When GigaOm unexpectedly announced they were shuttering in March, it sent shocks through the media and tech communities and raised important questions about the funding structures behind media companies.
If GigaOm went down, people asked, should others fear? What are the lessons for media in general?
Here are a few questions I’ve learned to ask.
Should You Take Funding?
Nearly all money comes with expectations, financial or otherwise.
Jon Oringer, the successful founder and CEO of Shutterstock Images, said he grew the company organically and resisted taking money for years.
“The best way to start a company is by bootstrapping it yourself,” he wrote in a Re/code column. “I would recommend trying everything you can to remain independent.”
Anyone who receives substantial sums from investors should expect to hear from those investors about what’s being done with that money.
Sometimes the guidance will be driven by strictures that come from the type of money offered (see below) and the desire for financial return.
Other times, demands are made, or at least hints dropped, due to cultural or political leanings about what should or shouldn’t be done.
Even charitable foundations have expectations for how you fulfill their mission after taking their money and may try to steer things in one direction or another.
Do You Have to Be Profitable?
By profitable, I mean “cash-flow” positive, or that the money you bring in pays the bills. If you’re a small company without other financial means, then, yes, you do have to be profitable. That need will have a huge effect on how you run the business.
On the other hand, if you’re able to use savings or do something else for the money that funds the business — whether it’s a few hundred dollars monthly in server fees or many thousands for coding, salespeople, and office space — you’ll take a different approach.
Lerer Ventures’ Eric Hippeau told me that BuzzFeed, of which they are key backers, wants to show tremendous growth but is structured so as not to need to make a profit, at least in the near term. That means whatever money they do make — and it is said to be in the many millions — can be put into seeing to that growth.
Can You Create Multiple Revenue Streams?
All but the biggest media businesses need more than one way of making money: subscription and advertising; advertising, events, and e-commerce; research, education and webinars; and so on.
Every niche media company I can think of — from Penton Media’s Aviation Week to Digiday and, yes, PBS MediaShift — has multiple ways of bringing in revenue.
NowThis (also known as “NowThis News”) built a state-of-the art studio to produce short news videos it shares on social platforms. It’s also using the studio to make videos for commercial clients who pay handsomely for the privilege.
BuzzFeed not only runs paid “listicles” as native, in-stream advertising for its commercial partners, but also also charges clients to use the BuzzFeed creative team to produce those ads.
A number of newspapers have created marketing arms that will do anything from draft marketing content to run Facebook and Twitter accounts for local businesses.
What Supports Your (Editorial and) Business Model?
When I ran a media business property, one of the blogs got a big spike in traffic for a story about supermodel Kate Moss appearing nude.
But the traffic was mostly useless from a business perspective. It came almost entirely from a porn site, whose users viewed only that page and weren’t interested in our offerings, such as media training and jobs.
For a general interest news site, the calculation is different.
Fast-growing Vox.com, whose parent company — like BuzzFeed and Vice — has received multiple rounds of multimillion dollar funding, is usually thought of as a substantial and serious news property.
On a recent day, Vox’s most popular page was about bombshell pop star Iggy Azalea’s troubles in social media, a staffer there told me. That may not be the most serious of news, but Vox — as a general interest news site — is happy to cover Azalea and others of her ilk and get the resulting page views.
What Kind of Funding Do You Have?
Different kinds of money come with different kinds of benefits and pressures.
Venture capital funds are set up to make money for the investors. Period. There are variations on the theme, but ultimately, if you don’t produce financial results within a time frame the fund managers expect, pressure will increase and/or funding will be cut. You’ll have to make choices that are strongly driven by finances.
Many venture capital firms require fast growth and a “liquidity event,” such as an IPO or a strategic acquisition, that will bring in many multiples more than the total yearly revenue.
In other words, just making a profit and generating cash usually won’t be enough to satisfy investors.
Who you take funding from can also be key. Some investment firms are not just funders, but also partners and supporters, known for having great networks of contacts and experts they’ll tap to guide entrepreneurs who need special expertise.
Debt funding is structured a lot of different ways but basically means receiving money for which interest payments become due.
Financial professionals often refer to debt as “leverage,” the theory being that a big infusion of cash can boost a company to faster financial returns by increasing its operational capabilities to churn out more revenue-making stuff.
The danger is that the company has to create enough cash flow to not only pay for its operations but also to service the debt. That debt load can undermine a company even if it is cash-flow positive.
Debt financing is reported to be what brought GigaOm down, despite operations that were otherwise profitable, if somewhat mismanaged.
“Gigaom’s failure is a failure of vertical media models as much as Color’s failure was a failure of app models,” said Rafat Ali, a successful media entrepreneur and friend. The media company he founded had been part of the GigaOm empire.
In other words, in GigaOm’s case, it’s not the media model that was at fault. It was the financing.
There are other types of funding, including private equity, bonds, angel investing, and more. And each of those breaks down into sub-categories. If you’re going to go after money, it’s a good idea to understand what you’re getting into, and carefully explore your business and business model.
For more on the topic of digital media companies taking VC funding, check out this episode of our weekly Mediatwits podcast:
An award-winning journalist and MBA, Dorian Benkoil (@dbenk) is founder of The MediaThon, a hack-a-thon for media makers, and Teeming Media, a digital media strategy and research consultancy focused on publishers and media tech. He previously developed and executed sales and marketing strategies for PBS MediaShift.
Disclaimer: The above is based on research and observations and should not be relied upon in lieu of consultation with appropriate professional advisers.