Sizing Up BuzzFeed: Could This Unicorn Ever Go Public?

The herd may be starting to thin for “unicorns,” the label Silicon Valley reserves for its most promising start-ups.

The number of private companies that exceeded a $1 billion valuation is roughly one-third of what it was prior to 2016, according to research Goldman Sachs issued in March. Even rarer: the number of unicorns that reach a more exalted status — the initial public offering. Those plummeted at a similar rate after 2014.

All of which may explain why one such unicorn, BuzzFeed, has the tech industry abuzz in anticipation of an IPO of its own — even though CEO Jonah Peretti has yet to confirm that’s where he’s headed. In an interview with Variety last week (read the full Q&A here), he makes clear he’s aware of the attention that “one possible path” is bringing to his company.

“I know that there’s a lot of focus on things like IPOs or potential transactions,” says Peretti. “The thing I try to stay focused on is the work itself.”

Diego Patiño for Variety for Variety

But Peretti may find his work cut out for him if an IPO is what he pursues to bring liquidity to investors, including NBCUniversal, that have been with the company for varying lengths over its decade-long history. Going public would be met with considerable skepticism among BuzzFeed watchers, including current and former employees who spoke with Variety about the company’s ability to achieve a successful IPO.

For starters, any company daring to dive into public markets faces challenging conditions, as Snap is learning the hard way. BuzzFeed also must consider several business obstacles that could thwart the growth necessary to go public, particularly regarding the vaunted video production and distribution capabilities that are being counted on to drive that growth.

At a time when an unusual number of media companies are considering IPOs — including Vice Media, Rovio, and STX Entertainment — they all may find that being in the content business is a knock against them on Wall Street.

source: CB INSIGHTS

“If at the end of the day the market just perceives BuzzFeed as a media company with a new spin, but it’s still just a media company that’s paying for content, frankly I don’t know if that’s a good formula for a successful public company,” says Hale Boggs, chair of technology consulting firm Manatt Digital Media in Los Angeles.

Co-founded by Peretti, BuzzFeed has excelled at leveraging multiple social platforms with advertiser-friendly multimedia content that resonates with a massive, millennial-skewing online audience. But the hype is tempered somewhat by financials that, by unicorn standards, are modest. The company’s current valuation is $1.7 billion, set in late 2016 when NBCU pumped in $200 million, doubling down on the $200 million it plunked down the prior year. Putting aside NBCU’s later capital injection, BuzzFeed has been at the same valuation since 2015.

One of the tech/media sector’s most prominent investors, Ken Lerer, is the chairman of BuzzFeed and managing director of Lerer Hippeau Ventures, a major stakeholder in BuzzFeed along with RRE Ventures, General Atlantic and NBCU, which all declined comment for this story. While he’s not tipping his hand as to where BuzzFeed stands on an IPO, he says it’s one of many possible options. “BuzzFeed, if it chooses, might be very well positioned because of the strength of the core business, where the digital content industry is going and where the traditional media industry is not going,” he says.

Ultimately, revenue is what IPO candidates will be judged by most. Reports earlier this month suggested that BuzzFeed is internally projecting total 2017 revenue of $350 million, up 35% from 2016. This has been a sore spot for the company in the past: Reports last year maintained that BuzzFeed cut its overly optimistic 2016 revenue goals in half, and that it missed its 2015 sales goals. BuzzFeed has long disputed the figures.

What’s not in dispute is that video is a crucial revenue driver for BuzzFeed’s business. It represents more than half of total revenue, up from less than 10% three years ago, according to the company. With more than 9 billion content views per month, BuzzFeed says it has reached all-time monthly highs in content views, unique visitors and time spent in 2017 — no other content company, traditional or digital native, can top it.

SOURCE: tubular labs

A giant success for BuzzFeed has been Tasty, a series of short how-to cooking videos and recipes (e.g., taco pizza and ice cream churro bowls), which frequently pull in well over 1 billion views each month. Now BuzzFeed is building new franchises using the same model of short, shareable videos, including Nifty (DIY), Goodful (healthy eating), Bring Me (travel) and Top Knot (fashion).

