Thinking About Depth Over Blind Growth

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With media so beaten down, it appears that some investors are starting to look at it as a contrarian play.

On Monday, Business Insider published a story on Union Square Venture’s Fred Wilson investing in political video app, The Recount. On investing in a media company, Wilson said:

It is absolutely not something we've done in the past, but as media has come out of favor in the venture business in the past couple of years, that has created a pretty big negativity around the sector, and I think it's a very contrarian thing to do. It's possible we'll get even more conviction and do more [media investing]. We're intrigued about what looks like a little bit of a vacuum now in media, so we're making a couple of bets, and if we feel good about those, it wouldn't surprise me if we continue to do that. I like to zig when other people zag. I like to get to things before people get into them or when other people have gotten out of them. Those are generally the good time to invest in companies.

I’ve shared my thoughts on why I see The Recount as a difficult sell; that’s not the point of this essay.

Instead, I want to talk about how VC interest in media had an outsized contribution to the mess we have today in digital media.

Over the last decade, investors threw a ton of money at media companies that were more than happy to take it, promising that media could scale into the billions. BuzzFeed, Vice, Group Nine and the list goes on all made a similar pitch about scale. While these names have, so far, remains independent, so many others didn’t…

What about Mic, which at one time was a great success, but then pivoted to video and sold for pennies? How about Mashable, which sold for $50 million despite being valued at $250 million in its last fundraise? Refinery29 is reported to have sold for less than its previous valuation—and in a stock-only deal, which is just kicking the can down the road.

All of these media companies took tens if not hundreds of millions of dollars from investors and then went up like a cloud of smoke.

Now, we’re all adults here… I’m not saying venture capitalists are solely to blame. These media executives were adults and were responsible for their decisions. They knew that they were growing top line numbers—revenue—and sacrificing profitability. The rationale was simple: so long as top line numbers grew, even in money-losing deals, they could always go back for another round of capital.

It was a beautiful, virtuous cycle. Venture capitalists wanted to see growth and the media executives were more than happy to provide the allusion of it so long as VCs kept providing that sweet, sweet funding.

When you’re addicted to the venture capital drug, you’ll do basically anything to get more of it.

And then! Then! When the going got tough, the conversation pivoted to “Facebook is destroying media.”

No. You destroyed your business. You took too much money. Your investors were pressuring you to achieve the unrealistic growth you told them you could achieve and then when you couldn’t, you had no choice but to “scale back in the pursuit of profitability.”

The whole thing was built on a house of cards.

Forget about getting larger; think about depth

The problem was with the blind pursuit of growth. If a media startup raised $10 million and was valued at $50 million, it needed to hit specific revenue targets to justify those numbers. It spent aggressively to hit those targets, ran out of money, and had to raise additional capital.

Because it spent all its money to make its revenue appear higher, it was able to raise at a higher valuation. The circle continued with round after round of capital.

No one stopped to ask whether the business was profitable, the key indicator of a media business’ health. The conversation was always “if we grow more, we will then be able to achieve profitability” with no understanding that there was a linear correlation between revenue growth and costs.

But why did this have to be the conversation? Why couldn’t there have been a better dialogue around building viable media businesses?

I believe it boils down to the fear of being too small; being irrelevant.

I was having a conversation with an investor I respect and he said that he doesn’t like to use the word “niche” because it implies small. When you’re dealing with large amounts of money, you need to make deals that move the needle. “Niche” deals don’t do that.

What I told him, though, is that I like to think about it a different way. Niche is not small. Niche is about going deeper than anyone else possibly can.

Let’s look at STAT, a biotech & pharma media company. On Monday, Digiday published a piece that talked about its subscription revenue:

Stat launched Stat Plus in December 2016, barely a year into the publication’s existence, with the goal of amassing 10,000 subscribers in three years. Stat hit that target in the first quarter of 2019, thanks to 81% growth in subscribers between 2018 and 2019. Since launching Stat Plus, Stat has also raised the price, moving annual subscriptions from $299 per year to $349 and monthly ones from $29 to $35.

