Telling a story is half the battle; how do you create the right kind of content that commands a premium and creates shareholder value?
Storyteller entrepreneurs are individuals who have a healthy balance between creativity and business acumen. Investors would always credit my ability to tell a good story while reading a P&L (profit and loss). But they would also pass on investing. It was frustrating, but it built my resolve. While the world has changed and new opportunities abound, you can apply this kind of thinking into building a sustainable foundation that is built to last.
In some ways, this graph captures the balance needed.
While my experience is in content and production, you can apply the following framework to your sector, whether it’s new content formats, software, AI etc. It’s about understanding the levers needed to command value in the marketplace.
Using content, to create programming that commands value, you need to think of the following:
- The Right Programming
It’s not a coincidence that today, we operate a model with strong unit economics. We recognized an opening, then built a foundation hoping that “If we build it, they will come” and watch. We were lucky with good timing, since we were contemporaneous with YouTube and also made the bet to focus on it. Our content was/had:
- Strong Intellectual Property
- Coveted by distributors and licensees
- Brand safe
Companies command outsized valuations thanks to Goodwill, or brand equity. It’s no wonder that WatchMojo logo was branded heavily from day 1, being seen tens of billions of times since day 1 amongst the generation that grew up on YouTube. Once we made our four big bets we could then mobilize and ramp up.
2. All Revenue is Equal But Some Revenue is More Equal Than Others
I used to joke that we’d consider anything… except weddings, corporate videos and bar mitzvahs, because those weren’t what media companies produced but left for “a guy with a camera.” Indeed, because our videos could be produced once and generate revenues over a long period of time, they were more valuable. Today this talk of catalog has been accentuated, fuelled by demand from streaming platforms. I snagged this slide from an old investor deck from 2014; no one would listen to me then, calling YouTube a pariah (even though it was emerging as the belle of the ball). I chuckled when the LA Times wrote an article eight years ago with the same headline!
3. The Right Margins
Revenue, above, is one side of the equation. The last thing you want to do is put the cart ahead of the horse and build an operation with a cost model that isn’t sustainable. Managing payroll and avoiding running out of money is ultimately the entrepreneur’s sole job. Everything else is a means to that end.
4. Commanding the Right Multiples
Investors effectively “bid” on each dollar of revenue and earnings you generate. Such price-to-sales (P/S) or price-earnings (P/E) are the bedrock of valuations based on comparables (stand alone valuations could include the dividend discount model, for example). Historically the average price/earnings multiple on publicly traded stocks is 15 (which is why today’s stock prices are crazy, even though I remain long in the market). Either way, while publicly traded companies offer liquidity, private companies do not. That means investors park their cash with your startup and hold their investment for a period of 3-10 years. That also means you will end up pricing your company at a discount to publicly traded peers, or comparables.
When evaluating your business, investors research comparables. This for example was what investors were bidding for $1 of revenue for some broad peers in our sector in 2017 before a correction.
If you multiply your annual revenue/earnings stream by your comparables’ P/S or P/E ratios respectively, that is how you get to your valuation. For purposes of illustration, say:
- your revenues are $3M
- you command a 5X P/S ratio,
- your valuation is $15M.
5. M&A Dynamics
The final variable is the demand and supply dynamics. M&A merits a whole section on this website, let alone article. I’ll follow up with how to win the game of musical chairs. But naturally, the more peers do the same you do, the less leverage you will have in M&A conversations.