CFSG corporate advisor and investor Jason Rose asks whether Buzzfeed's woes could have been predicted, and what it all means for the future of journalism. This article appeared in mumbrella.com.au on February 1, 2019.
It was disappointing to read recently that the Australian arm of Buzzfeed was not going to be spared from the company’s planned global cost-cutting and restructuring program. The decision to slash the company’s global workforce by 15% resulted in 11 local employees being axed – most of whom worked in the newsroom.
In an era in which traditional media companies have seen their business models up-ended by technological disruption, it seemed as though innovative companies like Buzzfeed, Vice, HuffPost and others had finally decoded how news and journalism could become economically viable in today’s world of social media-obsessed millennials.
This was particularly good news for journalists who have seen news rooms being hollowed out for years.
Despite this apparent optimism, the recently announced round of redundancies was not completely surprising. For at least the last 12 months, there have been consistent reports that a planned initial public offering of the company was no longer imminent due to lower than expected revenue numbers.
According to at least one report, Buzzfeed’s 2017 revenue figure came in at $US70m below the forecast target of $US350m – 20% lower than expectations.
Many analysts are blaming Buzzfeed’s declining revenue growth on changes to Facebook’s omnipotent algorithm. A decision by Facebook to tweak its algorithm to prioritise stories about friends and family over the sorts of news items that were the central building block of Buzzfeed’s success has taken a heavy revenue toll.
It’s ironic that today’s so-called tech-savvy media companies and their high-profile founders are seemingly no less at risk of being tripped up by digital change than their traditional media predecessors.
There is at least one other dimension to this story that is worth considering, and that is the role played by venture capital.
According to Crunchbase, Buzzfeed has raised over $US400m in funding since the company’s inception. These various rounds included a $50m cheque from venerated VC Andreesen Horowitz, which has previously invested in companies like Skype, Twitter and Airbnb.
The standard VC playbook is well known.
Find an innovative, young company that can demonstrate product/market fit and then pump it full of cash to enable it to scale as quickly as inhumanly possible. The goal is to get the company large enough that the VC can engineer an exit by foisting the company onto the public markets or an industry player as an acquisition target.
And this is the critical point: it is essential that when it comes time for the that exit, the business needs to be able to demonstrate high levels of growth. It is that growth and the expectation of that growth continuing that underpins the exit valuations that drive the returns investors into VC funds demand and in turn justify the fees that VCs themselves charge.
That is why a company like Buzzfeed missing a revenue target is so damaging. The last thing that VCs want is a sputtering growth rate. Suddenly, it becomes much harder to justify the company’s imputed $US1.7b pre-money valuation – particularly for a business that is also presumably loss-making.
What happens next?
The company’s investors start putting tremendous pressure on the business to drive top-line growth from wherever it can find it. It goes and hires a chief commerce officer and starts pushing into ecommerce and product development – initiatives that reportedly generated some $US50m over 2018.
That’s impressive, but also possibly a sign of a company under so much investor pressure to perform that its strategy becomes murky and vulnerable to distractions.
In the final analysis it seems that media companies, whether new or traditional, are still struggling to build a sustainable business model. That certainly can’t be blamed on VCs, though their aggressive investment strategies probably don’t help.
In the meantime, most of the community is receiving updates from friends and family and fake news at a time when the world needs quality journalism more than ever.