Media donors are struggling to meet publishers’ ever-growing needs for funding, driven by rising global instability, relentless attacks on free media, and no scalable solutions to broken business models. Increasingly, this raises the question of whether private capital – investors, to be precise – can step in to shoulder the burden.

There are reasons to be optimistic. The number of cases of private investment in non-corporate media is growing, as is the number of funds involved (especially with the launch of such large investment vehicles as Pluralis). But the space remains quite niche and we are still in the early days of private financing of independent media.

A recent event on the Future of Media Finance, hosted by the Center for International Media Assistance, brought together some of the top thinkers and stakeholders working on the topic. While the mood was generally upbeat, many participants acknowledged a tough road ahead for private capital to play a meaningful role in saving independent journalism.

Here’s a list of 10 misconceptions, ideas and challenges that the sector will need to address as it grows and starts to play a more meaningful role. (Note from the author: These are personal reflections, and do not represent the views of other participants).

Editor’s note: This week’s International Journalism Festival in Perugia will feature a panel on Unlocking private capital to save independent journalism organised by CIMA. (10:00 – 10:50 on Thursday 18.04.2024 – Sala del Dottorato) – check it out in-person and online!

1) Replacing donors with investors doesn’t actually solve anything

Already relatively well accepted, but it bears repeating: investors are not just a fresh pool of money that can step in to help donors top up media budgets from one year to the next. Rather this is about bringing a new way of thinking – one that emphasises entrepreneurship and puts building a viable business model first.

That leads to a radically different way of working. Rather than just being a helping hand, investors are there to get media to achieve commercial successes. Investments are less about process (most funds are a lot less constrained by bureaucracy, especially compared with government-backed foundations), and more about achieving specific results.

One challenge is that while there are hundreds (thousands?) of cases of donor-backed media that one can learn from, media that have secured private investments are few and far between. As a result, media interested in going down this path often struggle to understand the process – or even where to start.

Editor’s note: if you have been on either side of the deal – as a media manager who secured an investment or an investor in media – reach out to editors@thefix.media to share your experience!

2) Media need to become way more appealing for investors

A major problem repeated by funds is just how few investable media companies are out there. This is due to a number of factors: media are not structured in a way that can accept investments (i.e., they are registered as NGOs, rather than for-profit companies), they have a limited commercial track record/ prospects, they are too small to accept investments.

Many founders also lack the mindset and know-how to work with investors. That starts with being ready to set ambitious goals and making plans to achieve them. In turn, that means understanding how your capital requirements will evolve (i.e. what will you use seed funding on, what milestones will you hit and what new capital will be needed to scale from there).

There’s also a communications story here. To convince donors to support them, media tend to emphasise their struggles and needs. With time, many have internalised this vision of media as a failure waiting to happen. Investors expect the opposite: they need to be excited by a vision of what can be achieved, rather than sympathetic to the prospect of impending doom.

3) It’s not enough to play defence, funds need to go on the offensive

Often we hear that the goal for media development is preserving media freedom and preventing state capture – with the implication that we win if we can just keep things the way they are.

There is value in playing for time, giving media the breathing room to update distribution or business models. But rather than just trying to lose more slowly – focusing on publishers with the scale and resilience to hold out longer – media investment needs to look for companies that can succeed in the future.

This is partially linked to risk appetite. Media is both a volatile industry and one that typically requires scale (it’s called mass media for a reason). That means taking a lot of small, risky bets and being ready to aggressively scale those that show exceptional promise.

For now, this is not something most media industry players are comfortable with. Failure is still very stigmatised and cutting your losses is difficult given the emotional investment that good content requires. But investors will need to manage both issues in order to make bets pay off.

4) There is a tension between returns and quality / sustainability of media

One of the first things you hear when talking about media investing is that you shouldn’t expect the kinds of returns you can get in other sectors. This can go as far as arguing that media investors should be ready for zero or even negative returns, and instead enjoy the intangible positive social externalities of their capital allocations.

While this is somewhat defeatist and is unlikely to attract new investors into the sector, it is also true that media tend to lag sectors that attract the most venture capital (e.g., SaaS, pharma, FinTech…).

One way to manage this is to bet on larger, more resilient companies – hoping that the risk-reward calculation is more favourable. The problem is that most media not only have low margins, they also have high risk. Investing in media is not the equivalent of putting money into a low-growth but very safe index of government bonds.

That leaves three options: focusing on social capital that accepts lower returns, getting better at spreading investments across different bets (e.g. mixing high-risk and high-reward content bets with tech investments and B2B plays), or getting better at picking winners (or note – “media-industry” investors have lost out on some of the most exciting companies to funds from other sectors).

5) It’s not just about content, we need to invest in tech

Donor funding to media tends to focus on content production. After all, heartfelt stories about marginalised communities, or in-depth investigative projects, is what gives you the emotional pay-off that motivates a lot of media philanthropy.

But tech companies – that focus on providing a service to a certain industry or set of users – tend to pay off better in terms of returns (Software-as-a-Service, better known by the acronym SaaS, has historically beat most other investment verticals). Perhaps even more importantly, software firms are dependent on the underlying user base doing well and hence invest in creating solutions to help them monetize better.

There are already notable cases in media. Piano is a successful subscription manager. Thousands of small publishers operate membership schemes via Patreon or Steady (initially a solution for German publisher Krautreporter that outgrew its parent company). Scaling these efforts, and standing up new MediaTech companies (YouTube for audio, anyone?) can be a path to both boosting returns and creating a more sustainable sector overall.

