February 9, 2021

Acquisitions Like The Hustle Will Mostly Target One Type of Publisher

One of the big joys of writing about the media business is when a company I’ve covered gets acquired. I’ve discussed The Hustle multiple times, so seeing the news that HubSpot had acquired it was obviously exciting.

Sara Fischer at Axios had the scoop:

Hubspot has long invested in using content to help educate its existing and potential customers about business trends, primarily through its web blog. The deal will help it double down on that effort. The Hustle’s daily business newsletter has more than 1.5 million subscribers.

The deal could also help HubSpot generate leads to acquire more customers without having to pay for lots of ads on Google and Facebook.

Details: The deal is valued at roughly $27 million, a source familiar with the terms tells Axios.

The long and the short of it, this deal makes sense for Hubspot. It gets to acquire an incredibly engaged audience of entrepreneurs who might, at some point, scale their businesses to the point where they need to level up their software. Since Hubspot is in the enterprise software play, it can quickly turn into a very profitable endeavor.

There’s also the multiple arbitrage, as Morning Brew’s Austin Rief describes it. The Hustle earns revenue, but can only really get acquired for a low multiple since the bulk comes from advertising. A SaaS business like Hubspot, though, is valued at a much higher multiple. It’s more than just “trading higher valued dollars for lower valued dollars,” though.

If we go back to an early episode of the AMO podcast, you might recall my interview with FreightWave’s Craig Fuller. I wrote in my show notes:

More than half of the revenue at FreightWaves comes from traditional media sources: advertising on the site and video and subscriptions. However, the company has been able to raise tens of millions of dollars because FreightWaves is also in the data business.

When investors look at the business, they see the entire community across media, data, and events and were willing to value the business much higher than if the company had just been a traditional media company. Data multiples are higher than media.

That has then allowed FreightWaves to play a bit of an arbitrage game where it can acquire smaller pure-play media companies at lower multiples compared to the multiples it raises.

It’s really a very simple strategy. Now let’s look at HubSpot. It releases 2020 numbers on Thursday, so we’ll use 2019 revenue numbers. At the time of last year’s earnings release, it was trading at a roughly $8.4 billion valuation. Its revenue was $674.9 million. Therefore, it was trading at a ~12.5x revenue multiple.

That’s not bad. My guess is when they announce this Thursday, they will be trading at an even greater multiple since the entire market is up considerably.

Now let’s consider The Hustle. If we use Fischer’s reported number of $27 million as the acquisition price and my estimate that The Hustle was doing $10m+ per year in revenue, then that’s really a 2.7x multiple. Here’s the real magic that Rief and Fuller are both talking about with an arbitrage strategy. Because The Hustle has its own revenue stream, that revenue now sits on Hubspot’s financial statement. At a 12.5x multiple, The Hustle is suddenly worth $125m rather than $27m.

I make it sound simpler than it is, but by folding that business into the broader business, all revenue starts to look alike for investors. And when you consider that The Hustle is profitable, it becomes that much better of a deal for Hubspot.

As one operator I was speaking to about this deal said, “it’s a low cost bet for Hubspot that is either going to pay off in a big way or will just be something they took a shot at and moved on.”

If all of this is true, why is the headline of this piece sounding bearish on deals like this?

The answer to that boils down to audience quality. The Hustle’s fans are incredibly loyal. They trust the founder, Sam. They devour everything that is written. That’s a great position to be in and a unique asset that is hard to build quickly.

Most media companies simply don’t have that. They have traffic, which is fine, but they don’t have an audience. Without that nurtured, owned audience, you’re just a lot of content. Sadly, for most companies, buying advertising it a better way to generate revenue than trying to enter the media business.

The exception is with B2B content (which you knew I was going to say). By and large, our business models are tied to the audience. We drive leads to advertisers. We run events where we know who everyone is. Perhaps we even run subscription businesses for pretty high prices, proving audience’s willingness to pay.

There is an argument to be made that the largest advertisers of respective B2B publications could start looking at bringing those costs in-house. Why spend to rent an audience when you can own the audience?

I’m still not terribly bullish on this happening, though.

Many of the companies that have been acquired that look like The Hustle deal (Mailchimp x Courier, Penn x Barstool, etc.) are examples of media companies that don’t rely on journalism. The people creating content are writers, but likely not journalists. And that’s a pretty critical point to make.

