Vice Shows the Perils of the ‘Greater Fool’ Theory

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For years, Vice Media had a seemingly endless parade of investors.

They were eager to buy a piece of a media company with an edgy attitude that purported to speak to millennials and the digitally savvy to reach that audience. Many of those investors likely believed that they could invest in Vice at ever-higher valuations because someone else, whether through an initial public offering or a sale of the company to a media giant, would pay an even loftier price.

That’s known as the “greater fool theory,” and a recent profile of the now-challenged publisher in New York magazine shows the limits of such thinking. In the past several months, the outside world has learned of missed revenue targets, disappointing television viewership and questionable growth numbers for its web audience.

The New York Times also reported of a workplace culture that was degrading and uncomfortable for women.

The investors

Let’s consider who invested in Vice and at what valuation:

21st Century Fox invested $70 million in 2013 at a $1.4 billion valuation.

Technology Crossover Ventures invested $250 million in 2014 at a $2.5 billion valuation.

Disney made two $200 million investments in 2015 at a roughly $4 billion valuation.

TPG invested $450 million in 2017 at a $5.7 billion valuation.

TPG, at least, protected itself. Its investment came with provisions that limit the firm’s losses if the company sells for less than $5.7 billion, and it would get a bigger stake if Vice doesn’t sell or go public in the next few years, according to the New York magazine profile. (It’s similar to the deal TPG struck with the file-sharing company Box.)

But many other investors appeared to believe Mr. Smith would engineer a sale of the company to Disney or take the company public at a knockout price.

That sort of attitude had long pervaded much tech and media investing in recent years. Start-ups just needed to grow as quickly as possible and engineer an exit.

The problem, of course, is when that doesn’t happen.

Disney doesn’t appear likely to buy Vice anytime soon. The New York article highlights just how troubled the publisher had been, both as word of how shaky its businesses really were and of how pervasive sexual harassment was.

What could be next

Vice could turn itself around under its new leadership team, led by the well-regarded media executive Nancy Dubuc. And the media world may still think Vice is worth paying up for.

Or the company could see its reputation for cool dissipate — New York cited a 2017 survey of teenagers who found Vice to be less cool than Yahoo or J.C. Penney. And that may mean when it raises money in the future it will be at a lower valuation than what it had earned in the past, a so-called “down round.”

Those aren’t necessarily signs that spell the end of a company, but they are terrible for employees, as our colleague Katie Benner wrote in 2015:

“Employee stock options usually become less valuable when a company’s valuation falls, making it harder to retain people. If a company has raised many rounds of capital, later investors often have protections that guarantee a specific cash payout or return on investment. In a down round, those protections are paid for out of the returns that would have gone to earlier investors and employees.

What will be Vice’s fate? It’s hard to tell. But a former Vice executive predicted to New York, “In the not-so-distant future, the growth story ends, and the story is they have to shrink.”

Our columnist Andrew Ross Sorkin and his Times colleagues help you make sense of major business and policy headlines — and the power-brokers who shape them. Get the DealBook newsletter.

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