Start-ups

This digital media company is the anti-BuzzFeed — it's making money by staying small

Skift CEO Rafat Ali
Victor J. Blue | Bloomberg via Getty Images
Skift CEO Rafat Ali

In 2010, Rafat Ali was living every entrepreneur's dream. He was 35, had just sold his digital media company paidContent for millions of dollars and was traveling the world for a few months to think about his next move.

Those months turned into two years, and visiting places like Eyjafjallajökull volcano in Iceland, exploring the desert region of Tunisia and staying with locals in the grasslands of Mongolia gave Ali the inspiration he needed to start his next company: Skift, a digital trade media and research company for the travel industry.

When Ali launched Skift in 2012, digital media was a hot business; Business Insider, BuzzFeed, Vox Media and Vice were all growing quickly. Just three years after Skift launched, Business Insider sold at a $450 million valuation, and Vox and BuzzFeed raised hundreds of millions of dollars at near-billion-dollar valuations.

With money like that being tossed around, the natural play would be to emulate those big, flashy brands. But Ali went in his own direction. Instead of chasing rapid audience growth, Ali decided to build a smaller, sustainable business focused on making money. Today, the likes of BuzzFeed and Vice are stumbling, but Skift has already reached profitability, according to Ali.

"My philosophy of travel and life is: when everybody takes a right, to take a left," Ali tells CNBC Make It.

A profitable business model

Ali teamed up with co-founder Jason Clampet, a former online editor for Frommer's, and they set about launching Skift. They raised more than $2.5 million from investors, including New York-based venture capital firm Lerer Hippeau, which also invests in BuzzFeed and fashion and lifestyle website Refinery29.

In the media world today, Ali says, one of the big problems with a company like BuzzFeed — which took on nearly $500 million from outside investors over eight years and has more than a thousand staffers — is that there's often a gap between what the founders of a company want (like long-term profitability) and what its investors expect (like a high valuation and exit).

It's a lesson that Ali learned the hard way. He too tried to land further funding in 2014, when Skift was close to running out of seed money. He recalls overpromising investors that Skift could boost its revenue to ensure their return on investment. It's an experience that he has since referred to as a "cycle of self-flagellation."

The follow-up investment round never happened and Ali decided to break the cycle and end its reliance on outside money by staying small.

Today, Skift describes itself as the travel industry's biggest "intelligence and marketing platform," but has a staff of just 60, sees 1.5 million monthly visitors and in 2018, the company pulled in more than $10 million in revenue, according to Ali.

"If there's one evangelizing function I have in life," Ali tells CNBC Make It, "it's that small matters and that small can make a large impact."

Ali says Skift's laser focus on its core subject of travel and leisure and its in-depth coverage and research attracts loyal patrons – travel industry companies and executives – who spend money on Skift's research, read its newsletters and attend its conferences.

According to Ali, Skift gets 40 percent of its revenue from advertiser-sponsored content and traditional ads, and another 40 percent from its conference ticket sales and sponsorships. It will host at least five events in 2019, including its global forum in New York, which features industry speakers, executives and marketers.

The final 20 percent of Skift's revenue comes from its research business. Skift sells subscriptions to 20 industry reports a year, on topics like airline marketing and the potential for blockchain in travel. Individual subscriptions sell for more than $2,000 annually, according to Skift's website, but Ali says most customers are enterprise subscribers who negotiate a subscription price for company access, amounting to between 10,000 and 15,000 in total readers.

Skift also has more than 400,000 subscribers to its free email newsletters.

Ali's plan is working: He says the 6-year-old, New York City-based company has either been profitable or broken even every year since 2015. In 2018, the company was breakeven in terms of profitability. Ali expects revenue to grow by another 30 to 35 percent in 2019 while the company focuses on increasing its profits.

Surviving in an imperiled industry

With high-profile brands like BuzzFeed, Vice, Huffington Post, Mashable and other industry darlings hitting speed bumps in recent months, Ali's plan to find his own path — to go slow and deep — looks like a brilliant decision.

Take BuzzFeed, for instance. The popular news and culture site tailored to millennials seemed to be the gold standard of digital media success, attracting more than 85 million unique monthly visitors in the U.S. at its height, according to Comscore, and earning a valuation of roughly $1.7 billion. But the site's rapid expansion also raised costs, and BuzzFeed fell as much as 20 percent short of its revenue target in 2017, resulting in layoffs and putting plans for a potential IPO on ice.

In January, BuzzFeed announced plans to reduce its workforce by 15 percent, cutting more than 200 people. In an internal memo to employees, BuzzFeed co-founder and CEO Jonah Peretti noted that the company's business grew by "double digits" in 2018, but it wasn't enough.

"The restructuring we are undertaking will reduce our costs and improve our operating model so we can thrive and control our own destiny, without ever needing to raise funding again," Peretti wrote to his employees.

It sounds a lot like what Ali has been preaching, and Ali says he is optimistic about BuzzFeed's business prospects in the long term.