The unit within the company that’s producing all this content is BuzzFeed Entertainment Group, a unit separated last year from BuzzFeed News, which has evolved from traffic-rich listicles to acclaimed journalism. Its publication of a dossier on Trump’s activities in Russia was a huge scoop earlier this year, though the company has since been hit with a defamation lawsuit.

Ground zero for BEG is Hollywood’s Siren Studios, where Peretti is now based. (BuzzFeed’s official headquarters remains in New York.) BEG, led by longtime internet video producer Ze Frank, pumps out dozens of pieces of content daily to multiple platforms. The performance of each piece is closely analyzed with an eye toward optimizing future ones, reflecting the rigorous data-driven approach BuzzFeed proudly takes to everything.

But for a well-oiled machine, BEG spits out enough squeaky wheels to raise the question of its fitness to be an IPO growth driver. An increasing stream of former employees in recent months has been making charges that BuzzFeed operates a kind of old-Hollywood studio system for the digital-content age: Creators typically don’t own their work and are barred from engaging in any projects outside the company’s confines. That has led burned-out, disgruntled and/or fame-seeking BuzzFeed video stars to quit.

“They teach people how to make these viral videos, and if those don’t work, or if you have any ambitions to do something different, BuzzFeed shoos them away,” says Christopher Guerrero, a former video producer at the company who worked on “The Try Guys” and Tasty before leaving in January 2016.

Fittingly, the exodus has spawned its own meme, with a rash of “Why I Left BuzzFeed” videos cropping up on YouTube over the past year. In their testimonials, former employees complain about the company’s restrictive practices.

According to ex-BuzzFeed staffers, managers including Frank would routinely communicate that everyone at the organization was replaceable. “They just didn’t know what to do with how famous people were becoming,” says Gaby Dunn, who left the company in 2015 with her comedy partner, Allison Raskin. “There was the feeling ‘Why should we let you become more famous because of us?’”

Dunn says she and Raskin were pressured by BuzzFeed to stop producing material for their YouTube channel. So they departed, looking for creative freedom and to maintain ownership of their intellectual property — reasons cited by others who have since exited. Among other projects, the duo now has a development deal with YouTube Red for a half-hour scripted comedy series.

Peretti believes some of the aggrieved ex-employees probably should not have worked at BuzzFeed in the first place if they wanted to be the self-made “influencers” common on platforms like YouTube. But he also says BuzzFeed has room for improvement. “I think that in some cases there are people who may have had a bad experience,” he says. “If that’s the case, then that’s an area where we should work on doing better.”

In response to the issue, BuzzFeed has entered into new partnership deals under which certain top-performing creators typically receive a 10% cut of revenue associated with their projects in return for exclusivity, according to sources. But such a move carries risk of a different kind of backlash: the toxic atmosphere of a caste system, wherein the rank and file don’t get to participate in the upside.

BuzzFeed’s video business is also facing an explosion of competitors, including U.K. upstarts UniLad and LADbible, which have copied its viral model. Industry observers and former employees believe BuzzFeed doesn’t have a defensible position with its low-cost content production approach.

“In TV, if you have a new format, you are at least nine months ahead of everyone else,” says a former BuzzFeed video exec. “In the digital space, someone can post something similar within 15 minutes.”

Ashley McCollum, GM of Tasty, begs to differ. “If you look at Tasty as a format, you might say, ‘Yeah, it looks pretty easy to copy,’” she says. “But it’s not a format. It’s a set of complex distribution networks.”

To some, BuzzFeed’s get-results-now fixation on short-form memes leaves it poorly equipped to tap into the core competency of Hollywood: long-form scripted storytelling.

BuzzFeed insists it’s poised to expand beyond viral videos and says it has a “rapidly growing” external development slate of bona fide TV shows. NBCU-owned Oxygen has picked up true-crime docuseries “What Happened to … Jessica Chambers?,” based on a BuzzFeed article about the murder of a Mississippi teen. NBC and BuzzFeed are developing reality TV pilots based on some of the most viral of BuzzFeed’s formats finding traction on social media, including “The Try Guys” and “Mom vs. Chef.” And Warner Bros. is developing “Brother Orange,” a feature film based on the popular account of a BuzzFeed writer trying to find his stolen iPhone in China.

