Business Models for Local News: Finding and Seeding Growth Capital for Mission-Driven Journalism Enterprises

Part Three of “Business Models for Local News: A Field Scan” from The Shorenstein Center and The Lenfest Institute.

This post is one section of a new report published by the Shorenstein Center on Media, Politics and Public Policy at the Harvard Kennedy School and The Lenfest Institute for Journalism, “Business Models for Local News: A Field Scan.” On May 18, 2018, Shorenstein and The Lenfest Institute gathered industry leaders discuss prospects for finding and seeding new business models for local journalism — and how best to support those working in communities across the country to facilitate change. The report is based on those conversations. The full report is available here.

The Issue: While attracting seed money for new journalism-related ventures is an achievement in itself, established nonprofit and for-profit ventures are finding it difficult to raise the next round of funding they need to grow.

Key Takeaway: Entrepreneurs in journalism and media technology could benefit from new types of funding targeted to the growth stage of development, perhaps including those that blend philanthropic support with venture fund strategies. Overall, increasing the business acumen of journalists will help to create the next generation of sustainable news content and related technology ventures.

Growth capital problems for nonprofits

In the nonprofit journalism space, early reliance on foundation funding or other large philanthropic gifts can paradoxically incentivize new news organizations to grow beyond their means, or overlook the need to develop diversified sources of revenue. One participant with a wide view of the field noted, “I am seeing news startups go through a two-step process where they can get seed funding but usually get stuck in year three, and don’t have the operating fund of $30–$50K to get through to sustainability.”

In subsequent rounds of searching for growth capital, nonprofit journalism organizations can end up chasing sources of philanthropic funding, which can pull them off-strategy. “Next stage growth capital for nonprofits is very difficult to get because theories of grantmaking are very often programmatic. The worst place a growing nonprofit can land is with ‘on-mission, off-strategy’ funding that meets a funder’s programmatic requirements but doesn’t match the nonprofit’s strategy,” shared one participant.

Attendees noted a strong trend toward all types of news organizations pursuing reader revenue in the form of donations and memberships. Yet even as these organizations seek to solicit reader revenue, not all of their readers may be in a position to financially support their operations. Some organizations will end up having to seek other types of funders in addition. “Sometimes nonprofit newsrooms need some help in identifying a secondary audience that can take on a philanthropic role. These organizations can also partner with, for example, legacy, for-profit news organizations that can go together to a community and ask for support for the news,” said one person.

Growth capital problems for for-profits

In the for-profit journalism space (often companies creating software and other tools to help newsrooms), the traditional venture capital expectations of scale and return are proving to be a poor fit for journalism-focused ventures that have a limited addressable market of newsrooms. The small and shrinking size of the news industry is leaving many good media startups without investors beyond the seed stage. In addition, the outcomes of success or failure for journalism ventures is much more binary than in the nonprofit sector: garnering investment means a shot at success, but failure to attract resources means the venture shuts down and the tools, resources, and knowledge are lost. “In the for-profit investing world, the investor keeps giving money to follow the opportunity, but the trade-off is that there are more binary success/failure risks in for-profit startups,” said one participant.

For content-producing for-profit journalism startups, investors are now much less interested in funding advertising and looking for other ways to “monetize reader attention” as a business model. “Most big investors already have exposure to that kind of business model, and the biggest experiments, like BuzzFeed, have [seen] mixed success,” commented one participant. This is especially true as Google and Facebook continue to dominate the digital advertising market.

Reader-revenue business models are getting more popular, though nonprofits are also seeking these same readers. However, one person pointed out, “The funding would be there if someone was able to make money in journalism, but it’s an industry where everyone is unable to make money as a viable, profitable organization.”

Other participants emphasized that traditional venture money is a poor fit for journalism: “Expectations on scale of returns and time horizon typically don’t match media verticals.”

That said, the person and other participants agreed that journalism is not a big enough market for sustainability or returns, even with a standardized product. Product-focused media startups, like many of those supported by Matter Ventures, often find themselves seeking adjacent markets to journalism in order to grow and find viability — for example influencers or music.