As for BuzzFeed, a spokesperson tells CNBC Make It, "[D]igital media scaled up as a reaction to the enormous growth they were seeing on the big platforms, but have had to adjust as the platforms have been slow to create significant opportunities for publishers to monetize."

And BuzzFeed is not alone.

In February, Vice Media, which had reached a $5.7 billion valuation as recently as 2017, announced plans to cut roughly 250 jobs, or about 10 percent of the company's workforce, to reduce costs. HuffPost also laid off about 20 employees in January as part of parent company Verizon Media's plan to cut around 750 employees at outlets that also include AOL and Yahoo. It's been a similar story for Mashable, which sold for just $50 million in 2017 after being valued at five times that amount a year earlier.

Vice Media, HuffPost and Mashable parent J2 Global did not immediately respond to CNBC Make It's requests for comment.

Ali also believes many online media platforms have spread themselves too thin by trying to offer content for everyone.

He points to Mic, which originally focused on political news when it launched in 2011, but expanded to cover a variety of news and opinion. Mic saw its traffic dip significantly, leading to financial distress. The company laid off most of its 100-plus journalists in November preceding a sale to Bustle Digital Group, reportedly for just $5 million. It's a far cry from the $100 million valuation that Mic had previously carried after raising more than $60 million.

Mic parent Bustle Digital Group declined to comment.

Here too, Ali and Skift have followed their own path. "My philosophy is that journalists need to pick a subject and go deep."

Pros and cons to staying small

Amid the turbulence in the industry, Skift isn't the only example of a digital media company doing something different and finding success.

Take Axios, the digital news site launched by former Politico co-founder Jim VandeHei and former Politico chief political writer Mike Allen in 2017. Axios Media has taken on $30 million in outside investment according to The Wall Street Journal, but it has a staff of just 150 and it more than doubled its revenue in 2018, to $25 million. (An Axios spokesperson declined to comment.)

And Business Insider became profitable in 2018, according to parent company Axel Springer, which bought control for $343 million in 2015, in a deal that valued the company at roughly $450 million.

Nicholas Carlson, global editor in chief of Business Insider and Insider Inc., tells CNBC Make It that BI co-founder and CEO Henry Blodget "[executed] towards an ambitious goal carefully" by taking a disciplined approach to growth, and found a buyer that plans to "own us for a very long time, hopefully forever. That changes the calculus for what a board or the owners of a company expect."

Indeed, Ali notes Skift also faces little or no pressure to prioritize short-term growth thanks to its choices. "We don't have a formal board," Ali says. "So, our pressures are ours and ours alone. … That said, of course at some stage we will have an exit and hope to give our investors who bet on us a rational good return, but we have no time horizons for it."

The revenue of companies like Axios and Skift is still much less than BuzzFeed's (which was more than $300 million in 2018). And Skift also isn't necessarily competing with those larger, high-profile sites; its biggest competitors for online traffic are typically travel industry publications that have around a million monthly visitors, as well as Northstar Travel Media, which sold to a private equity firm in 2016, at which point it was expected to hit $80 million in annual revenue.

The truth is business leaders have to pick the strategy that works for their business, not just do what the rest of the industry is doing.

"A publisher that aspires to be really high quality and small can also have a great business, maybe with lower risk in the long run," Brian Wieser, a senior media analyst at Pivotal Research, tells CNBC Make It. Small publishers may be better equipped to deal with the ups and downs of an advertising-driven business model, he says.

But if a digital media company is too small to compete with larger sites for dwindling advertising dollars that increasingly go to Google and Facebook, it's that much more reliant on a strong economy. In an economic downturn, subscription numbers will shrink, says Wieser. And revenue streams like conferences tend to be costly and can have a poor return on investment, especially if the economy suddenly turns sour and sponsors and attendees stay away.

Of course, the endgame for founders is almost always an exit via a sale, says Rick Edmonds, media business analyst at the Poynter Institute. So it's potential buyers that will ultimately determine if a company's business model is viable.

"The payout will reflect whether you have built a solid business," Edmonds says.

As for Ali, he says, "My media companies have been a philosophy of growing lean, and I'm sticking to it, raising as little money as possible."

The results, so far: Skift is surviving on its own revenue and has been able to make moderate moves aimed at expansion, including buying newsletter Airline Weekly in September for an undisclosed amount. Skift also announced in September that it is launching a nonprofit foundation, expanding into Asia with a slate of new hires in Singapore, and it also recently began covering the business of wellness (which might seem to go against his philosophy of narrow focus, but Ali believes it is adjacent to the business of travel, falling under the umbrella of "leisure").

Ali says those moves represent the sort of manageable growth that will allow Skift to continue making money without digging into a financial hole from which it might never escape. Skift's size, and the fact that Ali isn't courting outside money will save it from making the mistakes other have.

"The fact that we don't have tons of extra money lying around just gives us that discipline."

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Disclosure: CNBC parent NBCUniversal is a minority investor in BuzzFeed.