Note: On this topic, B2B media projects also tend to be sorely overlooked.

6) Media should consider investors might be outside the sector

Working in media tends to require a lot of context and industry knowledge. People from other industries, who find themselves working in publishing, tend to struggle with the many unwritten rules and instinctive decision making.

Surprisingly though, some of the most successful media investors actually come from the margins or even outside the sector. For example, Gimlet, a podcast studio that eventually sold to Spotify for $230 million, received investments from the likes of Lowercase Capital (best known for its investments in Facebook, Uber) and Betaworks (known for Tumblr, Airbnb and Groupon). (Additionally, Gimlet also received investments from media-focused funds like Graham Holdings, formerly shareholders in Washington Post and Newsweek).

Such investors can bring unique know-how and perspective, pushing media to try unconventional ideas (they don’t know media are “doomed to fail”, so they sometimes build successful ones). Importantly, they can also manage greater risk (media tend to be a small share of their assets), offer higher valuations to founders and move more aggressively.

7) The sector is too small to invest in

It might come as a surprise, but one of the biggest hurdles to having more capital in media is… the lack of capital in media. Or specifically, the sector is too small for most investors to allocate money into.

Investing in companies is an expensive process – to do it right, you need a lot of specialist labour (lawyers, investment analysts…). You also need to go through a lot of companies to pick the right ones. In order to make this pay off, the size of deals needs to be big enough to absorb a lot of those costs.

The average deal size for venture capital firms in the US was $2 million for seed and $6.8 million for later-stage in the second quarter of 2023. Given that most VCs tend to take 10-20% stakes, that implies a market valuation of $10 to $70 million for the company.

That valuation, in turn, is typically calculated as a ratio of sales (investors prefer to go off profits, but many media companies don’t have those). Axel Springer bought Politico for a price worth 5 times revenue, but a 1-2 ratio is more common. This back of the envelope calculation suggests that media should have at the very least $2 million in revenue ($10-30 million would be ideal) to be in the running.

Most media companies just aren’t that big. Even worse, VCs invest because they believe larger players will follow – for example private equity or pension funds. But the latter move in tens or hundreds of millions, even billions…

8) If we want more investors, we need more options to exit

It might seem trivial, but investments are meant to generate returns. When investing in companies, these generally come in one of two forms – dividends paid over time or increasing in value. Think of an apartment, which can generate returns via rent or by appreciating in value.

The former, dividends, tend to be relatively rare among media companies. That leaves the latter. But just as with the apartment, in order to turn a higher market price into tangible returns you need to sell your ownership stake to someone else (who in turn typically plans to sell it further down the line, but that’s a second order problem).

The challenge with media is that there are few buyers “up the food chain”. That means investors in early-stage, smaller companies, don’t really have anywhere to exit. The fact that a fair share of investors buy into media to prevent them from falling into the hands of oligarchs or government control only makes this problem more acute (there are not just few buyers, some of those out there are not acceptable). But if you can’t sell your stake, its value goes down, and we fall into a vicious cycle.

Ultimately, there are only a few solutions: public offerings (listing a company on the stock exchange), standing up a large buyer (either by bringing in some long horizon players, e.g., pension funds, or mobilising a large volume of “social” or public capital), or selling to large tech firms / media holdings etc. None of these is simple to implement at scale, meaning this will likely be a persistent problem – lowering valuations across the sector.

9) We need more instruments to invest

A lot of investors don’t want to spend months looking for the right media company to buy a share in, but simply find the sector interesting and would like a bit of exposure to media overall. The challenge: doing that is almost impossible.

Many sectors have index funds that allow you to make a bet on commodities on a specific sector. Media, with already small companies, most of which are not privately listed, doesn’t really offer an alternative. Nor is it possible to easily, say, make an investment that is spread across a dozen different media (diversifying risk), or a mix of content and tech companies.

As a result, some of the biggest pools of capital are untapped. It is relatively easy to imagine that some of the world’s biggest funds (e.g., pension funds or sovereign wealth funds), would want to allocate a small share of their assets to the sector (media is a rare countercyclical industry – when there is crisis, consumption and interest goes up). Without tools to do so, we are leaving capital on the table.

There is also a lot of work to be done on blended finance – which to slightly oversimplify combines philanthropic funds with private capital to leverage the best of both worlds. That means looking to retain private sector edge and entrepreneurship without losing the social and long-term focus that philanthropy can afford.

10) We need to get serious about moats

Investors like moats – economic ones, to be specific. This term refers to advantages that help companies maintain market share or profits because elements of their business model cannot be easily replicated by potential competitors or that make it difficult for customers to move around.

This goes against the ethos of many media and the philosophy of media donors, who try to make entry into the sector as accessible as possible and encourage sharing solutions. Ultimately, though, it undermines building businesses with high, sustainable profits.

In order to make sure media can be successful in the longer run, publishers need to build models that can lock in customers. Investors can play an important role, making sure that media managers keep this top of mind and play devil’s advocate when needed (although most people hate difficult processes to unsubscribe, the experience of New York Times or the Wall Street Journal – not to mention gyms – shows that this approach works).

But it’s not just about making subscribers call you between 2 and 5 pm on working days. It’s also about technological and product innovation (e.g. Amazon keeps Prime subscribers locked in by offering a mix of services, from video streaming to express delivery). That’s exactly the kind of thing that private investors can help with.

Source of the cover photo: generated by ChatGPT, DALL·E

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