How NOT to finance a news startup
Layoffs and cutbacks at big digital news sites show that less is more -- usually
You’re reading the My News Biz newsletter. My goal is to help digital media entrepreneurs find viable business models.
One of the biggest mistakes that many news startups make is to burn through their cash before establishing a solid revenue base.
And actually, they’re no different from other startups in this regard: They want to gain market share rapidly with free or low-cost products that attract users. But their revenue model is neglected and they run out of cash.
Francisco Coronel, a venture capital specialist, explained to me once why so many startups “fall into the Valley of Death”.
Death by heart attack. They keep borrowing money but are not generating enough cash to pay off their debts. The lenders tire of excuses and call in the loans, causing bankruptcy or liquidation— a financial heart attack.
Death by cancer. The startup attracts investors with promises that their cash will help generate growth and big profits. But if the startup burns through the cash without showing profits or an exit strategy, the investors decide to cut their losses and walk away. The startup has to close its doors — death by cancer.
Coronel explains this in a two-minute video below (in Spanish with subtitles).
Coronel made his comments years before some of the current media cutbacks and failures we’re seeing now. But here are some.
The newsiest example was Jimmy Finkelstein’s The Messenger, It launched in May with great fanfare, a staff of 175 journalists, and $50 million from giddy investors. The pitch was to produce high-quality, unbiased news. Just eight months later, the Washington Post reported that the publication was laying off employees and had cash for only a few weeks of operation. Contrary to its promise, it had delivered an aggregated diet of clickbait, with Finkelstein meddling in the newsroom, The Post said. The Messenger closed its doors and fired all its staff at the beginning of February.
Artifact, a “personalized news app driven by artificial intelligence”, founded by the co-founders of Instagram, announced in January it was shutting down just one year after its founding. “Despite early appreciation from news professionals and users alike, it appears Artifact couldn't beat the quick churn of popular social media sites — and the increasingly inevitable trailing off of AI buzz,” Chase DiBenedetto, a member of Artifact’s Social Good team, reported in Mashable.
In April, BuzzFeed shut down its award-winning news division, citing declines in ad revenue, among other factors. The Deal Book newsletter reported that “its closure is the latest reminder that digital media start-ups, which deep-pocketed investors once valued at astronomical sums, are facing headwinds . . . .Networks like Facebook and Google ended up keeping most of the available ad dollars, and are increasingly favoring content formats that yield less money for publishers.”
Vice filed for bankruptcy in May with “significant liabilities”, according to the New York Times. Vice executives’ dreams of “a stock market debut or a sale at an eye-popping valuation have been wiped away. The company was considered to be worth $5.7 billion at one point.” Its investors were now placing its value at $225 million.
Ezra Klein of the New York Times included these and other examples of dead and dying media on Jan. 21.
What about nonprofits?
These huge organizations all have a for-profit motive. But the lessons are relevant to nonprofits whose mission is public service, the public good.
Perhaps the most eloquent and credentialed source of information on sustainability of trustworthy, credible news is Richard J. Tofel, who writes the Second Rough Draft newsletter. He was the founding general manager of the nonprofit investigative news site ProPublica, and its president from 2013 until September 2021.
A sample of some of Tofel’s thoughts. In A hard look at news sustainability, he writes, “For me, sustainability means nothing more or less than the goal of building something enduring, an institution that transcends its founders and finds a path to making a continuing contribution to its readers and community.” And, “From the outset, sustainability requires taking business operations as seriously as editorial. Over time, that means building a robust and independent business staff.”
In his A few words in celebration of the failure of newer newsrooms he argued that “the low failure rate for digital news nonprofits — 6% — over a long stretch of time” was not a proof of resilience. Rather, “I’m afraid it’s a sign of funder timidity, founder stubbornness and industry stagnation.” Too often, he believes, they prop up organizations that should be allowed to fail — even though their journalism is praiseworthy. Don’t throw good money after bad, he believes.
The wrong and right questions
Based on my work coaching media founders, I believe the biggest mistake that startups make is to start with the question, How can we make more money?
That’s the wrong question. They should start with the question, Do we really know who our customers are, and what are their needs in terms of information?
In other words, What are their problems in terms of getting information useful to their daily lives? How can we help solve those problems? You can find out through focus groups, polls, or through interviews of friends and family.
Create value
After you know something about your target audience, you can try to create value for them. But the important question is, What do they consider valuable? What is valuable enough to them that they would be willing to pay for it?
You can create value in lots of ways, not just with content. It could be the distribution channels you use. You could publish in a format that your community values, such as videos or podcasts.
You could also create value through presenting data in visually attractive and informative formats, such as maps and graphics.
And then you can test your assumptions by putting your content in front of users and measuring how they interact with it. Only then you can begin to talk about monetizing the audience. The monetization issue flows from understanding those first two points: Who our customers are and how we can create value for them.
Conclusions and parting thoughts
I’ve worked with dozens of digital news startups in various incubators and accelerators in Latin America, Spain, Eastern Europe, the Middle East, and East Asia. I’ve coached dozens more startup founders in other workshop and classroom settings.
Without exception these startups have a noble mission and are headed by people dedicated to serving their community. And almost without exception, their teams lack expertise in marketing, sales, and administration.
I hope I helped them with these relatively mundane considerations. Many face more serious obstacles such as government sanctions, physical threats, and active sabotage of their operations. In many countries where I’ve worked, journalism is a high-risk business.
They have to be endlessly creative and innovative to deal with all of the obstacles thrown in their path. I keep returning to the guiding principles of Ignacio Escolar, founder and CEO of elDiario.es, a digital news startup in Spain that is a model of wise fiscal management and high quality journalism.
“Journalism is not a business but a public service,” Escolar says. “But it’s a public service that has to be profitable to survive.”
And profit in that context is not a dirty word.