New media investing in favor but hazards lurk

By Jennifer Saba

NEW YORK (Reuters) - New media websites from BuzzFeed to Business Insider are on a roll lately, showered with dollars from venture capitalists betting that they will crack an advertising market that has stymied traditional media companies.

With their mix of top-ten lists, slide shows that highlight the indignities of air travel, eye-catching headlines and thoughtful news, such media start-ups think their fresh approach to working with brands will coax more money from advertisers.

They build large audiences by using social media like Facebook and Twitter to push content to young readers that marketers covet.

Some investors are already true believers, as evident in the much higher valuations that digital content start-ups are commanding - in some cases, they are valued at five times the multiples that venerable old media companies fetch. Still, the start-ups face steep odds in the long-term as scores of competitors vie for marketers' dollars.

 

Venture capital firm Accel Partners recently led a round of new financing of nearly $34 million for Vox, the publisher of sports and technology websites SB Nation and The Verge that has raised nearly $70 million so far. Last week, Vox announced it bought the Curbed Network, a group of blogs that cover real estate, food culture and fashion. Reports pegged the acquisition in the range of $20 million to $30 million.

BuzzFeed, a social news and entertainment company, received $46 million, including $19.3 million in January from venture capitalists. Technology-focused Business Insider and the fashion-oriented Refinery29 have also raised tens of millions of dollars each.

The influx of money has some industry watchers proclaiming the comeback of content, as entrepreneurs try to appeal to so-called millennial readers who grew up on digital news and have likely never touched print.

"If you can get to scale, the media model is fantastically profitable," said Dan Marriott, managing partner at the investment firm Stripes Group and an investor in Refinery29.

Thirty-four percent of people between the age of 18 and 24 consume news through social media, compared to 10 percent of people between the age of 50 and 64, according to recent figures from the Pew Research Center. Only 6 percent of 18- to 24-year-olds read a newspaper, and only 29 percent get their news by watching television.

VALUATION

New media companies that are grabbing a lot of Web traffic can command valuations in the range of four to five times forecast revenues, according to venture capitalists and other investors.

BuzzFeed's last round of capital-raising valued the company at $200 million, or roughly five times estimated 2013 revenue, according to press reports. The New York Times Co trades on the New York Stock Exchange at about 1.2 times estimated 2013 revenue, according to Thomson Reuters I/B/E/S.

"There is an argument that these (new media) valuations even with high growth rates seem high," said Greg Gottesman, managing director at the Seattle-based VC firm Madrona Venture Group and an investor in Cheezburger, a collection of humor sites.

"The only way you could justify that is if you believe monetization will catch up with where people are spending their time. I think it will. The question is how long will it take."

One-time investor darling Demand Media Inc was hailed as a way to create inexpensive content by tapping a network of thousands of freelancers for "how to" videos and articles, designed to show up prominently in search results.

But in recent quarters its traffic fell, as did its advertising revenue, and now its market value is hovering around $480 million today, one third of where it stood after its IPO nearly three years ago.

The company has been hurt by its heavy dependence on Google , which has made several changes to its search algorithm to weed out what it considers low-quality content. That pushed Demand's articles down in search results, hurting its advertising revenue - a sign of how such sites can be captive of technologies beyond their control.

A Demand spokeswoman said the company has faith in the value of its content assets and that it is broadening to other products and services.

AOL Inc spent more than $150 million on Patch, a network of local news sites dotting hundreds of communities throughout the United States. Persistent weak ad sales have resulted in deep cuts and a possible sale.

"The bottom line with content on the Internet is it's hard to get paid - particularly if the content is ad driven," said Evercore analyst Doug Arthur.

Another fast-growing content company, Say Media, operates a network of blogs like ReadWrite and has raised about $30 million. It then pared back its ambitions, putting its plans for an initial public offering on hold.

"We are growing, but it's not at the accelerated rate we had predicted 12-16 months ago," Chief Executive Matt Sanchez said. "This doesn't mean that an IPO is out of the question - it's just not in the immediate future."

GOING NATIVE

Free from legacy systems or print schedules, these start-ups have smaller editorial and sales staffs that can use new platforms to quickly produce integrated content - ranging from articles to videos to advertising.

"In most media areas, established brands have not been able to understand technology, utilize technology and modify themselves for technology," said Eric Hippeau, a managing director at Lerer Ventures, a backer of BuzzFeed "That has opened doors wide open to start-ups."

The start-ups are focusing on helping corporate brands devise campaigns that go beyond a blocky banner, tapping into data about users to better tailor ads.

"The easy thing to notice is that advertising on the Web sucks and it doesn't have to," said Jim Bankoff, the chairman and CEO of Vox Media. "One of the problems we are working on solving is to make advertising as good as the editorial product."

At The Verge for instance, an ad for Microsoft's Surface tablet is seamlessly woven into the design of the site's culture section.

"It's leveraging the voice of the (site) to write about a brand," said Philippe von Borries, co-founder and co-CEO of Refinery29. "It's creating an experience that is relevant to everything associated with it."

Research firm eMarketer pegs digital sponsorship advertising to grow 63 percent to $3.1 billion over the next five years.

"Professionally produced content is valuable and the audience is valuable," said Ari Bluman chief digital investment officer in North America for WPP's media buying arm GroupM. "If we can generate scale that is where our message needs to be." (Reporting By Jennifer Saba; Editing by Tim Dobbyn)