If cruel irony could take the form of a cloud, it’s looming ominously over Austin, Texas, this week at the annual SXSW festival, where entrepreneurs in creative businesses of all sorts convened in search of inspiration at a time when the climate couldn’t be any more discouraging for them.
If it wasn’t bad enough already that rising interest rates have deadened the capital markets necessary for frothy dealmaking going well back into 2022, the implosion of Silicon Valley Bank right before SXSW kicked off is sure to have a chilling effect on startups currently reeling from macroeconomic woes.
“It’s definitely going to have impact on the venture ecosystem,” said Charles Hudson, managing partner and founder of early-stage venture capital firm Precursor Ventures, in the SXSW panel discussion “What’s Driving Digital Media Deals” Sunday. “I worry that it might cast a pall over just people’s willingness to engage in risky things.”
If venture capital support is going to soften in any number of industries, it will be doubly felt in the media business. In the wake of the flameout of such digital media ventures as BuzzFeed and Vice that were the darlings of the VC world not too long ago, no one is beating down the door of anyone in the media sector to begin with. The exits are small — good luck getting to $1 billion, a figure top VCs sneeze at — and the number of willing buyers even smaller.
“Most of the media companies we invest in — it’s like the same three or four seed-stage investors,” said Hudson on the panel, moderated by The Wall Street Journal’s Jessica Toonkel. “I text them, and we’re like, ‘Are we gonna do this one together, yes or no?’ It’s not like there’s hundreds of VCs for these companies.”
What's all the more frustrating is that 2023 was starting to look like a promising year for new investments, after a busy 2021 was followed by a market correction in late 2022 that slowed dealmaking. "And just as people, I felt, were getting comfortable adding new companies and making new investments this quarter, we get hit with the second-largest failure in banking history," said Hudson. "Not good for business, not good for the economy — like, generally not good."
Entrepreneurs dreaming of big checks may want to knock off a zero or two these days, though the best of the crop, confident in the health of their businesses, could still probably hold their ground, said Brent Weinstein, chief development officer at Candle Media, a new company founded by a pair of Disney veterans who have acquired media ventures including Hello Sunshine and Moonbug Entertainment.
Candle is a big part of a trend that has played out the past few years among production businesses attracting a ton of investment from private equity types and others looking to attach themselves to companies feeding the peak TV boom in content.
Though Weinstein expressed doubt that Candle's deal volume in 2023 would match previous levels, he's very much on the prowl for promising ventures that may come cheaper. "If you're bargain hunting, I think it might actually be a really interesting year in M&A," he said.
Candle is on the lookout for companies that have strong brands and intellectual property with a robust social media presence at the intersection of content, community and commerce. Precursor is interested in subscription businesses, particularly B2B plays that cater to an engaged audience difficult for advertisers to reach. That said, even subscription-only businesses are less preferable than those with a diversified mix of revenues that extend into other areas ranging from events to software.
Axios is a classic example of that approach, a news operation that deftly navigated several rounds of VC funding before selling to Cox Enterprises for $525 million last year. Roy Schwartz, president and co-founder of Axios, counseled attendees that media ventures are best funded early in their lifecycle and also exited early because the upside is modest and quickly achieved. "If you drag it on and try and become a multibillion-dollar valuation company, you could be really stuck," he said.
Schwartz's comment recalls the travails of Vice Media, which plunged from a valuation once as high as $5.7 billion to the reported $400 million price tag currently being considered by Group Black. After years of flirting with potential initial public offerings, Vice is now a shadow of its former self — a sobering cautionary tale for a sector in which hype can distort sensible decision-making.
What makes looking for the next big thing in media so difficult is how cyclical its rhythms are. What is a hot bet one day can cool off quite quickly. But for those who can stomach the risk and accept that multibillion-dollar unicorns are not a possibility, there's money to be made with enough patience and savvy. As Weinstein said, "I still think there's tremendous opportunity in media."