Venture-capital funding turns out to be a mixed blessing for media

Venture-capital funding can often be a double-edged sword for startups. It allows them to grow quickly without having to worry about profitability, but it also arguably encourages them to take irrational risks–including some that ultimately turn out to be fatal–in order to produce the kind of large returns that VC funds rely on.

The dilemma that this can create for media companies in particular was thrown into sharp relief earlier this month when a trifecta of news came out about some of the most high-profile digital-media ventures of the last decade. Here are the highlights:

— BuzzFeed is on track to miss its revenue targets by as much as 20 percent, according to a recent report by the Wall Street Journal. 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 worth in 2015, which suggested that it wasn’t growing quickly enough to justify a higher value.

— Mashable has agreed to sell itself to Ziff Davis for about $50 million, according to reports from both the Journal and Bloomberg. 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. Not long afterward, Mashable laid off most of its news team, and “pivoted” to focus on video, a change driven in part by Facebook’s seemingly insatiable demand for video content. Mashable, which founder Pete Cashmore started in his home in Aberdeen in 2005 at the age of 19, has been rumored to be looking for a buyer for some time.

— Vice is also likely to miss revenue targets for this year, according to several reports. It had a 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 (giving Vice a market value of about $4 billion at the time), as in addition to a $250-million investment made in 2014 through A&E Networks, a partnership between Disney and Hearst. Vice has talked in the past about possibly doing an initial public share offering, but it has also named Disney as a potential acquirer.

Amid all the angst fuelled by these revelations, there was a glimmer of good news from Axios, a startup run by Politico co-founder Jim VandeHei, which said it had raised $20 million from investors including Lerer Partners (also an investor in BuzzFeed) and NBCUniversal. But will Axios’s funding ultimately lead to disappointment?

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

Is any of this venture capital’s fault? That depends on who you talk to. Although CUNY journalism professor Jeff Jarvis celebrated Axios taking venture funding, others were not quite so quick to say VC is always good for media startups.

Talking Points Memo founder Josh Marshall says 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 says, is that “the future that VCs and other investors were investing hundreds of millions of dollars in probably doesn’t exist.”

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 BuzzFeed and its investors had were too high, or did Facebook make changes that undermined those expectations? Or did the landscape change in other ways?

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 those forecasts back and 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.

If the Journal is correct, BuzzFeed likely increased its revenues by less than 10 percent to about $280 million. That’s not a great performance for a company that is seen as a fast-growing digital superstar, and it makes its alleged $1.7 billion value look awfully rich. One of the bets that VCs made was that digital-media companies like BuzzFeed could grow at rates similar to technology 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 according to the Journal, it is expected to only have revenues of about $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 might have hoped. Part of that could be Facebook’s fault, or the dominance that it and Google exert over the advertising industry. But part of it could also be over-inflated expectations of a pot of gold at the end of the digital-media rainbow.

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