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7 VCs discuss how COVID-19 is changing the media startup landscape

It might be time to stop relying on ad revenue

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Image Credits: Bryce Durbin / TechCrunch

The world has changed dramatically since May 2019 when we last surveyed venture capitalists about the trends they were seeing in media, entertainment and gaming.

Since then, COVID-19 and the resulting physical distancing measures have created plenty of demand for companies helping to inform and entertain us as we’re stuck at home. At the same time, there’s a dramatic reduction in ad spending, making it harder to monetize that consumer attention.

So we checked in a variety of top VCs about the new landscape, where they’re investing and what kind of advice they’re giving their portfolio companies.

Not all of them invest directly in what (paraphrasing Betaworks’ Matt Hartman) we might call media media — the companies whose business models revolve around content creation and advertising — but each of these investors are backing startups looking to change the way we stay connected and entertained.

Here’s who we surveyed:

  • Kevin Zhang (Partner, Upfront Ventures)
  • Pär-Jörgen (PJ) Pärson (General Partner, Northzone)
  • Vasu Kulkarni (Partner, Courtside Ventures)
  • MG Siegler (General Partner, GV)
  • Jana Messerschmidt (Partner, Lightspeed Venture Partners)
  • Matthew Hartman (Partner, Betaworks Ventures)
  • Gigi Levy-Weiss (Managing Partner, NFX)

The consensus? You can’t count on the ad business to recover in the next few months, but there are still opportunities for startups exploring new formats and new business models. And there’s still plenty of excitement about gaming and esports.

You can read their full responses, lightly edited, below.

Kevin Zhang, Upfront Ventures

What (if any) media trends are still exciting you from an investing perspective?

Live and interactive formats, especially shorter form, continue to be very exciting, made even more evident in this time of shelter-in-place. What has worked in China and broader Asia has not yet translated into explosive success in the West. As interesting as celebrity live broadcasts are from their homes, the lack of real interaction and participation features hampers long-term engagement and doesn’t make up for the lack of production quality.

Modern content production technology is needed to push both production and live ops cost down while enabling more interactive and engaging formats. Game engines are one example, there’s of course the Travis Scott concert that just happened in Fortnite built on the Unreal engine, but that 15-minute, pre-rendered show took months to create, we’re only just scratching the surface of what’s possible.

One of our investments in this space is Tellie for live-action formats, another is The Wave for rendered, live formats, and we continue to look for great combinations of tech and media talent innovating on new formats.

Speaking of gaming, multiplayer games continue to grow and grow exponentially, there is a lot to unpack in popular titles from new favorite Animal Crossing to classics like World of Warcraft to indie hits like For the King. They all have social cooperation as a core part of the game loop and design. I’d love to see more teams working on cooperative play and just overall a broader diversity in multiplayer experiences beyond purely competitive ones.

How much time are you spending looking at media startups right now?

20-30%, about the same as before.

What are you looking for in your next investment?

Nothing has changed in this regard, it’s always team first and foremost, especially in this unprecedented time when prioritization and balancing short versus long-term goals are more important than ever; there are only more shiny objects to chase after now.

How has COVID-19 impacted the media investing landscape?

It’s opened up and accelerated people’s willingness to try new experiences and formats they wouldn’t have considered before (such as playing Jackbox over Zoom with friends, watching esports given lack of in-person sports competitions, etc.), which in turn has drawn more investor attention.

How difficult do you anticipate the next year being for media startups?

Despite all the increase in demand, it’s still not easy to build companies remotely, especially ones that require in-person production. As well, the distribution platforms are also spoiled for new choices these days (Netflix, Hulu, Amazon, etc. being inundated with theatrical releases they had little access to before as an example), so it’s harder than ever to break out and get noticed. But for those who do, there’s a more accessible and willing audience than before.

What kind of advice are you giving to your portfolio companies?

Iteration speed and cash runway are always important and maybe even more highlighted now. That distribution deal or production partnership or influencer collaboration you wanted to do can happen faster than ever, but you also need to have the right decision-making framework in place to be able to balance speed versus value, short- versus long-term.

