The State of Media Technology Financing 2023
The formula for business funding and investment typically looks something like this: Identify a problem, and address it with a profitable solution, a great team, and the potential for huge growth. But in media technology, there’s something else most companies are fighting against: moving customers to a SaaS model and winning over media companies that want to build everything in-house. Given these inherent challenges, what are the areas where investment looks like a good idea for companies in this industry?
While billions in investment have been sunk into content development over the past few years—which has consequently drawn our attention—behind the scenes, a whole range of video technology vendors and engineers are building the infrastructure for delivering this content. That infrastructure is not only being used by old-school media companies, but by disrupters like Netflix and next-generation media companies as well.
According to S&P Global Market Intelligence, venture capital (VC) funding as total value of funding rounds went from 41% in 2019 to 45% in 2022 for tech, media, and telecom. The entertainment industry is considered more resilient during downturns than other industries. So, what does it take to get funding? Business fundamentals, growth rates, technology, and sound business models.
Series A or B?
Series A and series B funding is where companies head after they’ve gotten off the ground. Series A is considered seed funding. Series B is supposed to help companies that ideally have sales revenue and fund growth.
To secure the necessary funding to survive and grow, says Volition Capital principal Jim Ferry, “You need to have high retention of your clients. You need to be scaling well. You need to show that the margins of the business work, that you’re not going to get disintermediated, and that there’s not a lot of competition for what you’re doing.”
By “disintermediated,” Ferry means that his firm tends to stay away from companies that may function as intermediaries and lose their currency in the market through direct sales to consumers that bypass them. “A lot of the initial ad-tech companies that went public like rocket fuel wound up getting bought for pennies on the dollar because they were disintermediated over time,” he says.
Ferry focuses on internet and media companies. Volition Capital positions itself as a growth equity firm for series A or B investment. In terms of the size of the companies it works with, Volition Capital looks for a “minimum 5 million revenue” from tech companies, Ferry states. “Our check size is 10 to 40 million from an investment perspective.”
With Volition Capital’s focus in media technology, Ferry closely tracks prevailing industry trends, such as ongoing shifts in premium OTT content monetization, which we’ve covered extensively in Streaming Media. “I think we correctly predicted earlier this year that there’s going to have to be a change in the way all these streaming services are charging their customers,” Ferry says. “They’re all moving from pure subscription to ad-supported revenue. There are whole new tiers of ad-supported streaming, which is opening up a lot of opportunities in the ad-tech space and media as well.”
Ferry adds that there aren’t a lot of investors in ad tech because of the inherent complexities of the ecosystem in which ads are served into video, but he remains bullish on ad tech’s prospects in “certain subsectors, such as CTV attribution.” He says Volition Capital is “also exploring platforms that enable [small and medium businesses] to effectively run OTT campaigns, given that the landscape is still dominated by larger brands.”
In addition, Ferry notes, “Contextual targeting remains a hot topic, as privacy updates and the removal of cookies loom over the advertising industry. The problem is there is a reluctance to adopt any of these contextual targeting solutions, while there is still the ability to target through cookies. We will likely see a winner in this space offer a combination of both targeting strategies where end users can slowly transition to contextual over time.”
Math vs. Passion
One contact I interviewed for this article says there are two types of VCs: math-based and passion-based (typically, those that have worked within the space itself). The formula is fairly straightforward: Find an addressable market, a good team, and sufficient defensibility. “You want a CAGR [compound annual growth rate] of above 50% and at least a million a month in recurring revenues,” says Rob Green, managing director for WorksMachine. “When you have that kind of accelerated growth, particularly if it’s outpacing the rest of your peers, that’s a great acquisition target. You’ll get a high multiple, based on gross revenues, not profits.”
When assessing companies that are “early-stage in terms of revenue,” Green says, “you want them to be cash-flow breakeven, using what could be profits to continue to fuel growth. So call it sub-$50 million, and the reason for that is that you typically don’t find those companies to be profitable.”
So, what kinds of companies look interesting to VCs? Here are a few categories.
“I think most [investors] look for a type of company—for example, software-as-a-service or software with a particular go-to-market strategy, like digital self-serve products that are clear differentiators,” says Bitmovin CEO Stefan Lederer. He contends that only one to three companies per industry fit this description at any given time.
“Investors right now look specifically for healthy metrics,” Lederer says. The days of lots of “free money” floating around are coming to an end, he believes. “So, really strong achievements, metrics, and efficiency matter to investors. I think that’s definitely a change in the market dynamics right now.”
Dating back to its 2012 founding, Bitmovin initially created tools for developers, designing APIs to encode, play, and analyze video. “In 2014, we raised our first financing round to basically have the ability to build our products,” says Lederer. “Afterwards, we continued to finance the growth and the product expansion as well.” To date, Bitmovin has raised $87.3 million, according to Crunchbase.
