If you were measuring by the size of the headline fonts, 2014 looked as if it were an inflection point for venture capital (VC) investment into the digital content industry. According to Preqin, which tracks data on the investment industry, VC funding in the digital content industry reached $683 million in 2014, more than double the $286 million invested in 2013. From Andreessen Horowitz's $50 million Series E stake in BuzzFeed, to General Atlantic's $46.5 million Series E investment in Vox Media, to the whopping $500 million channeled from Technology Crossover Ventures (TCV) and A&E Television Networks, LLC to VICE, high-profile deals seemed to signal a renewed sense of optimism by investors about the future of digital content.
But if we take a step back and expand the definition of digital media to include those solutions that can help migrate traditional publishers to the digital world-think CMSs, ad platforms, and mobile content solutions-then interest in the market has been building for some time. Brian Rich, managing partner and co-founder of Catalyst Investors, which has invested in content companies such as F&W, Nine Systems, and Advantage Business Media, says, "If you look at the whole digital content ecosystem, it's been strong for years-not necessarily for private equity but certainly for VCs."
Putting aside the question of whether VCs and digital content companies can play nicely together in the long term-the abrupt demise of Gigaom in March 2015 is perhaps a cautionary tale that the measured growth characterizing many pure content companies is an uneasy fit with the rapid payoffs demanded by VCs-the spotlight of VC attention on the digital content space seems certain to shine even brighter in 2015. A series of discussions with VCs already active in the digital content space revealed a real appetite for further digital content opportunities-provided those companies searching for funds bring with them scalability, engaged users, revenue, and quality.
Scalability: A Critical Factor
When assessing potential investment targets, most VCs have a standard punch list of proprietary requirements that are largely independent of industry. Catalyst, for instance, seeks companies with at least $10 million in revenue. Verve Capital Partners AG, which runs the Swiss online investment platform investiere, looks for those with revenues between 500,000 and 3 million Swiss francs (equaling nearly the same in U.S currency). David Sidler, investiere's head of communications, says the company uses a standard process to evaluate the leadership team, competitors, and the userbase.
Solid business plans and a realistic understanding of the market opportunity are a given. As Brian O'Leary, founder and principal at Magellan Media Consulting, which provides research, benchmarking, and business planning services to companies with publishing and media components, says, "The hockey stick business plan-as in, ‘All problems will be solved in Year 3'-will not fly." Without the basics in place, no company-digital content or otherwise-advances in consideration.
But assuming those basics are met, then (for digital content companies) scalability quickly becomes a key factor. Sidler explains, "VCs are looking for bang for the buck. Their assumption is that most of the companies they invest in will fail, so the one to two that don't have to generate enough revenue to cover the cost of all the others." For content companies in particular, low barriers to entry make scalability critical. Rich says, "Anyone can start a digital publication now. We want to see companies that understand how to replicate their solution across markets."
O'Leary's advice to digital content companies seeking VC dollars is to be platform-agnostic. "You have to think about building a platform that works across audience segments and how you can make content available in as many forms as possible." O'Leary points to Vox Media as a content company that has successfully taken its model for high-end digital journalism into different verticals-with Eater (foodies), racked (fashion), and Polygon (gaming). Similarly, Nextdoor-the free private social network for neighborhoods that reaches more than 53,000 U.S. neighborhoods and could easily be extended to many thousands more-attracted an additional $110 million in funding in March 2015, from new investors Redpoint and Insight Venture Partners, bringing its fundraising totals to about $210 million in four rounds.
Liza Boyd, a venture partner at StarVest Partners-which has a particular focus on SaaS and internet marketing companies, including CrowdTwist, iCrossing, and Travora Media, Inc.-agrees that scalability is important. But, she says, that on its own, it's insufficient: "You need to offer both platform and creative services. Creative services aren't necessarily scalable, but they increase the stickinesss of the platform." She cites StarVest's portfolio company Ceros, which offers interactive content marketing, as an example of a digital media play that combines elements of scalability and creative services in a way that StarVest is willing to back (to the tune of $6.2 million in April 2014).
That stickiness can also stem from meaningful integration. Boyd says, "We look at how deeply integrated the company's solution is into customer workflow." O'Leary states, "You want to see companies that become a part of how people go through their day-to-day."
User-Generated Content: A Proxy for Engagement
All things being equal, and particularly for business-to-consumer (B2C) players, the presence of user-generated content in a platform is attractive to VCs. In part, it relates back to the scalability question. Roger Lee, general partner at Battery Ventures, which has a stake in Angie's List, Glassdoor, and Gogobot, says, "When you have to hire people to create content, it's much harder to grow and for us to get the return we seek. That's a virtue of the user-generated content model; by definition, they scale gracefully. That model is flourishing."
User-generated content, also speaks to a site's ability to engage its audience, an attribute that VCs will obviously find attractive. Sidler says, "It's extremely difficult to actually build a community, but it's valuable. It becomes a virtual circle-the end users creating content and other end users reading it," which increases the stickiness of the site. Catalyst's Rich says, "We clearly think UGC is an area of growth," mentioning his portfolio company Conductor, which provides web presence management and includes social aspects and UGC, as a sign of their interest in the space.