As for the NBCU collaborations, a source familiar with what’s been sketched out on BuzzFeed’s Hollywood whiteboard isn’t particularly impressed. “The [BuzzFeed] programming ideas are not well thought out, and NBC does not have a lot of confidence in developing those ideas,” the source says. “There’s hesitation about what they can really do because they have never demonstrated an ability to do it.”

But for now, revenue from these bigger-budget, longer-form projects is largely theoretical; BuzzFeed would not be nearly the first entity to try to migrate IP from digital to TV only to learn success on one is far from a guarantor of success on the other.

Peretti believes there is ample opportunity to partner with Hollywood, which he freely admits is better equipped to produce long-form fare. “We’re not experts in making traditional television,” he says. “I don’t watch much television.”

Eager to capitalize on its investment, NBCU has worked jointly with BuzzFeed on branded content. BuzzFeed has become a leader in these sponsored videos produced in the style of the publisher. In the first quarter of 2017, Tasty was the No. 1 publisher of branded content on Facebook, delivering 331 million views, according to video-analytics firm Tubular Labs.

SOURCE: tubular labs; 2017 Q1 (in millions)

But BuzzFeed also has evidently had to buy audience, in the form of Facebook ads, in order to hit its big numbers. During the first quarter of 2017, engagement with BuzzFeed’s partner-branded content leaped to more than five times the average for the previous six months, perhaps due to audiences growing more accustomed to this form of advertising, according to Jason Klein, co-CEO of ListenFirst Media, source of the data. However, a more likely reason for the jump, according to Klein: “BuzzFeed potentially boosting these posts with Facebook ads to hit bigger engagement numbers for advertisers — a common practice among media publishers selling branded content on Facebook.”

A BuzzFeed rep, disputing ListenFirst’s conclusions, says the company didn’t newly implement paid promotion in the first quarter and suggested the increased engagement on Facebook was likely due to overall growth and increased output of branded content.

One of the dangers for BuzzFeed in filling up the branded-content funnel is overloading viewers with advertiser-generated content, which could result in diminishing returns. “There could be a backlash from consumers if it’s too much,” says media and advertising analyst Rebecca Lieb.

Talk to enough people on Madison Avenue, and they tell you they don’t see the return on investment of these campaigns. One former BuzzFeed employee familiar with these deals says on condition of anonymity, “If there was a constant complaint, especially from the largest advertisers, [it was] that the best content benefited BuzzFeed — but didn’t benefit the advertiser.”

Sean Corcoran, exec VP and executive director of the Americas at Mediahub, part of the MullenLowe agency, says his agency continues to work with BuzzFeed even though at BuzzFeed’s size, “native content doesn’t generally offer the scale that a Facebook, a YouTube or even a TV buy could potentially offer.” While BuzzFeed native content has shown increases in certain areas among the people it’s reached, “it’s hard to do it at such a scale to drive real business,” Corcoran adds.

Indeed Facebook and Google have such a stranglehold on the advertising dollars flowing through the digital space that BuzzFeed is left fighting for scraps.

As long as it stays dependent on ad sales, there’s a growth ceiling that isn’t going to reflect well in an IPO phase. But Peretti counters that while BuzzFeed will never reach the scale of a platform, it still has a sizable footprint with something platforms can’t match. “You could go directly to Facebook, or [another] platform,” he says, “but you still need to make good content.”

Figuring out how to diversify the business beyond ad sales is smart and plays well with Wall Street. No wonder there’s been increased effort in recent years at BuzzFeed behind e-commerce, creating viral content studded with links to transactional opportunities at online retailers like Amazon, which allows BuzzFeed to collect a portion from every sale. But BuzzFeed also has an assortment of its own products on offer, from scented candles to coffee beans, as part of its Product Lab effort.

