As entrepreneurs well know, it’s hard to turn down money. And when you’re in an industry that’s been depleted for many years, it’s even harder. But in the media business, taking the cash may lead to the kind of headlines you don’t want to see.
Flush with money from venture capital, companies like BuzzFeed and Vice were supposed to represent a new model to replace the legacies of fallen print and digital news firms. Only now, those very companies are posting the kind of layoffs reminiscent of the legacy firms’ early troubles.
Before its recent setback, BuzzFeed alone had been valued at more than $1.5 billion, and Vice at more than $4 billion. But those numbers were the result of venture capital pouring hundreds of millions into those firms, creating demands for high returns from an industry still struggling to keep its head above water. “When you raise money, you have to put it to work, so you hire a lot of people to try to grow,” says Henry Topping, senior client partner in Korn Ferry’s Media, Entertainment, and Sports practice. “But you also have to be careful not to create a human capital structure that’s too big for the business to support.”
It’s a dilemma many leaders can relate to, and one that isn’t easy to calibrate, especially when VCs are throwing money at firms. US companies raised more than $100 billion in venture capital last year, the most in the last decade. With money like that so easy to come by, the temptation for leaders is to take it and worry about how to drive growth to meet the increased valuation later. Topping sees similarities, in fact, between the first dot-com bubble and what companies like BuzzFeed, Vice, and others are experiencing today. A surplus of money needs to be invested, forcing firms to chase deals. As a result, “brands are being built with no certainty of their underlying value,” Topping says.
The business model of digital and traditional media companies alike consists mainly of advertising, subscriptions, or a combination of both. Advertising revenue, of course, has been declining for decades thanks to competition from Facebook and Google, and subscription revenue is still nowhere close to offsetting those losses for most organizations. As digital media companies have raised more money, they have sought to supplement their traditional revenue streams by expanding into video, podcasting, retail, and other adjacent areas. That means leaders not only have to balance the revenue and profit yield of new business lines against the traditional business, but they also have to recruit and retain people from completely new talent pools with entirely new skill sets.
While the media industry faces its own unique business model issues, layoffs are not an uncommon aspect of the funding-versus-growth equation for start-ups across other industries. Cost-cutting, layoffs, restructurings, sale talks, and the negative attention that accompanies such moves take a toll on employee engagement, motivation, and productivity, studies show. A company’s culture is extremely important to getting talent through tough times. “It’s critical for leaders to build a reservoir of good will during good times that can help carry organizations through the bad times,” says Mark Royal, a Korn Ferry senior director who helps firms with their employee engagement efforts.