The VC-backed media myth is combusting
Business Insider is a large media operation and filled with many smart and talented business reporters, and so I imagine a recent headline sent shivers down some of their spines. CNN reported that Axel Springer, BI‘s parent company, is trying to go private, with private-equity firm KKR offering to purchase minority stakeholder shares.
True, media companies are prone to sales, yet this move could prove to be a worrying one. Private equity isn’t invested in the long game: It wants to consolidate to maximize cash flow wherever possible. It’s a get-rich-quick scheme for already rich people. And so this news likely gave some people pause.
For examples of PE’s destruction, we need only look at numerous industries. Aging retail stores like Toys “R”Us and Payless have been bought private by PE firms, only to face growing debts and ultimately death. Newspapers like the Denver Post saw a similar fate after being sold to a hedge fund.
In theory, private equity is designed to give mature companies growth capital when they sit in between being a venture-stage company and a public one. In practice, though, the private-equity playbook all too often operates to extract cash from struggling companies rather than find clever new ways to revivify them. Investors use it as a financial apparatus. Firms invest with an eye toward a company’s cash flow, or an overfunded pension, let’s say, and then saddle it with debt if the company needs more funds. From there, they make even more money from fees and other expenses. And then, when the load become too much, the companies either go public again or file for bankruptcy—which will, once again, give investors another fresh lump of cash.
To be clear: I’m not saying this is what’s going to happen to Axel Springer or what happens in every instance of private-equity investment. Just that it has happened enough, in enough high-profile examples, that it is reason to be cautious rather than optimistic.
Indeed, changes are already afoot at Axel Springer. Reuters reports that BI is joining forces with eMarketer, another Axel-owned publication. BI founder Henry Blodget will be leading the combined entity, and AdAge adds that the proposed merger will result in the consolidation of both companies’ intelligence units. According to the report, neither plans any layoffs.
I emailed Blodget asking for more info about the merger’s plans, and he wrote back:
The combined research company’s mission will be to create the world’s leading research firm focused on digital transformation. We will invest heavily in our products, services, technology, and coverage over the next few years, and we plan to at least double the size of our team. We will work through the branding and product-integration details this summer and communicate them to clients and our team in the fall. We will need everyone on our respective teams (and more), so we’re not planning any layoffs.
I reached out to KKR for comment, too, and will update if I hear back.
In AdAge, the merger was explained as a natural move given the overlapping research programs of both companies. It also described going private as a way for Axel Springer to invest more deeply in its programs, because it would no longer be beholden to public scrutiny.
But that’s not really how these business strategies generally play out. If a company is taken private with the aid of PE, it usually means a pivot is on the horizon—one that focuses less on investing and more on creating value from a pittance. The media business is many things, but efficient is not one of them. It requires myriad intelligent humans to create content, and even more to figure out how to monetize it. A private-equity perspective on the media business model wouldn’t create opportunities for investment, but rather rationalizations for budget cuts.
This falls in line with recent Axel Springer news, too. The company disclosed in its most recent earnings report that it expects both revenue and profits to fall in the coming year. While Business Insider did announce that it’s profitable, the rest of its parent company is likely fearful for its future. Blodget’s media company is only a small percentage of Axel’s overall European media domain, which includes such newspapers as Bild and Die Welt.
It’s unclear how all of this will play out until KKR has had time to follow through on its plans for Axel Springer.
But the one thing this development brings to light is that VC-backed media has never turned out the way company founders expect. Years ago, before Google and Facebook hoovered up most of the digital advertising share, the popular story went thus: Media companies could raise millions of dollars from venture capitalists, and then grow and scale at the same clip as other technology companies.
But nearly every company that followed this track has either failed completely or significantly scaled back: Mic, Vice, Mashable, BuzzFeed, Funny or Die, the list goes on.
Many critics looked to Business Insider as the proof that the VC-backed model could work. The company produced a lot of content, grew at a fast rate, and then saw one of the most successful media exits to date when it was purchased by Axel Springer for $450 million in 2015. But now, in the epilogue, we see the company being taken private by PE—which is certainly not an end nearly any media founder wants.
The business model underlying it all is flawed and unsustainable. We in the media were fed the idea that if you raise enough money and grow fast enough, a profitable business will follow. Even when that reality started to waver, a few exceptions to the rule were still somehow doing well enough to allow some to cling to the notion. But these examples have a reality to face, and Axel Springer’s new move may prove to be a foreboding sign for media bulls, if there are even any left.
Disclosure: I worked at Business Insider between 2014-2015.