One media CTO I spoke to likens supporting too many different brands, distribution modes, and revenue models to being a mile wide and an inch deep. Companies that attempt to diversify too quickly or extensively struggle to succeed, whether they’re working with end-to-end vendors or trying to do everything by themselves. In both cases, they can only go an inch deep. The CTO cites Netflix as an example of a company that does only one thing, “and they are a mile deep. That’s a challenge for a media company with a vast portfolio of assets, brands, and use cases. If you provide best-in-breed components, like a toolbox of media supply chain components, you can put together the pieces that are a mile deep in compression or players or telemetry,” he says. “We have the same products across hundreds of media companies,” and they do little customization for customers, he states.
“We were able to expand our market because media entertainment is a set vertical,” Lederer notes, “with maybe a few thousand meaningful media companies worldwide.” Bitmovin created an offering for new media companies that requires much less technical skill and customization. The challenge: Can the new media market become a profitable sector for the company, or is going deep for traditional media companies a better approach?
An AI Marketplace
Defined.ai is an online marketplace for AI data, tools, and models. Providing data for training recommendation engines and media content analysis is Defined.ai’s media-related business. “We are the largest marketplace of training data for AI—which basically is downstream of every builder of AI,” says Daniela Braga, Defined.ai’s founder and CEO. The company’s offerings include “data that allows AI builders and AI users developing voice recognition, text-to-speech, conversational AI, natural language processing applications, summarization, speech transcription, translation, search relevance, motion image, image recognition, object recognition, facial recognition, facial emotion detection, and all sorts of biometric models,” Braga says.
Covering 190 countries and 150+ languages, Braga notes, Defined.ai has real and simulated data and will soon branch out into synthetic data as well. “Everyone needs data, and our marketplace is the most transparent and ethical because we pay for the data,” she says.
When it comes to courting investors as an AI-driven media content analysis company, “They will ask you for the same things: business plan, the burn rate, the financials, understanding your growth trajectory, the number of customers, the business model, and how do you make money,” says Braga. “In Series B, you’ll have to start to diversify your markets and prove that you’re not dependent on one customer or one market or one product. Series C is diversifying a portfolio of products. It gets more complicated because every product has a different margin profile, a different market strategy, a different team.”
Braga asserts that women-run businesses like her own have to meet higher standards to secure funding than companies led by men. “I always had to show revenue and revenue ahead of my series for which I was running. My male peers don’t even have to have revenue in series A phase,” she says. “Only 2% of women in the world get VC funding, and that’s across many different industries. I don’t know of any woman in AI who has raised more VC capital than I have as a CEO. You see other women in other industries raising more, but we’re all talking about outliers.
“There’s an unconscious bias when you have a woman in front of you,” Braga continues. “You measure confidence, background, perception of ability of executing, strength, and resilience that men are not exposed to. I need to have 100 conversations to get one ‘maybe,’ and oftentimes, they don’t even go to the next step. The level of asks for a woman in a CEO position are insane compared to a man that can just bring their team, and they don’t have to be experts in everything.”
Defined.ai has raised $81 million, according to Crunchbase.
Delivering Live Streaming
“Our investors are really looking for a business idea that is solving a concrete issue in a market that is growing,” says Alberto Nava, marketing and communications manager at MainStreaming. The company started in the ’90s with a focus on caching of content and speeding up internet connections. Today, it provides edge media delivery with an emphasis on QoE for live streams at scale. “Now, we are entering a scenario phase where IP networks will be delivering more and more live content,” Nava states.
In addition, Nava says that MainStreaming is disrupting traditional CDNs with its focus on the delivery of high-concurrency live streaming. “We have been serving content to almost 4 million [concurrent] viewers in Europe,” he notes. Filling the need for edge services is also one of the company’s goals. “There will be a huge deployment of equipment, architecture, staff, and computational capacity closer to the final customers to properly serve video,” Nava says.
“We will be looking at a new financing round within 18–24 months to foster growth,” Nava continues. The company’s evaluation will be based on revenue, the team, and, of course, all of the metrics it can deliver. “We have healthy fundamentals. We are profitable, and we keep growing. What is most interesting is that we are working in a market that is booming and will continue growing fast in the next 5 years.”
MainStreaming has raised $10.5 million, according to Crunchbase.
FAST and Advertising Technology
Free ad-supported streaming television (FAST) is growing in popularity, and the technology behind the monetization is ad tech, which both Amagi and Wurl supply. These companies provide content creation, distribution, and advertising services. Amagi raised $100 million in 2022, and Wurl was acquired by AppLovin for $430 million (55% in cash, the remainder in stock). Amagi and Wurl have products in FAST and also the ad-tech side of the house.
“The market narrative has shifted to profitable growth rather than just growth,” says Amagi co-founder Srini KA. “We are the largest player in cloud playout of traditional linear broadcast. Media has been one of the last industries to move to the cloud. Less than 10% of all television runs on cloud. Pretty much everything still [relies on] on-prem hardware and a data center-based approach. The next few years are going to see a wholesale migration of traditional media companies into the cloud, and I think we’re in a really good position.”
