In this third and final part of our three-part series on ideas for creating successful media companies, serial media entrepreneurs and CommonAngels members Tom Burgess former CEO of Third Screen Media and Jay Habegger, founder and CEO of OwnerIQ, Inc. of Boston, MA, and I share our advice and experience about how a media company grows value and considerations of acquisition.
James: For many angels, media businesses take some getting used to. Creating value is more of a challenge, partly because it’s a different kind of value.
Jay: True. In a software company when a person goes out for capital, they need money to commercialize a prototype. There is a computable amount required to bring a product to market. At that point customers can buy or not, you get customer validation or not, and away you go.
In media, you do have a web site prototype, because the business is all about getting the audience. But that’s tough to do in scale without resources, so there is significant up-front investment while in the early days revenues tend to be zero.
Media businesses don’t look good early on, and you don’t know for a long time whether or not you are being successful. You have a two-year or longer period of building audience and scale; in only a few cases can you make meaningful cash flow without that audience scale. Some lead generation businesses may work that way, but in most cases it takes a while for things to play out, and there aren’t quick exits.
You are spending at high levels—burning cash. You show more audience and your advertising sales people are plugging away, yet nothing much is happening with revenue. You get to a B round, and this is often when media businesses look their worst. It can be hard to tell if this is a growing phase or the company got it wrong.
Tom: There are several models used to determine value for early stage media companies. I’ve found that comparison with other, similar companies that have demonstrated some form of success over time offer a solid place to begin. From that point it is important to identify the strengths, weaknesses, opportunities, and threats of your business model that will add or subtract value.
Invariably early stage media companies will be valued on some combination of audience size, audience demographic, economics of audience acquisition, and potential lifetime value of registered users. This may prove to be a challenging formula for angel investors accustomed to placing value on intellectual property and/or technology assets such as proprietary software or hardware. In the end it is all a risk and the final decision comes down to barriers of entry and execution efficiency.
Jay: Another thing to remember about these businesses. First, advertising rarely sells itself. Advertisers have to be sold. The more specialized the advertising is, the more it requires sales talent to be deployed. The difficulty of advertising sales is minimized. Even if you have a great offering, getting it sold is a challenge.
Any media company business plan needs to have a lot to say about the cost of ad sales, which is likely to equal close to one-third of sales. There are ad networks which will go sell advertising for you. If some rare cases it will sell itself. Google is the outstanding example of this. But, even Google has a sales force. In most cases the advertising is going to have to be sold and entrepreneurs must recognize that getting it sold is key part of their equation.
Tom: I’ve learned through my own history of being able to sell small companies to big companies that whenever anyone looks as you it’s a build versus buy opportunity based on cost and time to market. They can go build hire a bunch of technical and marketing people to compete with this small company or they can acquire the company.
There’s an interesting thing I’ve found over the last eight to 10 years. It used to be that the big companies were buying the little ones once they had good revenue and well-proven business models and were seeing see sizable business transactions. When AOL bought Advertising.com for several hundred million, Ad.com had been around a while, lived through the hay-day, crashed, changed the business model, came out of the hole, and back to making big revenue.
Today the big companies are looking at the small ones companies really early. Even A and B round companies are getting sniffed at. The big companies have learned that if they buy early, they can spend the money and get a dozen small companies—and the great people that come with them.
One of the hardest things to do is to get good, talented, experienced people. When you buy a company that already has people focused on a deal, you buy a team. If you find a team of 10 people wrapped around an idea and working full-speed, your time to market is significantly reduced. Lots of times that outweighs profitability. I can’t state how important is to have a good team.
The most important end result is building value. Whether the potential exit strategy is public markets or an acquirer, what matters is what they find valuable. That should be the media start-up company’s target from day one.
James: For media businesses, creating value is much more than the mechanical step of just getting the email addresses for site visitors and shoving products back at them. A far more elegant reciprocity goes on that starts with understanding the needs of each of the three legs of this stool—the media company, the advertiser, and the audience.
In its ideal form, a deliberate part of the media company’s strategy is to align the interests of the audience and the advertisers. As a result, the advertising messages are not viewed as obtrusive or objectionable to the audience; rather than being seen as an undesirable necessity they are seen as a benefit. I’m talking about the kind of moral contract that Google has. When we use Google, we don’t think of it as advertising; we think of it as search.
