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The VC-fueled media bubble is popping

In early 2015, The New Yorker published a profile of a young man named Emerson Spartz, whom the magazine dubbed both “the virologist” and “the king of clickbait.” Spartz ran a constellation of media sites, the most prominent of which, Dose.com, regularly published image-heavy listicles, the kind that, for a few short years, dominated our Facebook feeds with their hyperbolic, information-gap headlines.

I point to this profile because it serves as the perfect time capsule to represent a now-bygone era that was fueled by easy VC money and Facebook-inflated traffic. In the article, Spartz issued rapid-fire axioms and trite bromides about the nature of virality and how a media company should function. “Facebook should be 80 percent of your effort,” he advised at one point. “Use lists whenever possible. Lists just hijack the brain’s neural circuitry.”

Even more notable was his view of original content —  that it was overrated. Unlike more reputable sites that at least put in the hard work of compiling their lists from scratch (for the most part, BuzzFeed fits into this category), Spartz openly bragged that his staffers lifted lists wholesale from other sites and slapped new headlines onto them. He justified this with pseudo-intellectual drivel. “If you want to build a successful virus, you can start by trying to engineer the DNA from scratch—or, much more efficient, you take a virus that you already know is potent, mutate it a tiny bit, and expose it to a new cluster of people.” At one point in the article, The New Yorker documented how the writer of a Dose article titled “23 Photos of People from All Over the World Next to How Much Food They Eat Per Day” had lifted all its content from an article at Elite Daily, which in turn had lifted its list from another site called Urban Times.

And here’s the kicker: at the time of the article’s publication, Spartz had raised $8 million in venture capital funding. But that was just the beginning; by the end of the year, he had raised a total of $34 million, including $25 million from Tribune Media.

Think for a moment about what this actually means. Venture capitalists are known to only invest in companies with the potential for exponential growth. Because most of their investments fail, each investment, at least in early rounds, must have at least a chance of growing by a multiple of 10. That means these VCs thought a company that couldn’t even be bothered to create its own content was worth at least $340 million.

Flash forward three years, and visiting Dose.com no longer even leads you to a media site; it’s now some kind of consulting service that delivers social media intelligence. Its careers section lists a single open position: social media intern. Another prominent site in the Dose Media network, OMGFacts, doesn’t appear to have published an article in at least nine months. It’s difficult to determine the current state of Dose Media, since searches for both it and Spartz don’t return any articles written about them that were published after 2015. But suffice it to say, I don’t think Tribune is going to be making its money back.

At least it’s not alone in that regard. Over the past year, we’ve seen strong evidence that the VC well that pumped hundreds of millions of dollars into millennial-focused news sites has dried up. And the premise that those massive investments were built on — that Facebook-driven scale would somehow allow these media companies to overcome the harsh economics of internet advertising — has been revealed to be nothing but a house of cards, one that has come crashing down.

The sale of Mashable probably wasn’t the start of this crash, but it was a wake-up call for the media industry. The site, which had begun its life as a tech-focused blog, had raised money valuing it at $250 million, only for it to sell to Ziff Davis last December for less than $50 million. A month earlier, The Wall Street Journal had reported that BuzzFeed, a VC darling if there ever was one, had missed its revenue projections by 20 percent. By February, the paper was also reporting that Vice, which had raised money at a whopping $5.7 billion valuation, had also missed revenue projections by a wide margin.

And then there’s Mic, which was sold last month to Bustle Media. Often namechecked in previous years as one of the digital-first sites that truly understood Millennial news consumers, Mic sold for as low as $5 million, down from the $100 million valuation that was bestowed upon it in April 2017.

The list goes on. I could name several sites, from Gigaom to Upworthy, that either shut down or were sold at fractions of their previous valuations after their VC-funding dried up.

Why did this happen? Why did VCs, for about a four-year period, dump hundreds of millions of dollars into an industry category — media — that they had typically avoided in previous decades? And what occurred over the last year to trigger a retreat from these sorts of investments?

