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March 28, 2007 / Toby Dayton

Why Invest In The Media & Classifed Space?

In yesterday’s post about the recent deal activity in the media and classified space, I forgot to mention another March deal. Taleo acquired JobFlash in an asset purchase worth about $3 million. The original investors in the deal, including Maveron LLC, Mosaic Venture Partners, and the Band of Angels, invested about $5.45 million in the deal and obviously got clobbered with a less than stellar exit. For every deal that one reads about in the space, whether it’s an up round or a terrific exit, there are countless other instances where past investments have failed entirely, are underwater, or the company is sold for a mediocre or even negative return. So given all the chaos and upheaval going on in the employment classified space, not to mention the larger media space, why are venture firms, corporate strategics, and private equity firms so active in investing in the category at the moment? While the answer may be be obvious to some, and I do not in any way purport to have the perfect, complete explanation, it is interesting and quite instructive to think about.

The first part of my brief, incomplete, and simplified answer (as always, I’d appreciate anyone else’s thoughts on this), is that the employment classified category is still a $10+ billion industry, depending on how you define it. No matter how high the risks are, that’s a very attractive space to be competing in. Given the sheer size of the industry, combined with the complexity and multi-faceted nature of of delivering recruitment solutions and human capital management solutions to employers of all sizes across the entire economy, there is tremendous opportunity for both success and failure. While there are certainly some clear leaders today in many areas, no one is totally dominating the playing field yet and there will be lots of winners, lots of losers, and some really attractive returns down the road. Of course, there will be some abysmal returns as well.

The second part of the answer is that, to some extent, the macro factors positively impacting the entire industry are going to create an above-average number of winners. Because of retiring baby-boomers, fundamental shifts in the labor market and the economy itself (service-based & informational-based), outsourcing, offshoring, HRO, an increasingly transient, freelance workforce, higher churn, less loyalty to employers, etc., the need for effective talent management and recruitment advertising is going to continue growing at an exponential rate for at least the next decade. So despite the maelstrom, the tide is certainly rising and will lift a lot of boats as long as they can stay afloat long enough.

And finally, the chaotic transformations taking place create enormous volatility throughout the industry. And that volatility creates opportunity in and of itself. Like certain market-neutral hedge fund managers who can make money regardless of whether the markets are up or down but require volatility to succeed, there will be companies and shareholders who benefit substantially from the chaos itself. One company’s failure constitutes success for another, as markets are, for the most part, a zero-sum phenomena. Furthermore, the volatility that creates both risk and opportunity are a prerequisite for the higher returns that certain investors are seeking, at least according to capital market theory. At a high level and over sufficient lengths of time, markets are efficient. In the shorter term and/or at a micro level, it is inefficiency that allows investors to generate significant returns for the risk they take. The challenge is to pick the specific sectors, the management teams, and the business models that are going to win. And while that is always true in investing capital into businesses, the premium placed on those elements is more critical in an industry such as ours that is being turned upside down at the moment.

[tags]Taleo, JobFlash, Media M&A, Job Boards, Media Deals, Classifieds, Investing In Media[/tags]