December 6, 2019

Should There Be an For Media?

Thank you everyone for your notes following my piece earlier this week about going deep in a topic and raising money in a disciplined way. I appreciated all your responses and believe I replied to everyone.

One response, in particular, jumped out to me that touched on something I’ve thought on quite a bit. I preface: if you’re not a numbers person, this issue is pretty dense with my attempts at valuations, math and ROI.

In his email, the reader, who I will refer to as NC, said:

It seems to me that there’s an opportunity for a new kind of investor in media companies with a thesis around profitability, diverse revenue streams, and slower growth. This approach has been thriving elsewhere, but it feels particularly suited to media businesses, given that they’re often misaligned with the growth expectations that come with traditional VC.

This model is being explored by, which believes in a system where you raise money—either solo or with other investors—and then treat your business like an actual business. It is expected that you’ll start generating revenue immediately.

They sum it up pretty nicely on their website:

We believe deeply that there are hundreds, even thousands, of businesses that could be thriving, at scale, if they focused on revenue growth over raising another round of funding. On average, the companies we’ve backed have increased revenues over 100% in the first 12 months of the program and around 300% after 24 months post-investment.

We aim to be the last investment our founders NEED to take.

That last sentence is a key point that is worth harping on. So many founders raise more money not because they want to, per se, but because they have no choice. The way around that is growing revenues to the point where you are profitable. When that happens, you’re in control.

On the FAQ page, the funding model is presented in a pretty clear way. But it boils down to this:

  • invests in the company, paying a specific amount of money for a specific percentage of the business
  • There is a pre-determined conversion trigger based on follow-on financing or a sale.
  • Anywhere from 12-36 months after raising, the company uses a percentage (3-7%) of its revenue to buy back 90% of the shares that owns.

That last bullet is worth looking at in more detail.

Let’s say that invests $500,000 for 30% of the business. That business then immediately starts generating revenue and growing with its own cash flow. After 12 months, the business begins to pay back Over the next few years, the business buys back 27% of the initial 30% of shares—90% of 30% is 27%—returning the initial $500,000 plus an additional $1 million in profit. ultimately keeps 3% of the business in the event the business becomes a smashing success. If it one day sells for $100 million, that would be an additional $3 million to For a $500,000 investment, walks away with $4 million in profit. That’s an 800% gain.

The one problem is that doesn’t do media. But I can’t help but wonder if that presents an opportunity. (

Hypothetically, let’s launch a fake investment company. Enter, totally focused on investing in niche media companies that want to be real businesses. You know the kind. I write about them all the time.

In my last post, I shared some remarkable numbers around fundraising:

There’s a better way to do it. A lot of media companies that I respect have all raised money in a smart way:

Skift: $1.5 million

Morning Brew: $750,000

Front Office Sports: ~$500,000

Industry Dive: <$500,000

Let that last number sink in… Industry Dive raised less than $500,000 from angel investors. Seven years later, they sold at a supposed valuation of $70 million. It’s incredible.

What if, instead of going the traditional routes, they opted for What would that look like? Let’s use Morning Brew because I like those guys and I don’t think they’ll mind me playing imaginary numbers with their business. And apologies ahead of time if my math is wrong. I am pretty sure my math is good.

Morning Brew raises $750,000 from in late 2017. In exchange, gets 20% of the business, valuing Morning Brew at $3,750,000. wants to start getting a return at the start of 2019 and agrees to a 5% revenue redemption.

In 2019, the business is on track to do $13 million in revenue. Over the year, is paid $650,000. This is about 28.8% of the total amount that will be paid back to If my math is correct, the founders of Morning Brew get 5.2% of the equity back from

For simplicity’s sake, the same revenue happens in 2020 and 2021. receives $650,000 in both of those years and the Morning Brew team gets 10.4% equity back. Finally, in 2022, with 2.4% of the equity outstanding, the Brew team makes one lump sum payment of $300,000 and buys the outstanding equity back minus the 10% that retains for being the initial investor—in this case, 10% of 20% is 2%.

Fast forward some years, Morning Brew has done a great job diversifying its business and it gets bought for $100 million. earns an additional $2 million for a total ROI of 500%. The Morning Brew team earns the other $98 million.

Let’s look at a traditional model…

Assume Morning Brew had sold the 20% of the business for $750,000 to a traditional VC and was subsequently bought for $100 million. That means the VC would get $20 million, which is a 2,566% ROI.

Is this a no-brainer? Not exactly and it’s something that I wrestle with.

While it’s great that the media company gets to reclaim 90% equity that was bought, giving up revenue always hurts. In the above example, Morning Brew has to give up $2,250,000 in revenue. What could they have done with that money if they had not given it up? Would it have helped them to grow their business faster? The whole point is to raise a round and then chase profitability. In this scenario, you’re giving up revenue, which could interfere in that goal.

Ultimately, I’m inclined to think that is a better deal for the entrepreneur. As a media operator, I get the initial lump sum of cash that I need to grow my business and then I am only giving up a small percentage of the revenue back to The better part is that the majority of the equity comes back to me, so I own more of my business.

The other benefit of this is there would be a portfolio of startup media companies that are all focusing on sustainable growth. Could you lean on the network for advice or suggestions? They say running a business is lonely. Having a network of similar businesses could help remove that loneliness. Problems that you are dealing with are possibly ones that another entrepreneur is dealing with.

I would also be curious to know if there are economies of scale that could be found with this sort of fund. Could all portfolio companies get their email service provider for less by going into it together? What about web hosting?

Could this actually work?

The tricky part launching is finding limited partners that feel comfortable investing in a fund that is specifically not chasing unicorn valuations. The desire for billion dollar exits is strong. The way around this might be to say the following:

We are going to invest in niche media businesses that are immediately chasing profitability, increasing the likelihood that more of the businesses ultimately succeed, which means more of our investments succeed as well. We also expect to start earning out on our investment, using a percentage of the company’s revenue until we’ve received 3x what we put in. We’ll also own a percentage of a strong, sustainable media business in a time when most media businesses are failing.

Think about it… You launch and raise $10 million from media-friendly limited partners. Over the next couple of years, you invest in 20 media companies, putting $500,000 in each of them for 25% of each company.

Not every company is going to succeed, but let’s say 50% of them do because these are real businesses that are focusing on revenue growth. 10 of the companies return $1.5 million each in revenue redemptions. This is $15 million total, which means the fund has received back all $10 million + $5 million in ROI. Additionally, owns 2.5% of each of the remaining 10 media companies (10% of 25%). If each company sells for $15 million, that means earns an additional $3.75 million. Total ROI is $8.75 million.

There are a couple of assumptions and one unknown in the previous paragraph.

  1. 50% hit rate. We should still be real and accept that media is hard. Maybe a 50% hit rate on niche media startups is still too high?
  2. How many of the surviving companies can be valued at $15 million when they finally get sold?
  3. How many years does it take to return the $8.75 million? If it’s 5 years, that’s a 13.2% annualized ROI. If it’s 10 years, it’s under 6.5%.

It’s interesting, but is it practical?

It boils down to this. There are quite a few media startups that I am sure can be great businesses, but are unable to find that initial seed round required to get going. With how many stories are published about the death of media, I imagine investors are sitting on the sidelines.

This model would fund many of these startups. I can see why a media operator would do this, but the question that investors need to ask is whether the returns are enough for the additional risk.

One way or the other, this is an interesting approach and it could be practical.

These niche media companies won’t ever be unicorns, but the vast majority of startups never get billion dollar valuations. However, because the media operator mentality is to achieve profitability, perhaps more of them can succeed, allowing for greater success all around.