New media investing in favor but hazards lurk


By Jennifer Saba

NEW YORK, Nov 17 (Reuters) - New media websites fromBuzzFeed to Business Insider are on a roll lately, showered withdollars from venture capitalists betting that they will crack anadvertising market that has stymied traditional media companies.

With their mix of top-ten lists, slide shows that highlightthe indignities of air travel, eye-catching headlines andthoughtful news, such media start-ups think their fresh approachto working with brands will coax more money from advertisers.

They build large audiences by using social media likeFacebook and Twitter to push content to youngreaders that marketers covet.

Some investors are already true believers, as evident in themuch higher valuations that digital content start-ups arecommanding - in some cases, they are valued at five times themultiples that venerable old media companies fetch. Still, thestart-ups face steep odds in the long-term as scores ofcompetitors vie for marketers' dollars.

Venture capital firm Accel Partners recently led a round ofnew financing of nearly $34 million for Vox, the publisher ofsports and technology websites SB Nation and The Verge that hasraised nearly $70 million so far. Last week, Vox announced itbought the Curbed Network, a group of blogs that cover realestate, food culture and fashion. Reports pegged the acquisitionin the range of $20 million to $30 million.

BuzzFeed, a social news and entertainment company, received$46 million, including $19.3 million in January from venturecapitalists. Technology-focused Business Insider and thefashion-oriented Refinery29 have also raised tens of millions ofdollars each.

The influx of money has some industry watchers proclaimingthe comeback of content, as entrepreneurs try to appeal toso-called millennial readers who grew up on digital news andhave likely never touched print.

"If you can get to scale, the media model is fantasticallyprofitable," said Dan Marriott, managing partner at theinvestment firm Stripes Group and an investor in Refinery29.

Thirty-four percent of people between the age of 18 and 24consume news through social media, compared to 10 percent ofpeople between the age of 50 and 64, according to recent figuresfrom the Pew Research Center. Only 6 percent of 18- to24-year-olds read a newspaper, and only 29 percent get theirnews by watching television.


New media companies that are grabbing a lot of Web trafficcan command valuations in the range of four to five timesforecast revenues, according to venture capitalists and otherinvestors.

BuzzFeed's last round of capital-raising valued the companyat $200 million, or roughly five times estimated 2013 revenue,according to press reports. The New York Times Co tradeson the New York Stock Exchange at about 1.2 times estimated 2013revenue, according to Thomson Reuters I/B/E/S.

"There is an argument that these (new media) valuations evenwith high growth rates seem high," said Greg Gottesman, managingdirector at the Seattle-based VC firm Madrona Venture Group andan investor in Cheezburger, a collection of humor sites.

"The only way you could justify that is if you believemonetization will catch up with where people are spending theirtime. I think it will. The question is how long will it take."

One-time investor darling Demand Media Inc washailed as a way to create inexpensive content by tapping anetwork of thousands of freelancers for "how to" videos andarticles, designed to show up prominently in search results.

But in recent quarters its traffic fell, as did itsadvertising revenue, and now its market value is hovering around$480 million today, one third of where it stood after its IPOnearly three years ago.

The company has been hurt by its heavy dependence on Google, which has made several changes to its search algorithmto weed out what it considers low-quality content. That pushedDemand's articles down in search results, hurting itsadvertising revenue - a sign of how such sites can be captive oftechnologies beyond their control.

A Demand spokeswoman said the company has faith in the valueof its content assets and that it is broadening to otherproducts and services.

AOL Inc spent more than $150 million on Patch, anetwork of local news sites dotting hundreds of communitiesthroughout the United States. Persistent weak ad sales haveresulted in deep cuts and a possible sale.

"The bottom line with content on the Internet is it's hardto get paid - particularly if the content is ad driven," saidEvercore analyst Doug Arthur.

Another fast-growing content company, Say Media, operates anetwork of blogs like ReadWrite and has raised about $30million. It then pared back its ambitions, putting its plans foran initial public offering on hold.

"We are growing, but it's not at the accelerated rate we hadpredicted 12-16 months ago," Chief Executive Matt Sanchez said."This doesn't mean that an IPO is out of the question - it'sjust not in the immediate future."


Free from legacy systems or print schedules, these start-upshave smaller editorial and sales staffs that can use newplatforms to quickly produce integrated content - ranging fromarticles to videos to advertising.

"In most media areas, established brands have not been ableto understand technology, utilize technology and modifythemselves for technology," said Eric Hippeau, a managingdirector at Lerer Ventures, a backer of BuzzFeed "That hasopened doors wide open to start-ups."

The start-ups are focusing on helping corporate brandsdevise campaigns that go beyond a blocky banner, tapping intodata about users to better tailor ads.

"The easy thing to notice is that advertising on the Websucks and it doesn't have to," said Jim Bankoff, the chairmanand CEO of Vox Media. "One of the problems we are working onsolving is to make advertising as good as the editorialproduct."

At The Verge for instance, an ad for Microsoft's Surface tablet is seamlessly woven into the design of the site'sculture section.

"It's leveraging the voice of the (site) to write about abrand," said Philippe von Borries, co-founder and co-CEO ofRefinery29. "It's creating an experience that is relevant toeverything associated with it."

Research firm eMarketer pegs digital sponsorship advertisingto grow 63 percent to $3.1 billion over the next five years.

"Professionally produced content is valuable and theaudience is valuable," said Ari Bluman chief digital investmentofficer in North America for WPP's media buying arm GroupM. "Ifwe can generate scale that is where our message needs to be."

View Comments (0)