Money is pouring into media, but will it find the value it seeks?

As a number of sites reported Sunday night, Vox Media has closed a new round of financing worth $46.5 million, which gives the company a theoretical value of close to $400 million, or almost twice what Amazon CEO Jeff Bezos paid for the Washington Post. Vox’s round comes not long after a $50-million financing by BuzzFeed, which valued it at more than $800 million. New media platforms seem to be the flavor of the month in investment circles. But are their hopes misplaced?

As tech analyst Ben Thompson pointed out in an email to Stratechery subscribers about the news, one of the most noteworthy things about both of these deals is that they came from investors who have previously not shown any interest in media: BuzzFeed’s round was led by Andreessen Horowitz, and Vox’s was led by a little-known fund called General Atlantic.

A new taste for media

Until the BuzzFeed deal, Andreessen Horowitz had never invested in anything like a broad, consumer-focused media platform — although co-founder and former Netscape creator Marc Andreessen has invested a small sum personally in Pando Daily, and Andreessen Horowitz backed the site Rap Genius, which started out by annotating rap lyrics and has made an effort to do the same with news stories. But enterprise software has been its bread and butter.

General Atlantic, meanwhile — which invests money on behalf of the secretive co-founder of the Duty Free Shopping empire, Chuck Feeney — also tends to invest in industrial or enterprise-focused entities. Until Vox came along, Box and Squarespace were about the only brands in the fund’s investment portfolio that most consumers might recognize.

This suggests one of two things: Either a) both funds have run out of interesting things to invest in in other markets, or b) they believe the media market has changed in some fundamental way that makes these kinds of companies worth their time. And it’s not just bottom-feeding — Vox’s market value is about seven times its estimated revenue, and BuzzFeed’s valuation is likely in the same ballpark, figures that are historically pretty rich for media companies (the New York Times is valued at about 1.2 times its annual revenue).

Vertical integration

Thompson argues that the big difference with both BuzzFeed and Vox is that they are not just content plays, but vertically-integrated technology platforms, something that Andreessen Horowitz partner Chris Dixon also mentioned when the company made its initial investment. Both companies have built their own publishing tools, their own analytical features and their own custom-content advertising businesses. As a General Atlantic partner told the New York Times:

[blockquote person=”” attribution=””]”We think we are at an inflection point. For the next five years, you are going to have the next generation of media platforms emerge. There are parallels to cable in the ’80s. There is going to be a huge amount of value creation.”[/blockquote]

This focus undoubtedly makes BuzzFeed and Vox worth more than media sites that rely on others for their technology platform or ad business — but it’s also worth pointing out that BuzzFeed in particular has a huge reliance on one third-party provider for the vast majority of its distribution, and that is Facebook. So far, the company has not suffered from repeated changes to Facebook’s content-ranking algorithms, but all it would take is one tweak and BuzzFeed’s traffic could go into freefall. That’s a significant risk.

Vox CEO Jim Bankoff said in a post on LinkedIn — which in turn was based on a letter to Vox employees — that the company isn’t concerned about relying on third-party platforms because “the best digital distribution platforms tune their services over time to reward the best and most relevant content from strong media brands.” But is that a statement of fact, or is it wishful thinking?

Humans don’t scale

Another factor that has likely changed the perception of BuzzFeed and Vox’s investment potential is that both have their own “native advertising” or sponsored content arms, which create custom material for brands and can therefore charge higher prices than many media companies get for their bog-standard banner ads and other content. But how sustainable are those margins?

The history of online advertising is one in which new ad forms or marketing methods continually emerge, only to become just as commoditized as their predeccesors. Native advertising may be more immune to this phenomenon than other kinds of content, but if it becomes the go-to solution for media monetization that many believe it to be, then it is going to face the same kinds of pressures that every other solution has.

The other awkward thing about media is that it still relies on one of the most financially inefficient content-production methods ever invented — namely, human beings. As one venture investor once told me, “human beings don’t scale.” The next writer or editor or content producer is just as expensive as the first one, and that makes it difficult to grow a media company to a truly global size — unless your producers work for free, as they do for Facebook and Twitter.

As someone who works in media, I’m obviously conflicted about these kinds of deals. On the one hand, I would love to see more people invest. But will Andreessen Horowitz and General Atlantic see enough of a return to justify the half-billion or billion-dollar valuations they are putting on these platforms? I’m skeptical.