Do you anticipate the advertising downturn rebounding this year, or will it be a more long-term problem? How should media companies be responding?

I think the speed and scale of COVID’s impact on employment, income and savings are unlike anything we’ve seen in most consumer’s lifetimes, and while there will be a rebound I don’t think it will be as fast and as strong as some anticipate. This year just feels like too short a time period to be able to counteract the negative impact.

Pär-Jörgen (PJ) Pärson, Northzone

What (if any) media trends are still exciting you from an investing perspective?

We’ve seen some tremendous unexpected growth within the portfolio in these last few months, such as Hopin (a virtual event platform) and Kahoot! (an online education platform).

Consumer habits are changing, and gaming is again becoming a booming vertical in which we have invested a lot. Our gaming portfolio company PlayDots have more than doubled revenues during this crisis and at the same time experienced lower customer acquisition costs due to less competition in marketing spend.

How much time are you spending looking at media startups right now?

We’re in conversation with several media startups right now and currently, due to the pandemic, many of them are gaining increasing traction and growing their audiences. Actually, we’re even more eager to invest when the risk-return balance is improving for us as investors. Some of our best investments were funded and grew through global recessions — iZettle, Spotify and Avito are great examples of this.

What are you looking for in your next investment?

The hardest thing to achieve in media is strong user engagement — so that quality in a startup is definitely something we keep looking at over the next couple of years. Blockchain-enabled media experiences will certainly be interesting for the longer term and we have so far invested in a couple of media infrastructure enablers such as Livepeer. I would love to see new emerging platforms in this industry. There’s no better timing.

How has COVID-19 impacted the media investing landscape?

The investment rate, in general, has slowed down, primarily because companies need to review their plans across their operations, teams and finances with a specific focus on cash runway. Another point worth noting is that valuations are coming down. Before a new equilibrium is established, you typically need some time and data points, both as an investor and as an entrepreneur, in order to bring some more certainty to the table.

For us, whether we invest in a strong or weak capital market, it’s extremely important to have aligned interests between the investors and the founders so that the founders feel confident and reassured that it’s their company to build. We think that there should be a very strong incentive for founders to adjust the course when required, and increase the growth when they feel that the market is opening up again.

How difficult do you anticipate the next year being for media startups?

These are the times where there’s bifurcation on access to capital. The media startups with strong traction still have access to capital markets, while those that still need to prove their metrics will struggle, particularly ad-financed business models. We’re seeing solid demand for companies with high revenue per user, which I expect to continue over the year.

What kind of advice are you giving to your portfolio companies?

We’re working with them on contingency planning and to create maximum strategic flexibility which is key in uncertain times. This involves often drastic cost-cutting but also helping entrepreneurs to navigate how to read market signals. As an example, we have previously seen the great importance of celebrating victories, even the small ones to keep morale up in challenging times. When things actually turn around, there is a risk to still be stuck in survival mode and miss the rebound opportunity. Therefore, it’s key to start building a new narrative and growth direction as soon as possible.

Investors today have a lot to choose between given the market conditions and tend to shy away from capital intensive, unproven models. This could be a very long situation that hurts the economy even more than what we can grasp at this point. That said, incumbents will probably suffer even more than startups and the startup will be able to capture the momentum more effectively when it returns, so on balance, I am optimistic.

Vasu Kulkarni, Courtside Ventures

What (if any) media trends are still exciting you from an investing perspective?

High-quality content remains king and queen. There is clear increased consumer consumption and a willingness to pay for quality content. This, paired with premiums paid by advertisers for live content, has led to a continued opportunity-rich media landscape. Despite brands facing one of most challenging economic times in decades, the lack of live sports content has only further strengthened the position of sports rights holders and the need for brands to advertise behind premium properties when they are back live on linear and digital again.

How much time are you spending looking at media startups right now?

At a standstill on the ad-supported media side. For subscription models that are focused on affinity groups and premium content, we continue to actively look for opportunities.

What are you looking for in your next investment?

