retail zeitgeist, pushing up their acquisition price. Best Reviews was bought for $110 million while there are rumors that Digital Trends was pursued at an even higher number.

Legacy media companies tethered to ad-based models will wisely pay a pretty penny to diversify. But since VC also bet big on ads, there just aren’t a ton of media startups for them to buy.

So what now? One line of thinking is that venture capital should just stop investing in media companies. The basic idea is that the success models for each are so diametrically opposed that the two should go their separate ways.

This argument has some merit. Some of the enduring success stories in new media, such as The Information, The Hustle, and Barstool Sports, have been built with limited outside investment. Insofar as the companies share a common ethos, it’s the ability to rapidly experiment with myriad unproven business ideas free of outside pressure.

However, many of the most strategic investments have been made not in publishers but in the technology companies that advance the ecosystem. Companies like Parse.ly and Chartbeat are sustainable growth companies that have genuinely moved the digital media business forward by elegantly introducing data into the editorial process. Both are backed by VC but have eschewed massive rounds in favor of sustainable growth.

Scroll is a platform geared toward providing consumers ad-free versions of popular news sites while paying publishers more per page view than an ad-based model. Given the macro trends toward subscriptions, it’s a sort of obvious good idea that would be near impossible to bootstrap, and it unsurprisingly raised a $7 million series A round from Union Square Ventures. In a similar vein, if Arc Publishing weren’t under the Washington Post umbrella, it would be the ideal media startup for VC investment. Even selling only to media, there’s a clear path to $100 million annual recurring revenue. More importantly, Arc could bring stability to the shitshow that is content management for publishers, solving a rate-limiting pain point for the entire industry.

Media companies need two things: more good journalism and a business model geared at getting folks to pay for it.

Flying deeper under the radar is a company called Portico payments, a pioneer in the micropayments space. The company is a sort of amalgamation of existing media analytics tech with a strong micropayments infrastructure to nudge users toward paying what they will for news. Most impressive is the company’s integration model, which is ready-made for scale. Rather than rolling out on a small number of stories, Portico’s software is deployed sitewide to a small percentage of users on all stories, creating quick feedback loops. If this catches, it is a business that will likely need capital in a race against the clock to reach its customers before more of them fall off the map.

Finally, there’s ample opportunity for outside capital to bolster the trajectory of companies like The Athletic that are newer outlets built in the model of providing premium content for a clearly defined audience. This is merely microcosmic of a broader movement on the web away from mass interest properties and toward networks where users have common interests and skin in the game. Among publishers, the winners will be entities that have diversified revenue streams, loyal readers, and access to unique, proprietary data.

But VC will never be (and should never be) a savior of mass-interest civic journalism once subsidized by ads. Realistically, only benevolent billionaires, massive foundations, and perhaps even governments are the only entities that can truly take up this mantle. When newspapers produced excellent investigative journalism, they did so as a loss-leading strategy, a luxury made available by the healthy margins of print’s heyday.

Only another loss leader can effectively fill these shoes. For example, when Craig Newmark invested $20 million in The Markup, he “did so to investigate technology and its role on society.” If the website does its job well, it has no path to profitability. Paying journalists $150,000 and more per year and plowing untold costs into FOIA requests and travel expenses is not a business model. But it’s a damn important public service.

When Jeff Bezos decided to address “Mr. Pecker” on Medium of all places, it was the high-water mark for a company that was the subject of mass ridicule just two years ago. While Medium caught an Amazon-sized lucky break, the foundation to capitalize on that opportunity was laid in 2017 when the company decided to nerf ads. But more than shifting to a subscription model, the website has given consumers a reason to pay by assembling a delightfully weird assortment of content. As a bonus, they’ve built the only content personalization algorithms I’ve seen in media that don’t suck.

Medium, of course, is not exactly a traditional media company. It’s owned by a tech billionaire and is part publisher, part technology platform, and part endless Twitter. It’s also awash in venture capital. With $133 million raised, the tragedy is that Medium must become a unicorn to be viewed as a conventional success to its investors. The math to get there is arduous.

Giving Medium a generous five times multiple—and note that all the following is based on my best guess and not inside knowledge—this would require becoming a $200 million business. Sans launching any additional products, the publisher would need to sign up more than three million paying customers. For context, the New York Times has about four million paying subscribers and it’s, you know, the New York Times. Raising prices is also a possibility; years of experimentation from local newspapers has shown that about $10 per month is the magic number most consumers are willing to pay for news. But color me skeptical that consumers will be comfortable paying the same amount for mostly op-ed-driven content as they do for deeply reported stories about their local communities.

This is where the pursuit of profit has often led to a tradeoff in the quality of user experience. Historically, aiming for this kind of unnatural growth in media has caused a sort of regression to the mean in quality of content as publications resorted to whatever would get the most clicks. However, this was all predicated on an advertising-based model where a single news product had to be packaged for a mass audience. Medium is, in effect, a network of small publishers meticulously targeting content to readers who are most likely to pay. Medium is seven years in and has stumbled on the model that most B2B trade magazines have used to quietly thrive amid the media apocalypse. It’s the right model, albeit one that is probably never meant to build a billion-dollar company.

And so here we are, after 2,500 words, stating the obvious point that nearly every member of the media ecosystem has forgotten at some point in this tumultuous decade: If your content is good enough, people will stick around.

While they may never be the kind of businesses that deliver dazzling VC returns, companies that deliver quality journalism will have a place in the new world. If BuzzFeed News continues to publish four-year investigations into systemic societal failures, the company will exist in some sustainable shape for decades to come.

To survive, media companies need two things: more good journalism and a business model geared at getting people to pay for it. With those two things in place, a small dose of rocket fuel can go a long way.

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