This migration is well underway, according to KA. “If you look at the whole industry, there’s a massive transition happening. We see that at the back end, where people are moving away from hardware, and at the front end, where people are moving from linear to streaming.”
Asked why he thinks media didn’t move to the cloud sooner, KA says the first reason is that when it comes to “video workflows in the cloud, we’re not really ready for video processing. Video required much better networking in general.” The second reason, he explains, is that “given the high egress costs, and given the high reliability requirements that broadcast needed, they were worried about moving to cloud and not being able to meet the SLA. Now, the systems and software are mature enough that [cloud] makes sense for most of our customers as a serious option.”
As to how Amagi succeeded in securing its funding, KA says, “One investor saw value [for us to] become a media tech vertical SaaS company, providing an operating system for all media companies. That’s a playbook that has worked well in other industries.”
Amagi has raised $349.7 million, according to Crunchbase.
The Fruits of Roll-Ups
One company acquiring another is an additional way that media tech companies can get funding. There are three paths here. The first one is acquiring revenue, and this can happen in a horizontal merger in which one company buys a competitor. The second is that if a company wants a strategic area of a product line to be faster to market, it makes more sense to buy a company in that particular space because it can take years to actually build up a corpus of intellectual property. Thus, the time to market is dramatically accelerated.
There’s a third way that’s becoming increasingly common in the media tech space. Private equity firms come in and do roll-up mergers, in which they buy up companies in the same market and merge them together. Two recent examples in the streaming space are Telestream’s acquisition of EcoDigital in 2020 and Masstech in 2021 and Backlight’s integration of Zype and Wildmoka in 2022. The underlying thesis is that there is more value in having a stable of companies.
Backlight CEO Ben Kaplan went shopping for companies to purchase with $200 million in funding from PSG. It acquired five different companies as majority investor. “We certainly identified key markets in SaaS and cloud-based technologies that we thought had great growth potential and the opportunity to be disruptive and really healthy businesses,” says Kaplan. The plan was to find SaaS companies with an open architecture.
“When we make investments, we’re acquiring the company,” Kaplan explains. Not every entrepreneur or operator wants to do a majority-owned deal. “The team is a big piece of what we’re acquiring. We want these people to help it integrate and help scale this business.
“In no circumstance are we looking to build a monolithic platform where customers have to use all of our software or none of our software,” Kaplan continues. Backlight has acquired companies for specific parts of the video workflow, with applications in a number of adjacent areas, such as playout (Zype), collaboration (ftrack), and asset management (iconik). “In many cases, these companies either were integrated with each other or in certain circumstances were integrated with like products,” says Kaplan.
One key advantage SaaS acquisitions provide is higher margins, Kaplan notes. He looks for companies that meet a number of criteria, including growth, product strength, and profitability. With the businesses Backlight acquires, the company looks for opportunities for cross-sell between one or more of the product lines. “I don’t need to acquire EBITDA for EBITDA’s sake, or growth for growth’s sake,” Kaplan explains. “We’re continuing to both look at acquisitions and to look at the way that we can integrate teams and product lines to deliver more value to customers and continue to improve our growth and scale. For early stage, we’re looking for product market fit in either growth or growth potential. At a later stage, you’re looking at repeatable, forecastable growth. At late stage, you’re looking either for continued growth or solid growth and great profitability.”
As for specific targets, Kaplan says 50% growth and 10% profitability would be an “amazing” outcome, as would 20% year-over-year growth with 20% profit margins. Backlight has raised $200 million, according to Crunchbase.
“Two years ago, if you had growth, you were going to raise additional capital because the valuations were so high,” says WorksMachine’s Green. “It is far less dilutive to raise a large round of money at a really high valuation than it is to raise a small amount of money at a really small valuation. If the cool tech is really worth something,” he adds, “then people start to pay you.”
So, regardless of which financing method is right for the company, one hopes the money follows. Do companies have to be profitable? Common sense dictates that when you’re using other people’s money, gross revenue is king. “When you have accelerated growth—particularly if it’s outpacing the rest of your peers—that’s a great acquisition target, and you’ll get a high multiple,” Green argues. “Typically, that multiple is going to be based on gross revenues, not profits.”
Fast-forward to today, when the financial markets are down and we’ve seen a lot of tech layoffs. “There has been a market correction, and entrepreneurs may need to re-orient how they think about valuations relative to public comps,” says Volition Capital’s Ferry. “We are still looking to make investments in great media technology businesses. … With the current economic outlook, we are focused on ‘need to have’ instead of ‘nice to have’ solutions.”
In addition to having great technology, a great team, and solid metrics, it never hurts to be profitable too.
Companies and Suppliers Mentioned