We are looking at the opportunities that can ride the tailwinds of the current environment, but will continue have large opportunities even post-COVID-19. Venture investing is a 10-year game, so there’s no point in being short sighted.

How has COVID-19 impacted the media investing landscape?

Media investing will be affected the way just about all investing is being affected. Investors are a little trigger-shy, the bar has been raised, and valuations will be lower than everyone would like.

How difficult do you anticipate the next year being for media startups?

Consumption will be up. Revenue likely won’t keep an equal pace, but in the long run we expect that it will. It’s going to be a tough year for everyone regardless, so the name of the game is making sure you have enough cash in the bank to make it through to the other side.

What kind of advice are you giving to your portfolio companies?

View the world and habits of your customers/clients from the lens of pre- and post-vaccine. Different capital needs, resources and assumptions will be required across that timeline. Most importantly of course, do whatever it takes to get yourself an 18 month runway now.

Do you anticipate the advertising downturn rebounding this year, or will it be a more long-term problem? How should media companies be responding?

Our belief is that a broad rebound on advertising will not happen until 2021 and potentially longer when it comes to money flowing into smaller properties.

Are there any other thoughts you want to share with TechCrunch readers?

Stay safe, and don’t forget, good times are ahead of us again.

MG Siegler, GV

What (if any) media trends are still exciting you from an investing perspective?

It seems like the COVID-19 situation is unfortunately accelerating the trend that media entities can’t solely rely on advertising. Of course, the situation has left another pillar, events, in even worse shape. The hope is that it accelerates the move towards subscriptions and entities like Medium (a GV investment) and Substack (not a GV investment) seem positioned well for that. Of course, just as in video, there will be a saturation point for subscriptions, so we’re watching to see if and when some sort of bundling movement starts happening. There are only two ways to make money in business, after all…

Audio also remains an area of great interest. Beyond podcasting still being in the spotlight thanks in no small part to Spotify’s efforts, it’s impossible to ignore the current Venus flytrap for VCs: Clubhouse. Our stuck-at-home reality could mean it’s the right time for something like this to work. The question is whether it will work if/when things go back to normal.

Various video plays remain of interest for some of the same reasons: time has been shifted, so we’re all spending time filling in the new cracks that have formed in a day.

How much time are you spending looking at media startups right now?

Again, anything that’s solely advertising-based is tough right now. But other ideas might find a way to use the aforementioned time shifts to their advantage.

What are you looking for in your next investment?

Same thing I’m usually looking for: a good team thinking a bit outside the box — or revisiting an older box whose time is perhaps now.

How has COVID-19 impacted the media investing landscape?

Again, advertising-based businesses are very challenged at the moment. Even if the numbers aren’t falling as fast as feared, and even if they don’t fall as far as feared, there’s just too much uncertainty at the moment. The trickle-down effects of the businesses hurt the worst by this situation, such as the travel space, are just brutal.

At the same time, people seem to have more (well, different) time to explore for news and information and entertainment, so there are opportunities there.

How difficult do you anticipate the next year being for media startups?

I think the next quarter will be very, very challenging for the reasons mentioned above. After that is a bit of an unknown, but I’m hopeful that things start to rebound after that. The question is even when advertising starts to come back, how much media startups realize they can’t rely on that money as much as they once did?

What kind of advice are you giving to your portfolio companies?

At a high level: do what you can to weather this storm. It’s hard because it’s almost entirely external factors at play right now, but the hope is that everyone will come out the other side stronger in some ways, having been stress-tested to the extreme. But it’s very, very challenging across the board right now.

Do you anticipate the advertising downturn rebounding this year, or will it be a more long-term problem? How should media companies be responding?

I suspect it’s overall a longer-term issue, but also sector-dependent. It’s hard to imagine travel companies spending as they once did any time soon, for example. Even when those businesses come back, it’s going to take some time to get fully back up to speed.

Diversifying revenue streams will be even more important. Again, none of this is new, it’s just accelerated by the situation at hand.

Are there any other thoughts you want to share with TechCrunch readers?

