Yesterday’s news that Group Nine Media was shutting down Sourcefed Studios was a hard blow, as I led the team that bought Phil DeFranco’s company (which included Sourcefed) back in 2013 when I was at Discovery — who had purchased my previous company, Revision3, the year before.
The news got me thinking about why many of the YouTube multi-channel networks ultimately failed, and what could have been done differently. I’ve been mulling this for a while — hindsight is always 20/20 of course — and if I could change just one thing it would be how we structured business deals with our creators.
In the early days of Revision3, like most Silicon Valley startups we had about 10% of our equity set aside in an ESOP or employee stock option plan, and as CEO I insisted that we gave equity to every employee. Many of our early hires were creators, those in front of the camera, and they got options like everyone else. But as we expanded into an MCN, we began bringing on creators who weren’t employees, but instead were promised a significant cut of our sponsorship sales and in some cases a guarantee of monthly revenue. These early creators included Epic Meal Time, The Fine Bros, The Young Turks, Phil DeFranco and many others.
Our partnerships with these amazing creators worked great for a year or two, but ultimately their success led to other networks wooing them away with bigger guarantees — or in the case of TYT, a desire to forge their own path. In the end our interests were not aligned. Like top athletes, these creators were mercenaries — rightly so — looking to maximize their payday while their celebrity waxed.
If I had to do it all over again I would have given these creators a piece of the company. I should have expanded our ESOP to include a pot of options for creators, which would have helped to align our interests. As Revision3 grew, their stake in the company would grow as well.
I only realized this as I was selling Revision3 to Discovery. When the deal closed every employee suddenly had a windfall — albeit mostly a small one — when their options converted to cash. But after the acquisition there were no more options — in effect that brass ring had been taken away from our staff. And to make matters worse Discovery put us on the losing end of a two-tier pay structure as Revision3 employees made less on average, had poorer benefits and a lower bonus percentages than Discovery’s employees. The lack of a potential future windfall — via stock options — was gone, and we were all clearly second-class citizens at Discovery. It’s no surprise that 50% of the team left in little more than a year.
It was even worse, though, for our roster of creators, who didn’t get anything at all even though our success was in large part built on the backs of their views. They had no ownership at all, and were ultimately saddled with the whims of a large TV media company with outsized expectations. And so when I had the chance, I quickly locked up one of our last big creators — by buying out Phil DeFranco’s company and bringing them into the Discovery fold.
The power of Sourcefed in those early days was clearly enabled by the three very talented creators in front of the camera every day — Lee Newton, Joe Bereta and Elliot Morgan. They were soon joined by Meg Turney, Trisha Hershberger and Steve Zaragoza. All (except for Joe) were relatively unknown, and all were signed for very little up-front money, without any ability to share in the (eventual) success of the network.
In the end, networks of poorly incented creators are similar to other staff-heavy businesses like consulting companies and ad agencies. These agency-style businesses can grow, but ultimately don’t build great value.
Now that I’m working in venture capital at leading seed fund Social Starts, I can see why agency-style companies only sell for 1x annual revenue, while tech startups and platforms can see 6x or more. When your core value walks out the door every day — or in the case of MCNs don’t actually come in the door at all — value is fleeting. If you don’t love, reward and align your goals and financial interests carefully, that value can and will flee — all the way to zero. Unfortunately, this lack of alignment will be the final epitaph of Source Fed, Revision3 and many of the other MCNs that have been built and sold over the last 10 years.