Journalists are going to want the freedom to cover their industry independently and that becomes trickier when you’re owned by a major participant of your industry. Let’s say Hubspot had acquired a marketing news publication. Imagine if one of the journalists got wind of something pretty bad happening at Hubspot. Would that journalist have the freedom to report on that?

That becomes a much harder situation. Suddenly, the perfect, low cost, sustainable acquisition is a headache. Either the company comes down on those types of stories and the journalists leave (thus hurting the very business you acquired) or they allow it and are effectively getting dinged by their own company. Imagine the CMO having to explain to the CEO that “the reason this audience is worth so much to us is because it trusts the reporters, we have to let them do this.” In this era of fake news and overly sensitive rich people, that might not really hold up.

So, it becomes safer to buy ads, keyword block when necessary, and keep an arm’s length from the actual product. It might cost more and you don’t get your own, large owned audience, but everyone’s trying to keep their jobs.

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Now let’s continue…

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Bustle sees gold in newsletters

It should come as no surprise the last year has been a pivotal year for creators of newsletters—both independently and as part of a company. Because of that, many in media are looking at this as a new growth opportunity for revenue.

According to Digiday:

BDG currently has a total subscriber list of 2 million across 14 newsletters. Eight out of the publisher’s nine brands have at least one main newsletter while some brands, like Inverse and The Zoe Report, have branched out into smaller, subject-specific offerings. Bustle, the only brand without a newsletter, will launch by March 31, said Wesley Bonner, the company’s vp of marketing and audience development.

By the end of 2021, however, Bonner said the team wants to attract 10 million subscribers across all of the brands’ newsletters and increase the newsletter business from a seven-figure revenue stream to an eight-figure revenue stream year-over-year.

I, too, would like to to increase my revenue from seven to eight-figures in a year. But in a year, I anticipate we won’t hear about them succeeding for a few reasons.

The metric they are tracking is all wrong and is indicative of many of these “scale for the sake of scale” media companies. Which would you rather have? 10 million subs with a 10% open rate of 3 million subs with a 40% open rate? The answer is the 3 million subs because it means 1.2 million people opened the newsletter rather than only 1 million.

When the focus is on purely increasing the number of subscribers without having conversations about improving engagement and removing inactive subscribers, it’s a good bet that the company is focusing on the wrong metric. In the Digiday piece, Bonner did suggest how they would increase engagement with Inbox Collective’s Dan Oshinsky throwing cold water on the strategy:

Bonner added that one strategy for encouraging engagement, and thus higher CPMs, is Inverse’s proprietary rewards program that is currently only operating within Inverse’s newsletters. It acts as a “motivational incentive” for subscribers to track how many days in a row they open the newsletter, Bonner said. If they open it every day or a month, for example, they are then entered to win a prize, often from one of the newsletter’s sponsors.

Oshinsky said that while a rewards system can definitely help increase open rates, being able to translate that engagement to proof of a base of “super users” may not be as straightforward when dealing with informed advertisers.

You can’t gamify engagement. It either exists or it doesn’t. If the incentive is to get users to open the newsletter to win a prize, BDG will absolutely drive a higher open rate. Humans like winning things. But the big metric that many advertisers look for from newsletters is clicks. It’s a direct response business. Therefore, if the readers are not engaging with the ad, it doesn’t matter how many opens you get.

Here are the questions BDG should ask itself before throwing millions of dollars into growing the newsletters:

  1. What is our onboarding strategy? How do we introduce the BDG brand to people signing up for newsletters?
  2. What is our retention strategy? If people are not opening, how do we reengage?
  3. What is our list hygiene strategy? How often are we churning the list? If they want to hit 10 million, don’t be surprised if you’re deleting hundreds of thousands of people in a quarter.
  4. Are we paying attention to what readers are saying when we send a newsletter or are replies going into the void?

The way you build an eight-figure newsletter business is by delivering an exceptional product that results in an audience becoming addicted. That then results in them feeling connected to your brand and, therefore, more inclined to take a look at the advertisers. You can’t fast track that and assume you’re going to find success.

I’m obviously very bullish on newsletters. But the reason they have had such success over the past few years is because they have been the focus of the companies that own them.

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