Existing Experiments and Initiatives

  • The Knight Foundation hosts an annual gathering to help develop a civic mindset around supporting journalism, identify new major donors, and bridge relationships between local newsrooms and community foundations.
  • The Knight Foundation has in the past maintained the Knight Enterprise Fund, now on hiatus, to support for-profit media ventures. The fund provides seed capital and access to the Knight network. (Participants shared that some foundations have similar investment initiatives that are often separate from the grantmaking side, so it is important that entrepreneurs be aware there are different sets of people that handle new ventures.)
  • VTDigger is a success story shared in many circles. Its founder started very small with just $1,000 for one year of operation and then bootstrapped a variety of funding sources to continually prove the business could grow and be sustainable. The site now has a $1.5 million annual budget, with $1 million to be spent on tech and growth. It receives 30 percent of its revenue from membership donations.
  • Civil represents a totally new model for investment in journalism, positioning itself as a decentralized, blockchain-based marketplace for news. Of its first cohort of newsroom partners who will use the platform to distribute and monetize their journalism, some are nonprofit and driven by memberships and donations, while others have paywalls. Civil also plans to launch an Initial Coin Offering of its cryptocurrency tokens to begin its marketplace soon.
  • Matter Ventures has a strong, early-stage support program for new, for-profit media ventures: each company gets $50,000 investment and a five-month training program. The program focuses on building four roles: hacker/hustler/designer/storyteller. It’s an effective program, but oftentimes the six ventures that get chosen face expansion issues when they can’t find more funding.
  • The News Revenue HubINN’s Largo Project, and The News Project are seeking to help news outlets reach sustainability by lowering operating costs, particularly for publishing and business infrastructure. By providing a set of shared services for running membership campaigns and offering best practices for reader revenue, the News Revenue Hub, for one, helps its clients to bootstrap their own growth by providing resources (email templates, technical assistance, etc.) for fundraising and membership drives. Itself funded through a mix of philanthropy and client fees, the company is also seeking growth capital.
  • American Public Media is launching a philanthropic investment fund, The Glen Nelson Center, with the goal of investing $10 to $15 million in the a next few years into mission-driven media startups. Returns will go back to the nonprofit, but the fund will be similar to a venture or private equity fund.
  • Facebook and Google have each announced or developed initiatives that encourage sustainability for news organizations, including training, tool development, and some direct payments for content. In early 2018, Facebook launched its Local News Subscriptions Accelerator, reporting tangible enough business success among participating publishers to fund the program with an additional $3.5 million through the end of the year. In March, Google committed to spending $300 million through its Google News Initiative, a collection of projects that seek to combat misinformation, strengthen business models for journalism, and create training and products to support journalists.
  • Elizabeth Green and John Thornton are working on creating a venture philanthropy fund for journalism that would aggregate the gifts of wealthy individuals and foundations that want to support journalism. The fund will be a source of startup and growth capital for nonprofit civic news operations, and most of the grants will go toward building up their technology and revenue functions.
  • Berkeleyside created a direct public offering to fund the expansion of its newsroom, bringing on readers as investors. This is slightly different from some European models of newsroom equity financing which also feature readers as investors (such as Bristol Cable), but are run as cooperatives.
  • RadioPublic is incorporated as a Public Benefit Corporation — a for-profit entity with a social mission. The company is experimenting with raising capital through a crowd equity model, and using that to complement a mix of strategic media investors and traditional investors.
  • The Columbia Graduate School of Journalism has identified the greatest need in journalism as helping journalists to create compelling pitches and think about how to structure a viable business around their ideas. The school is starting to bring venture investors into the classroom “to reverse-engineer why some enterprises succeed or fail.”

Opportunities and Challenges

Risk . . . and a problem of perception?

