Hey big media, it’s time to invest

Guest author Chris Seper is co-founder of MedCityNews, a health industry news startup. If you’d like to submit a guest post or become a regular contributor to We Media, contact: andrew AT wemedia DOT com.

Acquisition is part of the solution for “big media” companies to catch up in the era of new media. But they need to go further, including more investments in early-stage ventures.

Some recent deals illustrate how innovation through acquisition works:

• Examiner.com purchased the citizen-media site NowPublic in a deal valued at $25 million.
• MSNBC.com acquired hyperlocal news aggregator EveryBlock.
• Patch and Going are now rooted at AOL.

Traditional media companies should take their cues from these deals and go further. They should become early-stage investors, too – particularly as new media outlets show an ability to exit and provide some return on investment.

Private investment firms have been doing this for some time. Maveron invested in The Wrap, a Hollywood news site run by former New York Times reporter Sharon Waxman. NowPublic had raised $12 million from firms including Brightspark Ventures, Rho Capital Ventures and GrowthWorks Capital. Sites like VentureBeat, SEC Watch and Xconomy have received early-stage investments.

The old media empires have their own investment strategies too, though largely in ad networks, shopping services and social media.

• Gannett has a stake in companies like MetroMix, Topix and Imaginova, and it acquired Captivate Network and Ripple6.
• Comcast Interactive Capital is an investor in the online sports community SBNation.
• Hearst in 2007 purchased the social shopping site Kaboodle for $30 million.
• Belo, McClatchy, Gannett, Tribune and The Washington Post all invest in Cars.com.

But there needs to be more media-to-media investment, particularly in the early stage with cutting-edge content providers and mobile solutions. It’s amazing to me that while Google employees see the value in an outlet like VentureBeat there aren’t announcements from wire services and other traditional chains that they, too, are putting seed-level investments into these kinds of businesses.

Pharmaceutical companies use investment and acquisition as a method of research and development. Why shouldn’t big media? Even in today’s economy, semi-annual seed-level investments — between $100,000 and $500,000 — in four or five promising businesses is possible for major media outlets.

Then, instead of having to attempt radical innovation within their own traditional shops — efforts that largely fail because they are traditional shops — big media companies would, through their investment and equity, own a piece of new ventures, technologies, approaches and revenue streams. They would put themselves first in line when their investments were worth acquiring. Plus, they would likely get first crack at the management talent that lead these ventures (and that’s as important for traditional outlets, too).

Think there aren’t enough new media ideas to go around? This year’s We Media conference in Miami showcased nearly two-dozen investment-worthy businesses in its early-stage venture competition and in the aisles of the conference. One of last year’s We Media winners, SeeClickFix, has raised $265,000 and seems to be looking for more. Also, literally thousands of new media ideas (mine included) are preparing to fight for a few million dollars in Knight News Challenge grants. A handful will win, but there will be scores more out there.

There have to be rules of engagement as the media bigs invest in new media companies. But they are not hard to create. Consider:

• Businesses with third-party validation, meaning companies that have won money through grants or seed investors who have done some due diligence on these outlets.
• “Successful” businesses that have validated at least a portion of their business assumptions and have customers.
• Businesses with a clear business plan (not a marketing plan).
• Journalists who have made the transition to business leaders and are backed by strong boards or advisers, depending on the stage.
• Outlets ready to give up a board seat and the fiscal and management transparency that goes along with it.

If you’ve done the math on the NowPublic exit, you’ll know there’s plenty of work to go to satisfy investors. It’s unlikely — because of the $12 million in equity investment and a $25 million acquisition — that the return was enough to excite many investors out there. And anyone who invests in early-stage companies must accept that many investments will flop or even turn out selling a product that didn’t exist when they first invested. But recent media exits are a signal that better days are coming and that the things done in the new media space are working.

Plus — and unfortunately for folks like me — the down economy makes now a time to invest. Valuations today are more favorable for investors than they would have been a year or two ago (or will be a year or two from now).

Private Equity Hub (registration required for archive) recently argued that investment firms should start rethinking investments in newspapers. That funding should start going to new media outlets. Traditional media shouldn’t be left behind. They have a chance to do some R & D and hit fast-forward on their own attempts at winning a stronger foothold in the media’s future.