In an insightful Twitter thread published in the wake of the Mic sale, Aram Zucker-Scharff, the ad engineering director at The Washington Post, addressed the faulty premises on which these investments were built. “The problem is that the scale that VCs are defining and that Mic is trying to chase is a lie,” he wrote. “The numbers were never really there. Eventually, they were always going to disappear as fraudulent traffic and metrics fell apart. This is still occurring.”

His argument echoed one made by Talking Points Memo editor Josh Marshall in November 2017. Titled “There’s a Digital Media Crash. But No One Will Say It,” his piece asserts that “there are too many publications relative to the funding available to support them, given that it has been almost universally assumed that the funding comes from advertising.”

But those VCs, in their due diligence, certainly saw how abysmal the current advertising rates were when they invested? As Marshall explained, these valuations were premised on the idea that the media companies would scale to the point that “you can solve the chronic problem of over-supply of publications in your favor through sales at volume and being able to command stable, premium advertising rates.”

And that gets to the heart of why this bubble formed: narrative. Because VCs often bet on a future that hasn’t yet come, they’re largely susceptible to the stories that startup founders tell. The more plausible the story of future growth, the more likely the VC is to invest.

And who or what provided the plausibility to this narrative? Facebook. It’s not a coincidence that the media startup bubble really started to swell after Facebook, in 2012, began to prioritize media content within the newsfeed, propelling the social network ahead of all other traffic sources.

It wasn’t long before startups like Upworthy learned to game the newsfeed algorithm, generating engagement and unleashing a spigot of traffic through a mixture of hyperbole, outrage, and other cheap tricks. Suddenly, the Emerson Spartzs of the world could point to this hockey stick increase and convince wide-eyed investors that the exponential growth commonly only found on tech platforms could, in fact, be achieved by media companies as well.

The better the narrative you could tell, the more money you got. And nobody was better at crafting a narrative than Vice CEO Shane Smith, who eventually commanded valuations much higher than any of his peers. His willingness to stretch the truth, as detailed in a New York article earlier this year, sometimes straddled the line of outright fraud. One of his early successes in growing Vice’s revenue involved convincing Intel executives that Vice was a much larger operation than it actually was; he rented a larger office and then got dozens of non-employees to occupy its desks. Intel soon signed a $25 million ad deal with the company.

Vice’s shady tactics only got more brazen. The company’s director of marketing told New York that he purchased spammy ads on torrent sites to drive mountains of low-quality traffic. In 2016, Variety reported that Vice had signed advertising deals with other viral content sites that essentially allowed it to piggyback on their web traffic, in the process inflating its own. Variety referred to these tactics as “the digital equivalent of mortgage-backed securities”

But then the music stopped, and it got a lot harder to weave stories about untempered growth. Facebook executives, horrified by how the platform had been gamed in the 2016 election, began dialing back the newsfeed’s preference for outside news sources. Mark Zuckerberg eventually made this change in direction official, announcing earlier this year that Facebook would shift its focus from page content to posts shared by friends and family.

What’s worse, the scaled traffic never led to better advertising rates. Facebook and Google continued to tighten their grip on the digital advertising market, leaving publishers fighting over an ever-diminishing share of what was left. Is it any wonder that every publisher seems to be pivoting to subscriptions and BuzzFeed CEO Jonah Peretti is publicly floating the idea of a media merger so he can consolidate his negotiating powers?

And the worst may still be ahead of us. As media entrepreneur Rafat Ali pointed out on Twitter, advertising-based businesses tend to do well when the economy is strong. If we enter a global recession, which some analysts believe could happen as early as 2019, then marketing budgets will be the first thing to be cut.

That’s when we’ll find out which media companies can actually stand on their own two legs, without the help of easy VC cash. Narratives can only take you so far. Eventually comes the day when you need to prove them true.

Simon Owens is a tech and media journalist living in Washington, DC. Follow him on Twitter, Facebook, or LinkedIn. Email him at simonowens@gmail.com. For a full bio, go here.

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