There are several categories of business that venture investors often avoid. Gaming was one, historically, because game-based revenues can be hit-driven and episodic. Media was another.
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The argument against funding media companies isn’t hard to grok — simply compare the aggregate value of all media-based businesses that have received venture backing against, say, the value of just one of America’s Big Five tech concerns.
This doesn’t mean that gaming companies don’t raise venture capital; they do, and web3 fervor has boosted gaming-related venture funding to a degree. Media companies also raise professional private capital, with outfits like Vox Media, BuzzFeed, Substack, The Juggernaut and others attracting venture money at one point or another in their corporate journey.
We’re deep into some of these experiments now, with BuzzFeed first raising venture funding back in 2008, per Crunchbase, and Vox Media stacking its first external capital around the same time. Of the two, BuzzFeed found an exit in the form of a SPAC-led public market debut, while Vox remains on the sidelines. We’ve also seen other media companies find the exits recently, including Axios, whose recent sale for half a billion dollars or so made waves in media circles and generated returns for its venture backers.
But while exits are happening, one of their types has been a mess. BuzzFeed’s SPAC story is one of employee-employer acrimony, brutal cost cutting, and a falling share price. Forbes tried the SPAC route but eventually gave up. Other media concerns that are publicly traded are also taking incoming fire.
Does that just leave M&A on the table? Are media companies perhaps even more exit-value-constrained than the traditional venture investor perspective might have led us to believe? If so, the latest VC experiment in media funding may prove to be more fizzle than bang.
Dead-end signs
BuzzFeed’s exit via a SPAC has been labeled a “fiasco” — and we can see why. Its shares plummeted on merger day and never recovered: BZFD‘s current market cap is around $218 million, when its SPAC deck boasted about a $1.5 billion enterprise value.
In addition, a legal fight now pits BuzzFeed against early employees who were unable to sell their shares while the stock’s value fell.
BuzzFeed’s troubles aren’t good for the media company, but they also send a negative signal about the industry as a whole: to journalists, who may lose trust in stock options that could be rendered less valuable by lock-up clauses, and to the market, which may see another reason to be wary of SPACs and media exits more generally.
It is hard to tell whether BuzzFeed is to blame or whether it has to do with broader issues surrounding SPACs, but at least two media companies have reportedly abandoned this exit route. Besides Forbes, Vice Media is also said to be looking for buyers after SPAC talks fell through.
As usual, private companies are also impacted by the woes of their peers who recently went public or were hoping to do so. For instance, Substack cut a dozen jobs this June after reportedly giving up on raising new external funding in a market context that would have made it challenging to avoid a down round.
Indeed, Substack’s previous valuation of $650 million, together with its presumed $9 million revenue for 2021, makes for a multiple that is very far from what even the most successful media businesses have been securing upon exiting.
How lucrative is media M&A?
Speaking of multiples, we found CB Insights’ recent recap of media exit data quite telling. It estimates that Axios sold for around 6.2x its trailing revenues. At $525 million, that’s around the same price that Industry Dive sold for, and a slight discount, per the group’s calculations, considering the 8.5x trailing revenue that The New York Times bought The Athletic for.
Notably, these are not aberrations. CB Insights notes that the sale of Politico was around the same multiple, while Morning Brew and The Hustle actually sold for far-slimmer multiples. In effect, the Axios sale price was far from cheap — it was smack-dab middle pricing.
This means that with public-market exits effectively off the table, and M&A for media startups historically capped between 6x and 8x or so, the upside in media deals isn’t very high compared to other investing opportunities.
Now what?
If M&A is the only way forward, the Axios saga leaves us with two tea leaves worth considering. The first is that pure-play media companies are not the only possible exit candidates. As the company said in its own post discussing the deal, the transaction doesn’t include its software arm. This is good news for media companies looking for an eventual liquidity point.
Per the company, “Axios will spin off its software arm, Axios HQ, into a separate, stand-alone company led by Axios president Roy Schwartz.” Why does that matter? Because Axios is not the only media company with a software component. Vox sells its Chorus CMS, for example.
Secondly, then, we can infer that the universe of acquiring companies is broader than merely, say, larger media companies. And that the value of media assets exists apart from other efforts that may support (from a technology perspective) overall business results (by driving higher-margin revenues from a distinct customer base).
More acquirers and the potential for multiple value-generating levers are good news, yeah? Yes, but only to a degree. Recall that Axios sold for a half-billy, or roughly one unicorn sawed in half. And it’s a success. Instacart, racing toward a public market debut, is defending a reduced valuation that is still around 40x or so what Axios sold for. So the potatoes we’re discussing here are simply smaller.
What are venture investors doing?
Notably, we’re far past the era when media-focused venture investments were tearing up the charts. Per data reported by Axios — ha — venture investment into media companies scaled from under $100 million in 2010 to $1.1 billion in 2015 before falling to around $300 million in 2019 and 2020. Last year saw just over $100 million, effectively concluding the arc of venture-media deal-making.
This means we are not curious as to whether the failed public-market experiments will limit venture investment into media companies — that’s already happened. The real question before us is whether the Axios sale will help bolster venture activity in an M&A-only exit world for media startups.
Probably not.
Good on Axios for finding an exit while holding a part of its value separate, but it’s not likely to change a declining venture market for media startups that has already endured a long descent into wintery conditions.