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How to predict whether a new media venture will fail

We all knew Rupert Murdoch’s The Daily would fail, right? Probably not.  A look back at coverage of the venture’s launch in 2011 recalls excitement about the boldness of the experiment. Boasting we knew The Daily’s days were few is likely old-fashioned hindsight bias.

There is an established business-school theory, however, about the likelihood that startup businesses will succeed, and which often goes unheeded in digital journalism blueprints.  This theory would have urged deep speculation about The Daily’s longevity.

The “Theory of Good and Bad Capital,” as some have called it, holds that new businesses are more likely to succeed if they are impatient for revenue and patient for growth. Most successful new businesses have an immediate plan for revenue generation and are not over-ambitious in scale or growth, delaying rapid expansion until a healthy revenue model is validated. Capital used to invest too heavily in growth, over revenue, then, is said to be bad money.

The Daily, while initially impatient for revenue, charging for access from the start, was nonetheless greedy for growth. It was “in competition with everybody and everything,” said Joshua Benton of Harvard’s Nieman Journalism Lab to the AP. Rupert Murdoch’s The Daily “could not find a large enough audience quickly enough to convince us the business model was sustainable in the long-term.”

The Daily, with a large staff at launch and lunar ambitions, was impatient for growth without ample revenue.

The good money theory, Clayton Christensen has written, “demands that a new company figures out a viable strategy as fast as and with as little investment as possible—so the entrepreneurs don’t spend a lot of money in pursuit of the wrong strategy.” The Daily was so heavily invested in its initial strategy—a failed gameplan that involved baffling isolation from social media—that it hadn’t the flexibility to pivot and try a new approach. It went all in with a lot of bad capital.

Most successful online news operations have been tweaked, prodded, and pruned hundreds of times before a profitable operation emerges.

Christensen attributes the good capital hypothesis to Amar Bhide, author of “Origin and Evolution of New Business,” who surveyed successful startups and found that 93 percent of profitable ventures changed their initial strategy. “[A]ny capital that demands that the early company become very big, very fast, will almost always drive the business off a cliff,” Bhide wrote.

The good money, bad money theory finds it no surprise that sites like Huffington Post, Politico and Gawker Media all had growth-patient origins that provided time to establish a viable revenue system.  Politico was originally founded not to cover every beltway slab, but to offer unique coverage of the 2008 US presidential campaign. There were, indeed, aspirations beyond coverage of the 2008 contest, but Politico founders were patient for that expansion. Gawker started as a spindly blog, and eventually its founder Nick Denton was “the first person to turn blogging into a large-scale commercial venture,” according to Reuters’ Felix Salmon.

The good capital theory also assists in explaining why the futures of ventures like GlobalPost, Patch.com, and The Daily Beast are less than certain. Most successful businesses, Bhide’s research suggests, begin tailored, like HuffPo and Politico, not galacto-projects funded by shortsighted venture capitalists. “Most noteworthy businesses have unremarkable origins,” he wrote.

Huffington Post, partly founded by the well-heeled Kenneth Lerer and Arianna Huffington, nonetheless had an initially modest approach. “We don’t want to build a big website,” Lerer once told co-aspirant Jonah Peretti. “We want to build an influential site.” Bearish on growth. And though the site didn’t profit for several years, it had a deviously unique revenue strategy: sell ads near news written by unpaid authors.

The expansive and expensive GlobalPost, live since 2009, on the other hand, aspired instantly to be a news site for the world, with scores of correspondents on all news-generating continents. (Impatient for growth). It has had no meaningful strategy for acquiring non-advertising revenue from readers, although it does have a membership subscription that allows readers to vote on stories and communicate with correspondents in the field for $30 a year. Yet all GlobalPost reporting is free, in the hope the publication will draw enough audience in the future to make money. (Patient for revenue).

The Daily Beast, similarly, wants massive growth now, and prays good money will be found down the road. Beast founder Tina Brown said in mid-2011 that the operation, along with albatross Newsweek, was set to be profitable in two to three years, a projection Forbes disputed. Newsweek’s print edition is now dead and scores of staffers are looking for work.

Matt Thompson recently alluded to the GlobalPost/Daily Beast approach for Poynter. “We journalists take care of the audience-building part, and overnight, the magic gnomes deposit money in our stockings, [right]?” he prodded. “How many recent journalism projects have successfully found an audience and proven their worth only to founder without a working revenue strategy?”

Daily Beast gets over 19 million unique visitors a month, but still hasn’t enough revenue to be profitable. GlobalPost attracts two million bipeds a month, not enough to keep the lights on longterm. Patch.com, which has a bevy of hyperlocal news sites across the country, still represents a growth-first approach. Northeastern journalism professor Dan Kennedy called the Patch project a “corporate, cookie-cutter approach in covering local communities,”—like if RCA placed hundreds of sidewalk guitarists throughout the US hoping for large audiences, with no revenue guaranteed.

Contrast the revenue-later strategy with a small science journalism startup called Matter. Selling one longform article about science each month for 99 cents, this narrow “magazine” has an immediate, reasonable revenue model, and is patient for a time when it can produce and offer expanded reporting. The good money model alone isn’t everything, of course; news providers still need compelling stories and reporting. Matter, whose first article described a rare disorder that makes people eager to amputate perfectly functioning limbs and shadowed a man traveling to India to have a healthy leg cut off, must continue to produce compelling writing. Matter is interested in growing its offerings, of course, but revenue comes first. Matter cofounder Bobbie Johnson wouldn’t disclose how many subscribers his operation has, but said in an email they have paying customers in the thousands.

Eventually, once a quenching revenue stream is inbound, businesses can afford to reverse the good money equation. That is, they can be bullish on growth and postpone some profit, as Huffington Post and Gawker have done with some of their bold expansions.

There are certainly victorious media organizations that start out with growth-now ambitions and big money.  Many examples are found in television, such as Elizabeth Murdoch’s Shine network. But, in line with the good capital, bad capital hypothesis, there are many profitable media organizations that bet the orchard yet preserve the farm, with a Midwestern eagerness for sustenance, but a steely patience for conquest. Rather than trying to get too big too fast, digital journalism ventures must first secure their existence.

You can follow Justin on Twitter at @Justin_D_Martin. We welcome your comments at ideas@qz.com

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