Yet like its TV production business, social commerce has not yet emerged as the next big thing for BuzzFeed — which makes the reliance on the branded-content deals that are the company’s bread and butter all the more glaring. “They’re going to say they’re ‘social,’ ‘digital,’ ‘video’ and ‘mobile’ because those are the buzzy words,” says Eric Jackson, a longtime investor in media and tech at EMJ Capital. “That gets sprinkled on top of being an ad company, which is not sexy for sure. They’re finding ways to grind it out, but it’s not some magical new way; it’s doing a lot of things that have made money historically, like the agency business.”

Diego Patiño for Variety

How BuzzFeed positions its corporate identity will be crucial to its IPO viability. Like a lot of next-generation media companies that are doing things differently from their traditional cohorts, BuzzFeed leans into technology in every aspect of its business, from data to distribution, and doesn’t really identify as a media company per se. “I would say we are a hybrid,” Peretti notes. “We do make content. But we give the content creators data and a connection with an audience that you don’t get in traditional media.”

The IPO market is said to be as receptive to new entrants right now as it has been in at least a year, and the media business will be represented among the latest arrivals: Altice USA, which owns cable operators including Cablevision, just signaled last week its intent to present an IPO, at a share price that could raise $1.3 billion.

But there’s a reason you don’t see too many media companies attempt to go public; there’s a perception that they are slow to grow and create true market value, in stark contrast to high-flying tech platforms. In truth, both kinds of companies suffer the same problem: They are highly dependent on advertising revenue, which, as lucrative as that is, tends to be unpredictable and subject to macroeconomic conditions that are out of their control. “All of these companies try to sprinkle tech pixie dust on themselves to make themselves more Facebook-ish or platform-ish because the multiples are higher for tech,” Jackson says.

The platform that once seemed the hottest out there was Snap, which made its long-awaited IPO in March at a robust $17 per share, raising $3.4 billion toward a $24 billion valuation. But Snap’s first quarterly earnings numbers showed such modest user growth that its stock got hammered in May, wiping out $6 billion in value.

Even though Snap and BuzzFeed are two very different companies, just a taint of tech could mean that BuzzFeed’s IPO fortunes could be inextricably tied to Snap’s 2017 stock performance. “If Snap continues to struggle and the stock is down in 2018, it could be a different analysis” for BuzzFeed, says Manatt’s Boggs.

Nevertheless, BuzzFeed will likely position itself to appear to be cut from the same cloth as tech companies, but there’s an important distinction savvy investors won’t overlook: While Snapchat, for instance, is a platform that doesn’t pay for the content that keeps users in its ecosystem (at least not yet, anyway), BuzzFeed is a publisher that does pay to produce content that then goes out on other people’s platforms.

The best-case scenario is that BuzzFeed’s audience data tells a great growth story that gets investors excited to scoop up shares of their own. But the flip-side scenario could also compel Peretti & Co. to go to market: Underwhelming user numbers can translate to desperation, according to Jackson. “If the growth is more mundane and they need cash, they have to pay off their early investors and are willing to do that at whatever valuation they’re going to get,” he says.

What role NBCUniversal plays in BuzzFeed’s decision to try for an IPO is unclear. While it’s presumed that investing $400 million in a company should give you some influence in its future, the conglomerate has just one representative on BuzzFeed’s board: Maggie Suniewick, president of NBCUniversal Digital Enterprises. “They don’t have any control over decisions [we make],” Peretti says.

But NBCU probably looks at BuzzFeed as more than a mere investment, as it does its $500 million piece of Snapchat (which it took upon that company’s IPO) or its stake in Vox. This trio of companies is known by NBCU insiders to represent CEO Steve Burke’s attempt to future-proof his company in case the traditional businesses that keep NBCU humming start to degrade more quickly than expected in the digital age. That could mean NBCU’s BuzzFeed endgame is to acquire it, but Peretti clearly prizes his independence.

“Founders often have a track record of being able to change and adapt and evolve,” he says. “To be a great public-company CEO, I would have to continue to be able to do that.”

Brian Steinberg contributed to this report.

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