In three years, they were able to build the publication to over $3 million in subscription revenue. Further in the article, Digiday reports that subscriptions account for 49% of revenue. In four years, you’ve got a media business that has revenue of close to $7 million.

According to SimilarWeb, it gets approximately 2 million monthly visits. It serves its target audience and doesn’t try to be something that it isn’t. It also only has 50 people who work on the product.

Let’s look at another…

Industry Dive is niche. It has over 100 employees and it has close to 20 verticals that it serves. Five million people visit its sites and I’m not sure there are many publications that go deeper on waste management than Waste Dive. The numbers are strong as I reported when they were acquired:

In 2018, it had EBITDA of $5.8 million on revenue of $22.4 million. If 2018 revenue was up 40% over 2017, let’s pretend that growth is slowing a little and 2019 revenue is only 30%s greater than 2018. That would mean the company generates $29 million in revenue this year. If margins stay current, EBITDA would be approximately $7.5 million. I would wager margins have improved since the brands are getting older and they’re streamlining operations across more brands.

Although it’s not been confirmed, the reported valuation for Industry Dive was $70 million. Not bad if you ask me…

Alright, one more company…

Informa. I know what some may be thinking. Informa can’t be a niche company. It has over 10,000 employees and does billions in GBP per year in revenue. How can that sort of a company be classified as niche?

If you look at what they do, it boils down to hosting a ton of niche events. You name it, they probably have an event about it. In any given day, there must be a few Informa events going on at the same time around the world. What Informa has figured out is how to take a lot of niches and create a business around it. It’s why they are constantly buying new companies.

Niche doesn’t have to be about small. It simply has to be about depth.

Too often, we lose track of what matters and get addicted to flashy numbers. As I continue to talk to people about niche and B2B publications, I say the same thing over and over:

I would rather 100,000 really loyal readers that I know are coming back time and time again than 10,000,000 monthly users I know nothing about. I can build a business with those 100,000.

As you think about your businesses, figure out how to serve your core audience. Go deep.

A smarter way to raise

Let’s circle back to Fred Wilson investing $5 million of the total $10 million invested in The Recount. Great, it now has that money.

What The Recount should be thinking about now is how it can get to profitability as soon as possible. $10 million—with 20+ in the newsroom and a senior staff that is likely very expensive—will run out in a couple years.

If it can use that money to launch, grow and achieve profitability, where it then reinvests its capital back into the business with a sustainable valuation, perhaps there’s a future there.

I’m not against raising money to launch a media company. On the contrary, a VC investing in a media company does not automatically mean that it’s going to fail.

Where things get dicey with these sorts of high-flying investment rounds is that the money runs out before they reach profitability. So, they raise again. And again. Then it all comes crumbling down.

There’s a better way to do it. A lot of media companies that I respect have all raised money in a smart way:

  • Skift: $1.5 million

  • Morning Brew: $750,000

  • Front Office Sports: ~$500,000

  • Industry Dive: <$500,000

Let that last number sink in… Industry Dive raised less than $500,000 from angel investors. Seven years later, they sold at a supposed valuation of $70 million. It’s incredible.

What all of these companies did was raise a round once or twice, invested it in the business and focused on generating profits. They didn’t go back to the well for more drugs, I mean, capital.

I imagine the early years were difficult. Growth was likely slow. But year after year, they continued to build on the previous year’s successes. Skift does over $10 million in revenue. Morning Brew did $13-14 million in revenue this year. Industry Dive did over $22 million. All profitable ventures.

Find smart investors that you trust, raise a single round and then get to work. Use that money to push you to breakeven. It’s when you start going back to the well for more money—not because you want to but because you need to—that things turn bad.

I hope The Recount doesn’t go down that path, but if it does, it’ll be like every other media business that raised a ton of capital.


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