Content Creation: Not Attractive to Venture Capitalists (But Keeps the Lights On)
Last week's Ad:Tech conference in New York was an opportunity to come at the question of digital media from a different angle, and some of the perspectives offered were pretty eye opening. When's the last time you went to a publishing conference and heard from venture capitalists and bankers about which ad-supported concerns stand to attract investment, and why?
It's an important question in the wake of Facebook's rough ride on Wall Street, and the fallout for publicly-traded Demand Media after Google changed its algorithm to punish lower-quality "content farms" in search rankings.
Investors, as always, are looking for growth and high profit margins, as well as companies they believe have value on the M&A (mergers and acquisitions) market. Mentioned several times at the show, for instance, was the explosive growth in picture-sharing sites Instagram and Tumblr, the opportunities for advertisers in these social ecosystems, as well as their value to a potential buyer like Facebook.
What really struck me though was the response to an audience question at the session, "Follow the Money: Investors Place Their Bets on the Future of Advertising." Given the rise of social sharing and user-generated content sites, the panel was asked about "brand safe" (professionally created and curated) content and its traditional appeal to advertisers. Is content creation still worth investing in, the question went, or do platforms have the upper hand?
The answer was unequivocal. "I think overall the public market is somewhat skeptical around the professionally created content model, largely because of the margin structure and the inability for companies to predict what will be hot," said David Liu, managing director and co-head of digital media and internet investment banking at Jefferies & Company, Inc. "A lot of the proprietary content models where there is a huge editorial component struggle to see long-term high margins."
Liu instead focuses on crowd-based business models as high-profit ventures. Jeff Crowe, general partner at Norwest Venture Partners, was even more blunt. "We invest in a lot of UGC [used generated content companies] because if you manage that process that can scale very quickly and at very high margins, the reason being is if it is user-generated, you are not paying them," he said. "Thats the whole point. When [content creation] is professionally done you are paying them. That's the brutal fiscal reality."
Many companies that invest in content creation are very good companies, Crowe was quick to add, but are simply not attractive to venture capitalists because the margins are not there. This is why Yahoo, for instance, has gone from touting itself as a content company to a platform (mobile) company.
So, does that leave professional content creators out in the cold? Not necessarily. There is the investment in content by companies such as AOL, the rise of content marketing, the rise in digital revenues for traditional media companies which have adapted well to new business models. It may not be high growth, but perhaps as the digital media market matures, the business of content creation will be seen as not high risk, either.
Witness the parade of highly touted digital IPOs that have not lived up to the hype: Facebook, Groupon, Zynga, Pandora. If I were an advertiser, I'd still see partnerships with the New York Times and Atlantic Media Company as pretty safe bets, regardless of where the investment bankers are putting their chips.