All of the above is a lot easier said than done, of course. Especially when people’s lives are being impacted in ways large and small. Staying afloat and sane in the next several months feels like a win, but also using the time to evaluate what really matters in a business context as well.

Jana Messerschmidt, Lightspeed Venture Partners

What (if any) media trends are still exciting you from an investing perspective?

At Lightspeed, we are always looking for new hardware and platform shifts that signal new consumer behavior patterns to come. With both smart speakers and AirPods hitting mainstream consumer adoption, we believe that now is the time to keep our ears open to new opportunities (pun intended).

We are also looking at the unbundling of social media networks. We’ve already seen large vertical social and professional networks form around gaming (Discord), neighborhoods (Nextdoor) and professional networks (Lightspeed portfolio company Handshake for college students, The Mom Project for moms, Incredible Health for nurses).

What are you looking for in your next investment?

We look for media consumption that has the potential to become a daily habit. This is a criteria for investing but was also a criteria for me as an operator working at consumer media companies like Netflix and Twitter.

Whether it was reading the daily newspaper a century ago or is opening up Twitter each morning to see what is happening in the world, the most successful media companies start with a daily habit. Netflix users spend 2+ hours/day watching content. Spotify users spend more than 25 hours/month listening to music. Snap, a Lightspeed portfolio company, has over 200M users who use the product daily. We see similar daily habit forming trends with other Lightspeed portfolio companies Calm and Epic Games (Fortnite).

How has COVID-19 impacted the media investing landscape?

It varies depending on the business model. In general, consumers are spending more time than ever with their eyeballs glued to screens and their AirPods in their ears.

Ad-supported media businesses will take a revenue dip despite the increase in eyeballs — especially media companies that rely on advertising dollars by hard hit sectors (local, travel, nonessential retail, automotive, etc). With more consumer mindshare available, subscription media services will thrive both in terms of new user sign ups and improved retention.

For media companies who have the marketing budgets to get aggressive on customer acquisition, we’re also seeing more efficient rates for ad inventory in a variety of channels such as influencer marketing, television and digital. The cost of customer acquisition could be 10-50% cheaper depending on the channel.

Are there any other thoughts you want to share with TechCrunch readers?

We are particularly interested in what I like to call the “lean way forward” genre of content: where a consumer chooses his or her own adventures to influence the outcomes within the story. Bandersnatch (Netflix) led the way in showing consumers love having a voice in directing and we believe more demand for this type of experience will follow. We recently invested in Solve, a true-crime content studio, and have made several other (unannounced) investments in this genre.

Matthew Hartman, Betaworks Ventures

What (if any) media trends are still exciting you from an investing perspective?

We invest in the future of how people create and connect and they’re doing more of that now than ever. We’re seeing amazing innovation in audio, as well as natural language generation across text, voice, and video to create brand new types of media experiences. Synthetic worlds are also fascinating, especially when they come in the form of digital third places such as Fortnite or Animal Crossing.

At Betaworks, we’re also focused on a new category we call Fix The Internet: data and privacy-first approaches to consumer social media, new business models that aren’t reliant on “attention harvesting,” and new approaches to disinformation.

How much time are you spending looking at media startups right now?

Typically that focus on how people create and connect using technology falls under the broad category of social media versus “Media” media. While we’re not investing in companies creating and producing their own content, we are continuing to invest in companies that are engineering-driven and thinking of brand new form factors in media spaces such as audio, inside the text message, and inside digital third places.

What are you looking for in your next investment?

I would love to see consumer social products with privacy-first approaches to user data and business models and interaction paradigms that don’t rely on attention hacking. The world is ready for a new type of social utility where the interests of the company and the people who use it are really tightly aligned from an attention and business model perspective compared to what exists today.

How has COVID-19 impacted the media investing landscape?

New demand for various types of media content and the experimentation right now with new products make it an interesting time to invest in media. We’re seeing an unprecedented time of people trying new tech and an increase in media consumption, particularly around social since it combines the desire to be entertained with the desire for connection many of us feel right now.

Social media products such as Squad, House Party, and Bunch let people connect with each other while watching movies or playing games. We’re also seeing an uptick in usage by companies who want to find new ways to connect with their employees and customers with products such as Teooh and Hopin.