Many participants who have worked in either the nonprofit or for-profit sectors reported that it can be difficult to counteract funders’/investors’ built-in assumptions about journalism and the news business. One participant shared that in the process of fundraising for his venture, he noticed that many of the people and institutions interested in supporting journalism right now are focused on problems related to the 2016 election: “Everyone wants to talk about their perceptions of media, and many would like to do something about it, but most of them only know that they’re writing a check for their local radio station or a subscription to The New York Times. My job is to persuade people that you don’t have to be Bezos to make a difference in the news space, that there are ways to support journalism around a topic, and other types of outlets for people who want to do something about news. Every time I tell people this, it’s an epiphany. There’s lack of awareness of what’s out there, and we need to get [the] message out that it’s not that difficult or costly [to contribute].”

Participants agreed that it is important to correct both investors’ and philanthropists’ misperception that business models in civic news aren’t viable or scalable. There is some evidence that these perceptions are changing. One participant, who founded a small newsroom, shared her experience, saying, “I’ve found the ecosystem is much more receptive to reader-based businesses than before. Many investors and entities with capital to give were probably playing the BuzzFeed game five years ago. Until very recently, as a new organization trying to do anything different, we ran up against obstacles. Now that reader-supported organizations are getting attention, we and others have a chance to prove that the reader-revenue model works. So I am optimistic; I personally have noticed a shift in models that can work, but the big industry change is that more business models are being taken seriously.”

Another participant, however, cautioned that because the technology, distribution, and business landscape for news publishing is changing so quickly, it’s not clear that a single business or technical model will prove the most successful. “At this stage we need investment in experimentation. Markets are all different, and there aren’t necessarily common threads between successful models. That is the big risk that civic capital is taking.”

For-profit sector: Leveraging software development to and from adjacent fields

Many participants believed there is a role for venture capital money in funding software to power journalism business models — for example, beginning with a free product that then scales with the size of the newsroom’s business. The standardization across newsroom needs is what can help bring the cost down for what would otherwise be individual newsroom investments in bespoke product development.

One participant pointed out that because journalism is a small market from a VC’s point of view, and media startups often have to diversify to other industries to grow, there could also be opportunities for companies that have started in other spaces to offer their services to journalism, with the subsidy coming from well-resourced clients in other sectors. There is of course a trade-off between building for the lowest common denominator across different types of users and products that are specific to the needs of journalism. “Often, from the perspective of platform companies, the newsrooms are the neediest while also having the least money to build their businesses,” commented one participant.

Blending nonprofit and for-profit approaches

Participants agreed that while nonprofit and for-profit organizing in the service of news and journalism face very different expectations and funding environments, both types need to exist and can be blended in interesting ways. Although people tend to think in dichotomies between venture-scale and philanthropy, there are different types of capital to support journalism: nonprofit foundation philanthropy, mission-driven investors, venture funding, and individually wealthy patrons. Each has advantages and disadvantages. Learning from other industries, particularly healthcare and manufacturing, which are going through their own digital transformation, could help.

And not all venture funds are chasing scale or large returns. There are different orientations and investment theses in the venture community, and what media entrepreneurs have learned in pitching VCs and recognizing those differences has not been widely shared. For example, Matter has focused on bundling strategic investments from media companies that have an interest in learning about new innovation and experimentation outside their own efforts. New Media Ventures is another fund which has slightly different goals from traditional venture capitalists. Those models could be strengthened and replicated. Everyone agreed that there is a dire need for more investment funds that are mission-focused, patient, and don’t expect Uber-level scale.

Some of the richest discussion in the sessions came from participants thinking about blended philanthropy and investment capital models. One shared, “There shouldn’t be competition between philanthropy and capital. For example, in podcasting, philanthropy got a decade of experimentation, and then the commercial opportunity emerged. Capital has stepped in to build on it and give things a chance to take off on the market side.” Participants saw an opportunity to create funds that combine a nonprofit, philanthropically fueled fund with an investment fund for both startup and growth capital that would service both nonprofit and for-profit civic news operations.

Building new types of funds to support journalism

Part of making better use of the existing sources of philanthropic and market capital in the journalism space is a shared awareness of what tools are actually working. That shared knowledge could be combined with a fund to support enterprises that have achieved some level of success and need to scale — that is to say, a “mezzanine” type fund. This would help entrepreneurs in the space who, at the moment, have to learn what the tools and funding sources are over and over again.

