complicated concepts

Investing in Media Companies

Before I joined Hustle Fund, I worked for a media company.

It always surprised me that the founders didn't raise a ton of VC money.

But when I joined the world of venture capital, I learned that most VCs don't invest in media companies for two reasons:

1. the revenue model
2. the exit potential

That said, there are things media company founders can do to mitigate those concerns.

Let's dive in.

The problem with an advertising model

Most media companies monetize through ad revenue.

The problem with this strategy is that it's a never-ending treadmill of ad sales.

Advertisers don't want to hit the same audience over and over again, so their spend with any one media company is limited.

Since their "customers" are constantly churning, media companies must constantly find new advertisers. This is a huge drain on company resources.

Plus, you know... growth.

Ad spend is only significant when the audience is big and highly engaged.

So while they're chasing ad clients, media companies must also be:

a) creating unique and engaging content, and
b) growing their subscriber base

This takes talented content creators, creative marketers, and some amount of marketing budget.

It can feel like each of those goals is competing for top priority, but in reality they are all critical pieces of a successful media business.

Engaging content → leads to more subscribers.
More subscribers → leads to advertising revenue.
Revenue → enables content creation.

And round and round we go.

If any one piece of that equation fails, the whole business suffers.

The problem with the valuation

Let's say the media company is successful. They have tons of subscribers, a repeatable sales process, and engaging content. They're earning $5m in annual revenue.

A SaaS company that's earning $5m in revenue could be acquired for 10x or even 100x their revenue.

But a media business will probably only see a 1x or 2x acquisition.


Because SaaS customers don't churn that much.

But advertisers do churn.

They might churn because the audience doesn't click on their ads. Or because those clicks don't convert to sales. Or because they want to explore other channels. Or because their ad budget got slashed. Or because there's a recession. Or because they're working on a new product.

Whatever the reason, there's no guarantee that the advertisers you got this year will come back next year.

Acquirers will use those doubts to negotiate down a sale price.

They'll say "Just because this platform brought in $5m last year doesn't guarantee $5m in revenue this year. And we're gonna have to do the work of getting advertisers."

So, what's the fix?

For starters, media companies need to focus their efforts in the early days on growing their subscriber base.

Instead of selling ad space to buyers, they could do trades with other media companies to try and reach new readers.

They could host events to grow readership locally, and sell sponsorships to cover the cost of those events.

Then, when their subscriber base is big enough, the company can layer on other business models.

For example:

  • run SPVs and let readers invest
  • earn affiliate revenue from recommended products
  • build and sell their own products to readers
  • host conferences, sell tickets and event sponsorships

All this is to say... most investors shy away from investing in media companies.

But instead of discounting an entire industry, talk to founders about their long-term plan for earning revenue.

If they have the patience to build a massive audience, and the creativity to layer additional products on to the business model, it could be worth the investment.

Constantly creating,
Kera from Hustle Fund