In Silicon Valley, there’s a widespread belief that VCs don’t invest in content businesses. Here are 3 reasons – based on my experience with Hyperink – why investors hesitate to invest in content-heavy startups.
To simplify, here’s what I’ll consider a “content business:”
1. The startup owns content as a core asset. In other words, it’s not just a UGC platform (eg, Tumblr).
2. The startup competes with big content companies. For books, an example would be HarperCollins.
Let’s take a quick look at Sequoia’s portfolio. Of the venture-stage investments on their site (77 in total), only 7 are “content” companies.” Yet people spend at least 33% of their time online consuming content, and this doesn’t include search activity and social activity (where the average person consumes more Facebook newsfeed content than he creates it). Kids spend 7+ hours every day consuming media.
Why the disconnect?
Reason #1: Content businesses are tough to scale quickly
The venture business is about scale and speed. Pinterest reached 11.7 million monthly uniques in nine months. This sort of growth has changed the game (Chris Dixon does a great job explaining how).
For content businesses, your core asset is your content and the experience you build around it. Content is expensive to produce (unlike Reddit, your users aren’t doing it for free!) and requires a lot of infrastructure at scale (WordPress can only take you so far). YouTube recently began investing $100 million into original, exclusive content. Netflix, Hulu, and others are doing the same.
The content companies that have scaled the most quickly are hits-driven (Angry Birds). But hits are tough to predict and expensive to manufacture – just look at the increasingly formulaic but mediocre movies that Hollywood’s been putting out.
So what do you do if you’re a content business? Create your own content, but also allow users to contribute. Your content can get the ball rolling and users can annotate, add, expand, etc. Your brand can be incredibly valuable so be thoughtful about it from the start!
A final example: Demand Media. Demand’s gotten a bad rap because of perceived low-quality content (eg, eHow.com). However, the company did a great job scaling, at one point managing 13K+ writers and editors creating 5K+ pieces each day. And they now have tons of eyeballs and steady growth! Their content production expertise also gives them flexibility to try new things, such as creating ebooks, producing branded video, etc. The best part of it all? Cash money-tons of ways to monetize and no, it’s not just AdSense.
Reason #2: Content businesses don’t have large exits
Let’s take Random House. Founded in 1925, it’s the largest book publisher in the world by revenues. Yet they sold for only $1.4 billion to Bertelsmann in 1999. By contrast it took AdMob 35 months to reach half that price—$750 millon.
Here are some other content-related exits:
While they’re all good exits, they don’t capture the same multiples—and speed—as companies like Instagram ($1 billion in 2 years) and Playdom ($763 million in 2 years).
The plus side? Content has multiple ways to earn cash money. First, people are used to paying if its quality (books, music, movies, cable TV). Advertising commands high CPMs because unlike user-generated stuff, it’s predictable and safe. Many content verticals have lucrative affiliate and lead-gen models (DUI lawyers, anyone?).
So what do you do if you’re a content business? Figure out your growth expectations and exit options (with your founding team) before you raise money (if you raise at all). If you want a homerun ($100 million+ exit), start thinking platform (Demand is a platform; Audible is a platform). It’s the only way you can grow quickly enough to satisfy VC outcomes. As Dave Shen puts it, “you can make money off other people whom you do not have to pay.” Raise money the normal way (from the best VCs, and more than you think you need).
If you’re ok with a base hit (eg, a $100 million exit or lots of the profits), find investors who are comfortable with smaller outcomes. Start thinking monetization as soon as you have the right product/market fit and a steadily growing audience. As a content business, you should be able to reach ramen profitability without breakaway growth. This gives you flexibility and leverage. If your content is evergreen, it will be valuable for at least 3 to 5 years.
*Jack Herrick of wikiHow makes a great point that funding for content companies—like other verticals—goes in cycles. How-to was hot from 2006-2008 and there was a lot of money going to HowCast, Mahalo, etc.
Reason #3: VCs think of content businesses as lifestyle businesses
Lifestyle business is a silly phrase as we all know. For this article, let’s say it’s one where the founders can build a profitable, steadily-growing business with a longer timeframe and smaller outcomes than funded businesses.
Because content businesses can generate revenues quickly, and early overhead costs are low (fewer engineers, more freelance writers & editors), it can be hard to convince Kleiner or Accel that you’re in it for that blockbuster Google IPO. Another wrinkle—accurate or not—VCs value engineers over writers/editors.
So what do you do if you’re a content business? Not every business needs millions of dollars (Chris Dixon to the rescue again!). If you want that Series B(ling), then present a long-term vision and methodical plan for how you’ll reach $100mm and then $1 billion in revenues – anything less is insufficient.
Even better: have data that shows this is already happening.
If your envisioned product cannot grow 30% monthly for the foreseeable future (startups = growth), you might not want that $5 million from NEA.
Disclaimer: Hyperink does ebook publishing, so I know text content best. And we’ve only raised a $1mm+ seed round, so I’m far from being experienced at this. The post is part-personal experience, part-conjecture.