The epidemic has been hard on so many people in so many different ways, but mental health is also being de-stigmatized, which is an opportunity for companies with a mission to serve that need, whether that’s a meditation app like Waking Up, Headspace, and Journey, or media companies focused on mental wellness broadly such as Thrive Global and Shine.

How difficult do you anticipate the next year being for media startups?

I think the biggest impact will be that up until now, media startups were spending a significant portion of their investment on paid user acquisition to fuel growth. I could see investors making a move towards value in the sense that companies with a profitable customer base will have a valuation premium whereas in the past the premium was on efficient paid user acquisition. There will be exceptions but if this happens, there could be a valuation reckoning as big companies start shopping for startups at a discount, which will create valuation comps for the market that are lower than what later stage VCs have been paying.

What kind of advice are you giving to your portfolio companies?

We are encouraging our companies to be conservative in terms of their spending, to err on the side of taking more investment when it’s available, and to expect that fundraising may be difficult for all but the fastest growing tech products and businesses at least for the next 3-6 months if not longer. In the past a founder may have chosen to close out a round because it was oversubscribed, whereas today it may be worth taking the extra capital. That can seem like unnecessary dilution and it’s certainly a tradeoff, but it’s a tradeoff worth considering.

Raising a “bridge” round later can often be the hardest round to raise so taking an extra 3-6 months of runway when it’s available may be wise when the economy is in an uncertain position.

Do you anticipate the advertising downturn rebounding this year, or will it be a more long-term problem? How should media companies be responding?

It’s reasonable to expect that overall ad spend will be tight through the end of this year, especially if major categories like travel and automotive take a long time to get back to something resembling normal. A lot of ad-based media companies that haven’t introduced subscriptions already may make the leap this year and do some form of direct audience monetization.

Gigi Levy-Weiss, NFX

What (if any) media trends are still exciting you from an investing perspective?

Given the downturn hitting ad revenues, I expect to see media startups that focus on cheaper means to create content through UGC or further content automation. We also see a growing trend of super premium content platforms which are supported by premium subscriptions rather than ads in specific verticals, though the model is yet to be proven at scale. We are also seeing more startups that are not pure media startup producing more media content as a cheaper means of customer acquisition, in an effort to reduce marketing spend.

How much time are you spending looking at media startups right now?

Given our focus on network effects businesses, we hardly look at media businesses unless they are based on content marketplaces, user-generated content of content that is the source for more transactional business. This has not changed with COVID-19. We are also seeing a positive trend on VR — the combination of devices being truly consumer grade for the first time (with the Oculus quest) and COVID quarantine getting users to be more open to VR than ever before.

What are you looking for in your next investment?

Our focus is on software businesses, both B2C and B2B, with network effects in their core.

How has COVID-19 impacted the media investing landscape?

Like most fields, the bar for investment in media startups has risen with COVID-19, so media startups will need to have higher KPIs (usage, retention, monetization) in order to raise compared to pre-COVID period.

How difficult do you anticipate the next year being for media startups?

I expect fundraising to be hard for all startups next year, with the situation improving mid-year. Good startups will still be able to raise, though valuations may be lower than what we all got used to.

What kind of advice are you giving to your portfolio companies?

I am telling our media-related startups to try to reach profitability and budget for low ad revenues and fundraising only late next year. For those that can add additional monetization layers beyond ads. I am encouraging [them] to do so.

Do you anticipate the advertising downturn rebounding this year, or will it be a more long-term problem? How should media companies be responding?

Sadly it seems that ads downturn will take at least a few quarters to rebound, and while I expect initial pickup in Q4, it will probably be the second half of 2021 until we see ad revenues returning to pre-COVID levels.

Are there any other thoughts you want to share with TechCrunch readers?

While there will always be great media and content businesses, it is our belief that every business needs the defensibility that only network effects can provide and recommend for any young media startup to focus on adding network effects on top of their core content business. This is especially true in the current market and given weakness of ad-supported business models.

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