Similarly, many participants were excited about the idea of creating a Crunchbase to connect funders with journalism organizations. Participants also suggested the idea of creating an “angel list” of investors for media companies on a continuum of different types of philanthropy and investment, with content creation (e.g., the journalism itself) as the dividing line. Another participant suggested a yearly convening around this kind of media investment, much like Media Impact Funders. Another participant made an interesting suggestion of considering debt as an instrument for financing small media organizations. He has seen this work in public media where there is stable membership and sponsorship revenue.

And in the nonprofit space, participants were excited about the idea of creating a United Way-type organization for journalism that could help connect donors to viable news organizations that could use their support. One participant said, “If you didn’t want to give to ProPublica, it can be hard to find out who to trust. And even within a local nonprofit community, there’s often six or seven potential nonprofit journalism outlets to contribute to. It would be worth it to do the work and find an ideal method to help potential funders reach the organizations that need support.” Building a organization that could bundle philanthropic gifts and then disburse those gifts to support journalism startups with a good shot at sustainability could really help transform the field.

Creating more knowledge, awareness, and capacity among local community foundations and corporate giving programs

One participant noted the rise of what she calls “civic investors,” saying, “There is a growing body of business people and successful entrepreneurs who are concerned about their communities and seeking to fund particularly nonprofit news.” Participants in all sessions talked about the importance of identifying and cultivating these people (see the section in this report “Growing a Culture of Philanthropy for Journalism” for more about this topic).

Thus far, corporate giving and Corporate Social Responsibility (CSR) programs have not been connected to community journalism. And though many news organizations are wary of corporate influence, there could be an opportunity to recruit CSR as a new type of philanthropic support for news. One participant who has seen this play out in a major city commented, “Despite the wariness, there is a case to be made, even if it’s a harder case.”

One participant shared that, in her experience as a nonprofit publisher, “It’s hard to have conversations with local community foundations and philanthropists because they don’t see journalism as a ‘cause.’” One opportunity for changing this see the Knight Foundation and other foundations that support journalism create a “roadshow” wherein they speak to the funders in those communities. ”The big foundations could share what they’ve invested in those communities and confront the local foundations with this sense that they have to pick up this slack, because the national foundations won’t be there forever,” one person said. Participants agreed that the bigger question at stake was how to use the Knight Foundation’s influence, even beyond its existing community foundation conference, to take that conversation afield.

Another attendee suggested that one missing piece, which might help community foundations feel more comfortable funding journalism, is some sort of metric, for example, an “aggregate community knowledge score” that could enable the foundations access and measure the impact of their funding.

Considering the value of contributions beyond cash

Participants agreed that beyond capital, there is also the possibility for in-kind contributions between companies, for example, gifts of content or software. One participant shared that his media employer is thinking about how to support intra-preneurship or employee entrepreneurship in new businesses, both to increase the culture of innovation in the company and as a form of wealth creation.

Startups with technology tools for journalists can partner with newsrooms, just as Hearken has tried to help subsidize the cost of learning to use its engagement tool and proving its revenue potential. But, as one person shared, “The big concern is: what happens when the money runs out? This approach can be wildly helpful to at least get people going, but you also have to teach newsrooms how to be financially literate, and borrow best practices from other industries around seed money versus sustainable revenue.” The starting and stopping of funding can also interfere with learning.

Raising the financial and business literacy of journalists

There was consensus among the group that the ultimate success of increased journalism hinges on building the business capacity of journalists. Participants identified a need to help journalists and news organizations become financially literate, teaching them to view all money as “seed money” rather than funds to consume freely. Attendees agreed that a venture’s ability to take a long-term approach from the start is crucial for maximizing funds and encouraging further investment and grants.

This report continues with Part Four, “Talent-Building at the Enterprise Level — Growing the Next Generation of Publishers in Business Acumen and Leadership.” You can find the executive summary here, and the full report is here.

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