How hacker investors could save the media

On one hand I agree with Clay Shirky.

“If the old model is broken, what will work in its place?” To which the answer is: Nothing. Nothing will work. There is no general model for newspapers to replace the one the internet just broke. (link to essay) 

On the other I believe that large media organizations (newspapers and broadcasters) are important to democracy. They have the clout to get access, a legacy of fact-checking and the money to afford lawyers. These are not unimportant details.  

So with no general model to replace the work that broadcasters and newspapers do (or did), what do we do? Don’t worry, I have a cockamamie plan to save it all. 

Here are some facts and assumptions grouped together in bullet form. 

• The Internet is a disruptive technology that has mangled the profitability of large media companies.
• Media companies are going through what Clayton Christensen calls the Innovator’s Dilemma. The successes and capabilities of successful businesses can actually become obstacles in the face of changing markets and technologies. 
• It is often entirely rational for incumbent companies to ignore disruptive innovations since they don’t compare well with existing technologies or products. 
• The deceptively small market available for a disruptive innovation is often very small compared to the market for the established technology. As an example, online ad sales for newspapers are a pittance to the money they make selling display ads in the paper. Sales staff have no incentive to push advertisers online. 
• Small startups are able to prove assumptions much faster and cheaper than any large media company ever could. This is especially true in an online environment because the barrier to entry and the cost of failure is so low. 
• Institutional investors (think Ontario Teachers’ Pension Plan) and extremely rich people devote a certain percentage of their vast Scrooge McDuckian towers of money to early-stage companies in the interest of generating a return through an eventual exit (IPO or sale). This is venture capital. 

Here’s the plan. 

If you’re a large media company scrounge up a bit of money – anywhere from  $5 to $100 million. Take that money and create a seed-stage startup funding firm with a focus on finding, funding and developing the best early stage online journalism, online advertising, social media, video streaming, geo-location, e-commerce and mobile startups. 

This seed-stage startup funding firm would take a page (okay the whole playbook) from hacker investor firm Y Combinator. Y Combinator was founded in 2005 by Paul Graham and has funded 80 startups in that short time. They are an incredible success story. Some of the companies they’ve invested in include;

• social news service reddit (purchased by Conde Nast)
• blogging by email service Posterous
• social geolocation service Loopt
• blog comment web service Disqus
• live video streaming and chat service Justin.tv

Here’s the amazing part of Y Combinator, they barely give out any money at all. Typically $5000 + $5000 per founder and rarely more than $20000. In return they look for a small stake in the companies they invest in (between 2% and 10%).  But the money isn’t even the biggest part. 

“The most important thing we do is work with startups on their ideas. We’re hackers ourselves, and we’ve spent a lot of time figuring out how to make things people want. So we can usually see fairly quickly the direction in which a small idea should be expanded or the point at which to begin attacking a large but vague one.”

Creating a community that would help entrepreneurs refine their ideas and marshall them through the startup process would be half of the value in creating this firm.

This firm would have to be completely spun off from the parent company. A key to the Y Combinator is their hands-off approach.

“We try to interfere as little as possible in the startups we fund. We don’t want board seats, rights to participate in future rounds, vetoes over strategic decisions, or any of the other powers investors sometimes require. We offer lots of advice, but we can’t force anyone to take it. We realize that independence is one of the reasons people want to start startups in the first place. And frankly, it’s also one of the reasons startups succeed. Investors who try to control the companies they fund often end up destroying them.” (find everything I quoted at Y Combinator about page)

Will this approach guarantee double digit profit margins and top down control? Extremely unlikely. But if large media companies want to be relevant going forward they’re going to have to adapt and change. Identifying great ideas, the best entrepreneurs, helping them along, creating becoming a part of those companies is a drastic difference from what big media does 

This strategy takes one of their greatest disadvantages, their slowness to adapt and farms it out to the fastest people out there. It’s too bad those large media companies spent the last 15 years using all their cash to buy up other large media companies. If they hadn’t done that they might have some cash laying around. 

Will these new companies cannibalize their existing online operations? Yes, that’s the point. If any other type of organization ran the websites that the large media corporations run as standalone operations they’d be laughed out of business school. They’ve never made any money and I doubt they ever will. 

I loved the hacker journalist meme that ran through the online journalism world (you know, last month) and while it’s awesome that the Chicago Tribune has hired a person the calibre of Brian Boyer, it’s a drop in the bucket. Imagine dozens of companies and thousands of entrepreneurs devoting their time, energy, money and ideas to figuring out this problem. 

There it is. It’s not the best plan but it’s certainly not the worst. What do you think?

This story was also posted on my blog, duncankinneyblog.com.