Venture funding drying up for media start-ups

As venture capitalists exercise more caution and place fewer bets, they’re leaving media start-ups behind.

Venture funding to media tech companies slid for the third consecutive quarter to $91.7 million, the lowest amount since mid-2013, according to data from industry researcher CB Insights. Investment activity followed a similar trend, declining to the fewest number of deals since the second quarter of 2012.

While U.S. venture deals were down overall in the first half of the year, the drop in funding to media companies has outpaced declines in other sectors, said Garrett Black, an analyst at researcher PitchBook. Investors worry the businesses are expensive to run compared with software makers and struggle to keep readers’ attention.

“I don’t think that venture capitalists are seeing a lot of compelling businesses currently in the market that are worth ponying up the money for, especially given the broader backdrop of trepidation,” Black said. “With all of the consolidated players that are already so powerful in the space, it’s really hard for new start-ups to figure out a new niche to target.”

The decline in venture funding comes amid a moment of reckoning across the digital media landscape. Web publishers like Mashable and International Business Times have fired dozens of employees this year. Smaller players are seeking new business models as they struggle to sustain themselves on digital advertising, which is being increasingly dominated by Google and Facebook. Many of them are shifting their business to focus on web video, where advertising rates are higher.

Media hasn’t traditionally been the top investment area for venture capitalists, but some big wins drew interest to the sector. AOL spent $315 million to acquire the Huffington Post in 2011, and the publication has become a cornerstone of Verizon Communications’ media strategy since it bought AOL. German publisher Axel Springer SE took over Business Insider last year in a $343 million deal, a win for backers including Institutional Venture Partners and Amazon.com’s Jeff Bezos.

Venture capitalists helped propel several newer media stars, including BuzzFeed, Vice Media and Vox Media, but the start-ups’ recent financing rounds have been led by legacy media companies. In addition to those mega deals, media giants are incubating, funding or buying up young companies. Time Warner’s Turner division led Mashable’s $15 million funding round this year, which coincided with job cuts at the millennial-focused news company. TheSkimm said last month that it raised $8 million in financing led by 21st Century Fox as the daily newsletter expands into video.

The funding slowdown hasn’t deterred investors like Hunter Walk. He’s a founder of seed investment firm Homebrew, which backs TheSkimm and has a supporting investment in Cheddar, a financial news start-up targeting millennials. When talking about media companies being able to build multiple revenue streams, he said: “There’s no doubt that we’ll see several billion-dollar-plus audience companies built around content and media, and that’s where we’ve put our money.”

Eric Hippeau, managing partner of Lerer Hippeau Ventures in New York, said media traditionally accounts for 10 percent to 15 percent of the firm’s portfolio, which counts BuzzFeed, the Huffington Post and Mic among its investments. “The media landscape is being transformed in very significant fashions,” Hippeau said. “When you see disruption on that kind of scale, it leads to great investment opportunities.”

Media start-ups have also expanded beyond content creation into distribution, analytics and other tools. Hippeau said his firm is looking for disruptive models such as those focused on distributed content, messaging platforms and virtual and augmented reality.

Changes in the way content is made and distributed have allowed media start-ups to more efficiently produce their product, said Sim Blaustein, partner at BDMI, the venture arm of Germany’s Bertelsmann SE & Company, which owns Penguin Random House.

“The equation of how much money you can make with content versus how much it costs to produce that content, the general unit economics of being a media company - that equation has shifted in favor of media companies,” he said.

The new class of media upstarts often sell themselves as outlets for a younger generation, but keeping that audience coming back is difficult, said Brendan Syron, principal at New York seed fund Scout Ventures. They’re constantly having to reinvent themselves when Facebook or Google change how they present news or when new formats, such as Snapchat’s and Instagram’s stories, captivate viewers - and advertisers.

“It’s a tough business to build, and acquiring users is such a challenge - increasingly so, because eyeballs are that much harder to get,” Syron said. Bloomberg